Insurtech Agents: a $130B opportunity

Agents won't disappear. They are the present and future of insurance distribution.

Insurtech Agents: a $130B opportunity

At $1.3 trillion in annual premiums, insurance is one of the largest segments in U.S. financial services and makes up almost 7% of GDP. In the last five years, insurtech — like other forms of fintech — has witnessed a dramatic upsurge in the number of new companies started and the size of their funding. Insurtech funding rounds north of $100 million and multi-billion-dollar IPOs and SPAC listings have become so commonplace that a casual observer might believe the sector is saturated and played out. This belief couldn’t be further from the truth.

One issue is that despite the massive size of the market, comparatively few entrepreneurs have taken notice. (In contrast, I’ve lost count of how many real-estate startups met as an investor, whose origin story was, “I had a terrible experience buying my first home, realized the industry was broken, and now I’m going to spend the next decade of my life fixing real estate.”)

As a result of this dearth of love for insurtech, over 75% of funding in the space has gone to a mere 25 startups (two of which Foundation Capital is fortunate to count in our own portfolio), and within multiple $1B+ TAM subsectors, there’s a complete absence of post-Series-A-funded startups.

Insurance is so big that if anything, insurtech is still under-invested, even within fintech. Case in point, Max Simkoff, founder/CEO at Doma, had his own terrible home-buying experience. But instead of doing what all the other mammals were doing on the Discovery Channel, he saw an opening in title insurance and was able to build a multibillion-dollar company, facing basically zero startup competition. Insurtech is an untapped vein of riches.

At Foundation, one aspect of insurtech that we’ve identified as a massive opportunity, and have been investing in for several years, is companies building technology to turbocharge insurance agents. If you’re in tech, you might be surprised to hear that insurance agents are thriving. In fact there are more insurance agents now than ever (over 850 thousand).

Collectively, agents sold more premiums in each of the last five years than ever before and earn over $130b in commissions each year. To put these figures into perspective, total U.S.-insurance ad spend is about $16b, meaning there’s a 9:1 ratio in how agents vs. ads, as distribution expenses, are split. Agents, in other words, are the present and future of insurance distribution.

Before expanding on our thesis, it's worth taking a look at the value chain of insurance: it is highly fragmented, especially when compared to say, the banking value chain, in which banks like JPM and Citi own and operate everything from capital markets, actual user products like checking and credit, and even branches.

Insurance carriers focus principally on their core: loosely defined as productizing and branding risk-management. Carriers rely on third-party vendors and partners to operate the rest of the value chain: carriers don't own hospitals or auto body shops (tech-carriers are also structured in these ways, although they might internalize a few more customer-facing functions early on as a way to differentiate vs incumbents). Most carriers also rely on a third-party workforce of agents to sell their products to consumers. As the main interface between customers and carriers, agents also provide different levels of customer support throughout the life of the policy: when there's an accident, many people call the agent who sold them the policy first and get guidance initiating claims (vs getting lost in an automated-voice-system labyrinth). Agents also provide clients with additional advise on coverage and other insurance needs, plus support on things like producing documents like certificates of insurance and even following up on the status of different claims.

The agent channel is highly fragmented: the 850k+ agents operate as part of 36k+ agencies. Most of them are true small businesses; 25% sell less than $100k in annual premiums, and 60% of them sell less than $500k. To engage the agent channel, most carriers rely on wholesalers and aggregators to acquire, vet and appoint these agencies. Aggregators also give small agents access to multiple carrier appointments. Why? Few small agencies have the volumes or track record to get more than a single direct carrier appointment at a time, but most independent agencies need to sell products from 10+ carriers in different lines of business or states to properly serve their clients' insurance needs. Aggregators also pool the premium volumes from their agent networks, helping negotiate with carriers for better commission rates and other incentives for the agents.

Now, let's look at some interesting dynamics in the agent channel. There's plenty of M&A activity in the space: at the bottom of the market, 500+ broker acquisitions per year worth $4-8b, with the typical deal values ranging $5-15m. At the top of the market, 2020 saw the marquee $30b merger between AON and Willis Towers Watson.

Another big trend is the ongoing shift in the mix of agencies away from captives (that sell policies from a single carrier), towards independents.

Despite all the investment into and efforts by direct carriers, they only exceed 10%+ market share in private auto, where Progressive and GEICO's differentiated strategies have resulted in 20y+ of consistent share gains vs captives. What is even less known is that independent agents have also taken share from captives. While we see direct carriers making a dent in other personal lines like homeowners and term-life, independent agents are also growing their share of the pie. In commercial lines, independent agents are the dominant channel by far, captives are holding their share, and direct carriers don't show in the share charts, yet. An interesting anecdote from our former portfolio company CoverWallet, is that the team found independent agents were using their website to get quotes vs using their carrier portals and tools because it was a much better and faster experience. This led the team to launch CoverWallet for Agents!

Insurance is so big, that each 1% of the $1.3t total premiums in the market represents $13b in annual premiums and almost $2b in commissions. Given the steady market share erosion of captives with no real competitive response in sight that would reverse the trend, it's no surprise that digital insurers and brokers trade at a premium to incumbents. That is, the market is expecting direct carriers to get substantially bigger in the future. At current valuation multiples, each 1% of insurance premiums is worth $10B+ in market cap to challengers! 🤑.

There's a similar effect happening in public markets between brokers and carriers. The former are outperforming by 40%+ (and these are mostly legacy brokers themselves). Here are some company examples: a fantastic company to look up to is Goosehead, the McDonalds of insurance agencies, which went public at ~$600m market cap in 2018 and passed $6b in February 2021. Mind you, Goosehead was founded in 2003, so it is a 18-year overnight success. A faster one: few people had heard or knew much about Assurance prior to reading about their $3.5B acquisition by Prudential, less than 3y since its founding in 2016.

We certainly see existing agencies starting to adopt new technologies to keep up with the times (sometimes tools are provided by carriers, sometimes by agent associations, and sometimes adopted by agents themselves).

Some agents will adapt without technology

The total number of agencies has remained roughly flat for the past decade despite constant M&A activity, implying many new agencies are launching each year. What does the 2021 cohort of new agencies looks like? We are already seeing them be digital first, launching on Agentero and on some of our other portfolio companies playing in the space. Below we share some thoughts on the opportunities in the space, they all see agents embedding technology throughout their workflows to turbocharge their capabilities:

  1. Automation. Our research has shown that most insurance agents spend many hours doing repeated data entry in multiple systems, which don’t talk to each other and often haven’t been updated since the ‘90s. Reducing the amount of manual work implies that agents can spend more time serving clients and prospecting to grow their business. We’ve seen similar changes in many other industries over the past two decades, so this is an obvious area to catch up on.
  2. Apps. Over the past few years, there’s been a big jump in the availability of carrier APIs and systems to quote and bind policies (in many cases largely thanks to the insurtech carriers themselves). Companies like Agentero in our portfolio are bringing the latest ML/AI techniques to surface opportunities within the agents’ own books and enable a one-click binding experience. The agencies of the future will be born out of aggregators like Agentero, as they simply can grow much faster than traditional ones, thanks to their broad carrier panel and by eliminating many of the traditional geographic and product/appointment constraints to their growth.
  3. Independence. Clients are now used to doing most of their product research online and buying complex financial products online. Users still want to access to guidance and advice, but they want this advice to be independent and timely, while staying in charge of the process (vs. pushy and biased). Captive agencies are steadily turning into independent agencies, and we believe this is one of the dynamics pushing captive carriers to trimming their commitment to that distribution model.
  4. All for one. When looking at the market-share charts by line above, you’ll notice that other than private auto, direct carriers continue to have less than 10% market share in almost every line. That’s because there’s only so much additional Google AdWords spend that many of these carriers can keep ramping up. Despite this, the majority of insurance ad-spend will transition online within they next 4y. The Sky-high CAC’s that insurtech carriers show, and the decreasing ROAS that captive carriers display despite substantial ad-spend increases, explain why many carriers are turning back to the agent channel to keep growing while containing acquisition costs.
  5. Insurtech <<>> bundles: Queue Jim Barksdale. Digital carriers are offering a superior experience on single-products to digital natives, but there are many insurance lines that are purchased in bundles, typically offered by captives and legacy carriers (OurBranch in our portfolio is having amazing success innovating with this very thesis). We are in the early days of the next rebundling part of the cycle, where tech-enabled aggregators like Agentero and "X" (still-stealth, but soon to be announced Foundation portco) will assemble for their turbocharged insurtech agent networks to sell.
  6. One for all. We estimate the wave of agency consolidations will continue over coming years as many principal agents reach their retirement age. At the same time, we see tremendous energy in the next generation of agents: they are tech natives, entrepreneurial, and have the drive and energy to grow their agencies much faster than their predecessors. These agents will use the latest technologies to eliminate the traditional geographic- and carrier-appointment constraints to their growth. Buying leads digitally can help agents accelerate their growth and let them focus on serving their customers. Lines will blur: much as captives are becoming independents, personal lines agents will begin to sell commercial, P&C agents will monetize life & health opportunities,  financial advisors will bundle insurance products into their offerings, many of these agents will complement their offerings with non-insurance products. Even within the current wave of companies focusing on embedded insurance at the point of transaction, we see agents playing a substantial role as advisors, customer success, and advocates for their client base.

The deck below has more analyses and content around this thesis, so we invite you to take a look. We at Foundation Capital are actively backing entrepreneurs who want to empower them to succeed in the digital world. If you are a founder already working on this, or the $130B+ TAM with limited competition sounds like an intriguing place to explore. please reach out to me. We'd love to chat!