Tech Is Disrupting Insurance: Should You Get on Board?

By now, you’ve probably heard the term “fintech,” referring to the apps and companies — such as SoFi, Qapital, Acorns, Prosper, Betterment, Wealthfront, Robinhood, Personal Capital, Digit, and others — that are using technology to shake up the financial industry. These services are focused on attracting younger people who use their smartphones to get things done.

What you might not know is that traditional insurance companies are feeling the heat as well. “Insurtech” (doesn’t quite roll off the tongue like fintech) companies have been popping up all over the place. They run the gamut, from health and life insurance startups to pet insurance. Heck, there’s even a startup specifically for delivery drivers who only need insurance when they’re working a shift. That’s specialization!

All these companies are betting that they can upend a stodgy industry notorious for high prices and poor customer service. By looking at the pros and cons of a few of the leading insurtech players, we can get a better grasp on whether or not it makes sense to give one of them a shot.

Auto Insurance

MetroMile is an insurtech company built around an idea that just makes sense: Charge a very low base rate for car insurance, and then charge a flat per-mile rate rate on top of that. Essentially, with MetroMile, you pay for what you use. This is in contrast to the traditional car insurance model of charging a high flat rate and largely disregarding the miles driven (up to a certain point, of course).

Back when I owned a car, I would have been thrilled to try out a service like this. I get to experience it vicariously through a friend of mine, Tim, who lives in California. I reached out to him to see how he liked the service, as he was the one who originally told me about MetroMile.

He loves it, saying that it has saved him over $500 in the year since he made the switch. He’s also totally on board with their mission. “I don’t pay a monthly bill to Trader Joe’s and take as much food from them as I want, so I don’t see why car insurance would be any different,” he told me.

He makes a good point, but it should also be noted that he’s never had to file a claim, so he couldn’t speak to their level of service. I’ve heard many a tale about how low-cost auto insurance providers are the best thing in the world until you actually have to collect money from them. It feels a bit like riding an old roller coaster at a state fair. It looks really fun, but do you trust the owners of “The Vomitizer 3000” to take care of you should something go wrong?

That being said, MetroMile is on solid financial footing, according to ratings agency A.M. Best, earning a financial strength rating of “excellent.” It’s also accredited (with an A+ rating) by the Better Business Bureau.

Related: The Best Car Insurance Companies for 2017

Homeowners Insurance

Hippo is a home insurance company that launched in California in April after raising over $15 million from a group of top-notch Silicon Valley venture capital firms. Much like the other players on this scene, Hippo is positioning itself as a home insurance solution for tech-savvy millennials. They have a slick, colorful website, and they promise to get you a quote in 60 seconds or less.

Hippo makes a point to insure stuff that millennials care about but traditional policies overlook, such as electronics, and focuses on proactive disaster prevention through smart home technology. They also make some bold claims about pricing, advertising that they can save the average consumer up to 25% while making sure you’re not underinsured. They do this by reducing fees and cutting out the commissioned agents who traditionally sell these services.

Hippo asks homeowners some basic questions and then uses its technology to search partner insurance providers for a policy that makes sense for your specific situation. They only partner with insurance companies that hold an A.M. Best rating of “excellent” or higher, and they hold a high rating on ConsumersAdvocate.org.

I can’t lie, it all sounds great on paper. If startups are good at anything, it’s making things simpler by cutting out middlemen. One just has to look at the travel industry, where once pricey travel agents have been replaced by online services such as Expedia and Kayak. But insuring your home is a different beast altogether than planning a vacation.

Related: The Best Homeowners Insurance

Renters Insurance

Lemonade has raised over $60 million from premium venture capital firms. Their tagline is, “Forget everything you know about insurance,” which feels like they’re laying it on a bit thick — but I guess that’s what it takes to try and win over the younger, urban crowd.

To their credit, they do seem to be on the right path. They seem transparent, as they mention that they take a flat 20% fee to run everything. They also have the most colorful, fun, intuitive, easy-to-understand website of all the companies I researched. That’s saying something, as it seems like insurtech companies must spend as much on graphic designers as they do paying out premiums.

Also, they’re supposedly able to use artificial intelligence to pay claims with lightning speed. If you trust their marketing, they hold the world record for fastest insurance claim paid, when a customer was repaid $729 for a stolen coat. The whole process, using the Lemonade app, took less than three seconds.

Keep in mind that filing a claim for tens of thousands of dollars after a hurricane hits will surely take more than three seconds, but the prospect of such quick service is pretty cool nonetheless. I personally love depositing checks into my bank accounts via an app on my phone, rather than going to a brick and mortar bank. Filing claims and having them paid out all on through my phone doesn’t seem out of the question.

Lemonade has yet to be rated by A.M. Best, but rival Demotech gives Lemonade an A rating for financial strength.

Related: The Best Renters Insurance for 2017

Life Insurance

Fabric is a brand new insurance company with backing from elite venture capital firms. It has a fancy website, a slick app, and life insurance plans starting at $6 per month. It’s positioning itself as a fun, simple, friendly way to get life insurance. It’s especially proud of its ability to get quickly get people covered. They say you can get an accidental death policy in two minutes. Whoa!

While I’m all for simplicity, I don’t think what’s holding people back from getting life insurance is the time it takes to get covered. This is a decision I’d want to put a little more thought into. The “speed over all else” vibe reminds me a bit of Rocket Mortgage, who advertises the speed with which they can get millennials approved for home loans. As we learned in the last housing crisis, a speedy and easy application doesn’t always mean the buyer is going to get the best terms.

Ratings firm A.M. Best says that Vantis Life Insurance Company, which issues Fabric’s policies, has excellent financial strength, indicating they can be trusted to make good on their claims.

Related: Five Things a Life Insurance Agent Won’t Tell You

Health Insurance

Oscar, the original insurtech darling, exploded onto the scene in 2012 and quickly grew into a company with a billion-dollar valuation. They hang their hat on being easy-to-use, easy to set up, and having excellent customer service. Long story short, they are trying to simplify and spruce up a notoriously complex and frustrating industry.

Unfortunately for the folks at Oscar, who surely have their hearts in the right place, they have become the poster child for what can go wrong in insurtech. For the last two years, they have been floundering.

Oscar’s entire premise was built around being able to sign up individuals who were dropped from employee health care plans, but this happened at much lower rates than they were expecting. Recently, they had to inform all of their customers in New Jersey that they were closing up shop. They’ve been slashing services and hiking premiums in other areas as well.

What If a Financial Startup Goes Belly Up?

Unlike with banks, there’s no federally backed program that protects your money in case your insurance company runs out of funds and can’t pay out on its policies. Fortunately, each state has its own insurance guaranty system in place to protect consumers, and they act much like the FDIC insurance that protects your checking account. You can see a full list of what’s covered here.

This should reduce some of the hesitation you might feel in trying out a new insurtech company. If something bad were to happen, your money should be protected. But, keep in mind that these policies, on average, are meant to mitigate the losses of policyholders, not necessarily to make them whole. As with investing, it’s wise to be prudent. If you choose to use the services of an unproven company, you are taking on a little bit more risk.

It’s all fun and games and slick mobile apps until the… stuff hits the fan.

Summing Up

Insurtech is only in its infancy, and the name sure doesn’t roll off the tongue like “fintech,” but it’s a major force that won’t be going away anytime soon. Personally, I’m excited. Insurance is expensive, and the companies can be a pain to deal with. If we can start to drive down prices with increased competition from companies that are easy to deal with, I’m all for it. Of course, breaking into these industries is easier said than done. Only time will tell which insurtech companies will have legs for the long haul.

Whether we’re talking about insurance providers, cell phone providers, or cable providers, remember that it always pays to shop around. With a little bit of effort, you should be able to find the cheapest plans that make sense for your unique situation.

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