Insurtech Fail? S&P Report Says Profitability is Elusive for Three Prominent Startups

S&P Global Market Intelligence is out with a report questioning three emerging Insurtech platforms. The report states that profitability is elusive for these startups. Mentioning specifically Lemonade, Metromile, and Root Insurance, S&P says that each reported overall net losses in the second quarter, as incurred losses from claims outweighed premium revenues and investment income was not enough to cover the deficit.

Ok, so no one would expect startups to be generating any profit as early stage companies typically target market growth for many years. Have you ever heard of Amazon? It took that company six years for its first profitable quarter and even after that point in time, profits remained elusive. But S&P adds the overall picture for U.S. property and casualty insurance industry as a whole is pretty bad. Per S&P Global Market Intelligence’s August 21 calculations, the industry produced a net underwriting loss of $3.68 billion during the quarter, based on data from nearly 2,500 individual P&C entities. State Farm Mutual Automobile Insurance Co. played a large part in these results, with its P&C group generating a $1.94 billion net underwriting loss.

Lemonade is offering Homeowners / renters insurance only (for now). Metromile and Root are gunning for the auto insurance sector. San Francisco-based Metromile offers insurance rates based on the amount of miles driven, without taking into account the driver’s behavior. Ohio-based Root takes driving habits into account, considering not only mileage, but factors like hard braking, dangerous routes, driving regularity and time of day. Metromile adds hardware to a car to gauge driver characteristics. Root uses a mobile App.

S&P says that while Lemonade, Metromile and Root did not turn a profit in the second quarter, the trio continued to grow premiums. Root had the biggest percentage increase in direct premiums written at 245%, though the amount it wrote was the lowest of the three in aggregate terms. Lemonade and Root expanded geographically in the second quarter and have continued to add states since that time. Lemonade launched in New Jersey in August and Root launched in Indiana in July.

The report added that Lemonade’s and Root’s investment portfolios (excluding cash) consist entirely of U.S. Treasury securities. Lemonade added some more Treasurys in the second quarter, purchasing roughly $840,000 worth, while Root did not make any purchases. Metromile’s portfolio is also mostly composed of Treasurys, though it holds some agency securities as well. It did not report any new purchases during the second quarter.

So what is the message here? Well, it is really way too early to measure any type of expected financial success. But many (if not most) insurance industry observers believe that this sector of finance is overdue for a digital transformation. And these three companies may be leading the pack.

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