Steve Lekas is the CEO and Co-Founder of Branch, a full-stack insurance company that uses data, technology and automation to make home and auto insurance simpler to buy and less expensive. Steve was interviewed by Michael Fiedel, a Managing Director at InsurTech Ohio and Co-Founder at PolicyFly, Inc in collaboration with The Future of Insurance Newsletter.
Steve, you often talk about the idea that Branch is restoring insurance to its original intent. Can you talk about the origin of insurance and how it's informed the way you built Branch?
“When I talk about that, I'm usually talking about the beginnings of insurance in the United States. Part of the story that I love is that at the beginning, the U.S. was primarily farmers, and people lived pretty far from one another. As a result, there was no one to rely on in the event of a catastrophe except the people that lived near you. At that point in time, fire was one of the largest causes of property destruction. If someone's barn burned, everybody in close proximity would get together to put it back up. That notion of neighbor-helping-neighbor was just something people did. Soon, they realized that if they pooled their money, they could offer even more protection - that pooled capital became premiums.
If you think about it, the concept of everybody getting together to put the barn back up is still how insurance works. People pool their capital so an unfortunate few can take a big chunk in the moment that it’s needed. What was very different about that time is that we were all sitting across the table from each other, grateful for one another's money and help to put our life back together. What’s missing today is that spirit. People think one of those jingles you see on TV as the thing that’s giving them money when they need it. It's fundamentally not; it's not the insurance company’s money, it's your money. You pooled it within their structure, and now it's your turn to get it back. What you really want from your insurance company is for them to efficiently manage your community’s capital and pay it out fairly when the time comes. In essence, you want them to have your back the way those original communities had each other’s back. That's why we talk about Branch getting back to getting each other's back. For us, it’s about taking all of the wonderful communal aspects of insurance and distributing them at scale with even greater efficiency by leveraging modern tools like data, technology and automation. For us, it’s all in service of our mission which is to fundamentally lower the cost of insurance, so more people can be covered.”
Can you talk a bit about the inefficiency you see in the industry today and how Branch is built to specifically combat it?
“It stands to reason that when you have a 150-year-old industry with incumbents that have been around for a century and no meaningful disruption in decades, that there will be plenty of inefficiency. Look at the amount of premium that we each pay in and the amount that actually goes to pay a claim. The simple product is tiny bits in, big chunks out, but only about half of your premium dollar pays claims. I just made it sound so simple, right? Tiny bits in, big chunks out and 50% evaporates along that path. That's the description of the inefficiency. If you then follow the money, what you'll find is inefficiency in lots of places, but the most pronounced one is very explicit: acquisition and commissions as a function of how insurance companies spend your premium dollar to acquire new customers. If the industry was working efficiently, customers wouldn’t need to pay 25% higher for insurance to help insurance companies acquire new customers.
But, even beyond the acquisition/commission expense, there’s tons more inefficiency. Think about the customer experience: the consumer goes into buying insurance not knowing if they bought the right product. When they have a claim, they're buckling up for a ride because they were never totally sure what they bought. Frequently, they feel like there's an information advantage that the insurance company has that they don’t, even though it is their money. That leads to a lot of inefficient structures like fraud investigations and claims review. This inefficiency is rampant across the total operations and yet the insurance company still needs to make a profit. When you look at the loss ratio of these companies you can see the efficient versus inefficient.”
How vital is the concept of embedded insurance to this more efficient future?
“It's incredibly important. I tell the story of when I was five years old. I got this GI Joe motorized tank for Christmas, and I was so pumped about it. When I opened it up, it had no batteries, so all I wanted was batteries. My poor parents probably heard about batteries for days. Insurance is a lot like that. You have to have car insurance to drive your car. You have to have home insurance to get a federally backed home loan to buy a home.
Imagine you went to the car dealership, and they said, ‘Hey, here's the car of your dreams; it's all yours.’ But, there's no steering wheel. If that were the case, every third commercial during an NFL game would be someone selling you a steering wheel of different shape, texture, color and size. Because everyone is forced to advertise to you to buy a thing you had to have only as a byproduct of buying the car, it becomes incredibly inefficient because you have to bear the burden of that acquisition expense. Why isn't the steering wheel sold separately from the car though?
Well, it's a silly idea. I mean, it's ridiculous. I'm saying this out loud, but that's how insurance works. Insurance grew up that way for all kinds of good reasons. It's just that it no longer has to be that way. Now that we have modern tools like data and automation, we can much more easily embed insurance into the underlying transactions that require it. This makes selling insurance much more efficient which ultimately makes a consumer’s life easier and their insurance less expensive. Everyone wins. I do believe that in the future, embedded will be the primary way insurance is sold for this exact reason.”
Beyond the opportunity to buy insurance in an embedded manner, are there even further ways in which buying insurance can be improved?
“There are all kinds of creative methods to bring insurance to market that are being further explored through technology. There's still a lot of regulation that's going to have to catch up to what some of those methods are. I’m excited about new technologies that are making insurance, underwriting and independent agents more effective at what they do, particularly for agents who need to focus on their ability to advise on choice. With embedded insurance, they can offer more convenience, but also, far more value during the sales process. Instead of using their time to intake information, they can focus on solution selling with customers.
You're going to see a lot of interesting experimentation, but the ones that win will be those focused on convenience. The big win for consumers is that insurance can be easier to buy, and thus, less expensive for them. Everyone's jingle who you see on television grew their market share when they were less expensive. This is the age-old thing we all want. If you ask consumers what they wish were different in their home or car insurance, they'll say, ‘I wish it were cheaper.’ The rest of it is nice to have, and insurers know that you can get people to jump through hoops for price, right? Agents know that price matters when making the sale. Because embedded insurance can be less expensive, it will be superior.
Playing embedded out to its natural conclusion, I think that over time the insurance transaction will start to morph into the underlying product. As we move toward that, I think you'll soon start to see people experimenting across verticals with models like that because fundamentally, the underlying transaction is what has always owned the customer's eyeballs, and insurance was just a pain point for them. Insurance becomes sort of an ingredient brand in that world, like an Intel chip in a laptop.”
What is the right amount of competition in the insurance industry to foster innovation and choice?
“Even in that more efficient history, it was also inefficient because the scale of capital was small. We had 5,000 county mutuals sprout up in a very short period of time, and 4,000 of them are gone now. Today, it's a different inefficiency problem; one that looks more like an effectiveness problem. We have tremendous competition, but we're nowhere near marginal costs. Everyone offers almost the exact same product, and in economic theory, it should be highly efficient at this point. I believe the competition is positive, but I think we've gotten to a place where everyone's happy to operate with a similar business model. As a result of the insurtech boom of the last five years, we're going to see more real competition.”