Non-Geckos take Cover

A venture firm investing in an insurance startup seems like a bet against Warren Buffet. Most people would say that you’ve got to be either quite smart or damn stupid to do so. Neither is true. An investment in an insurance startup is calculated, distributed risk. I want to show how Cover, and similar startups working on property and casualty insurance, is not a bet against Buffet but one he himself would have made over 60 years ago.

In 1951, Warren Buffett wrote an Op-Ed titled, “The Security I like Most” where he said,“The company has no agents or branch offices. As a result, policyholders receive standard auto insurance policies at premium discounts running as high as 30% off manual rates. Claims are handled promptly through approximately 500 representatives through the country.”[1] As we know a lot has changed since the 1950s but let’s take a snapshot of the things that have stayed the same in the insurance industry, which are increasing market growth, continually aging institutions, low customer engagement, and excessive human labor costs.

The Status Quo
  1. An enormous market that continues to grow. The $1.3 trillion in insurance premiums recorded in 2016 by the U.S. Department of Treasury represented over 8 percent of the U.S. GDP.[2] Consumers are increasingly protecting against downside risk and purchasing insurance to protect their assets, especially with constrained incomes. It is also estimated that almost 40 percent of sole proprietorships in the U.S. don’t carry small commercial insurance coverage. In addition, growth in total insurance premiums grew by 14 percent in emerging economies, compared to only 0.7 percent in more advanced economies, meaning that the appetite for insurance is global.
  1. No technological innovation. The industry is old and dominated by incumbents who have never been thrown into the deep-end their entire careers. Since premiums are easy to come by and costs can be securitized, the industry continues to swim in shallow waters and giving the same pat response, “If it ain’t broke, don’t fix it” as technological innovation continues to drain its moat.
  1. Insurants dissatisfied with their insurers. Now, think about that for a second. Insurance offers protection when things don’t go as planned: a car breaks down, your health takes a turn for the worse, a hurricane or fire devastates your home. Insurance agencies are protectors in times of trouble so how is it possible that over 60 percent of insurance clients worldwide aren’t satisfied with their service providers resulting and customer loyalty is abysmal with almost 50 percent of customers churning year over year? It is primarily due to the last mainstay of the industry.
  1. Middlemen mangling a B2C business into a B2B. Many Insurers have limited interaction with end-consumers because a considerable amount of their business is intermediated by brokers, agents, and analysts who are incentivized to close commissioned sales. In some cases, 60 percent of new business comes from these middle-men with high commission and service fees so insurance agencies respond by catering to their margins, not their members. The true cost is a lack of customer interaction which translates into limited insights into customer needs and the persistence of products nobody wants, but everyone needs.

As Newton's law of inertia states: objects at rest stay at rest. And this is where we find the insurance industry: on average, it is filled with 59-year-old brokers using legacy systems built around paper documents who collect $45 billion of fees every year from insurers for “servicing customers” into one-size-fits-all plans. The whole thing is a mess driven in part by the intangible nature of insurance products and in part by the fact that market will always be filled with people who need insurance. There are a few exceptions, such as Geico, the company Warren Buffett wrote about in 1951 and fully owns today as a subsidiary of Berkshire Hathaway. Geico sells directly to the customer, which eliminates broker commissions and builds engaged customer relationships. But this is an exception in the industry, not the rule. Most insurance companies are not your friendly neighborhood gecko who talks with an adorable, cockney twang. Comfortable with their margins, these “non-geckos” continually get trumped by Geico for the same reason they will be disrupted by Cover.

Over the next decade, customer centricity will become mainstream in the insurance market, not the exception that it is today. Customer centricity is what made Geico a promising investment for Warren Buffett in the 50s and Cover a smart, 21st-century bet for Shasta Ventures, Social Capital, and Y Combinator.

We all know that customer centricity is always asking, “How does this create value for the customer?” But what does customer centricity mean for the insurance industry? How does customer centricity translate into brand loyalty, retention, and ultimately, ownership of the end-user relationship? How can an upstart insurance company like Cover leverage customer centricity to disrupt incumbent players like Geico?  In order to answer these questions, let’s review the insurance value chain.

Property & Casualty Insurance Value Chain

Product / Premium Design

Pricing / Underwriting

Sales / Distribution

Policy Admin & Servicing

Claims Management


Most Valuable Components of the Insurance Value Chain

Most valuable is defined as the component(s) where incumbents struggle to innovate due to how hard it is to build and scale. The most valuable components of the value chain are highlighted.

Product / Premium Design

Pricing / Underwriting

Sales / Distribution

Policy Admin & Servicing

Claims Management


The “Access Layer” of the  Insurance Value Chain

The Access Layer is defined as the component(s) of the value chain which most directly correlates to ownership of the end-user relationship. The “access layer” is highlighted.

Product / Premium Design

Pricing / Underwriting

Sales / Distribution

Policy Admin & Servicing

Claims Management

Notice two things about the property and casualty insurance value chain: 1. “Product/Premium Design” and “Claims Management” are the areas where incumbents struggle to innovate due to how hard it is to build and scale; and, 2. “Claims Management” also shows up in what I call the “Access Layer” or, the area of the value chain which most directly correlates to ownership of the end-user relationship.

If you take 1 (most valuable components) and 2 (the “access layer”) as true, it means that Cover, and customer-centric insurance companies, will need to at least build a superior product and/or premium service in order to gain an innovative headstart on market incumbents. But to seize market share, insurance startups will need to get a handle on “Claims Management” which is both a source of cost for insurance agencies in terms of commission fees and outsized dissatisfaction for customers in terms of endless phone-calls and retrograde questionnaires just to get an insurance quote. Cover is addressing the most valuable components the insurance value chain with a laser focus on Claims Management since it is the “Access Layer” for the customer. Since the company understands the most important parts of the value chain, the roadmap to disruption is clear.

Build a superior product (at an increasingly lower price) that is simple, even magical. Innovations like Cover’s computer vision feature that allows users to walk around their homes and auto-detect, identify and catalog property against an existing policy. Cover is also setting price drop alerts on any policy and porting the insurance you have from your credit cards. Not only is Cover uncovering insurance customers already have but automating behaviors they already perform. These product innovations clearly articulate the value proposition of benefits to customers which will engender trust in pricing and ultimately build an on-demand insurance buying experience that customers will actually want to use.

Replace, streamline, or automate human labor (in this case, brokers).  Consumer insurance purchasing patterns are already beginning to dramatically change from offline sales agents to online comparison shopping websites. Applications like Cover are continuing the trend by leveraging mobile phones to eliminate the need for humans to evaluate risk. Why should I spend an endless amount of time fielding questions like, “what is the make and model of your car” if I can just take a picture of it and the relevant information is automatically captured? This will mean a fundamental shift in the role and purpose of brokers. Instead of being sales agents, they will become service experts. Brokers (most likely, augmented by chatbots and AI) will become personal assistants in the business of tailoring insurance product and service offerings to address customer needs. The CEO of Cover, Karn Saroya, hinted at this change when he said: “Insurance in the future will be about services + insurance. Our company is geared towards figuring out the right mix of services that resonate with customers such that they’re getting the most out of their premium dollars.”[3]

Control the end-user relationship and vertically integrate –– forming a monopoly. To quote Saroy again, “Take our services + insurance view to the extreme, and insurance premiums start looking like the next ad dollars - spinning out free products and services that bring joy to insurance customers, the basis for a consumer-centric insurance company." The insurance industry has created a false separation between different types of insurance. A standard homeowners policy (known as an HO-3 policy) will protect you from things like fires and fallen trees, but not floods or earthquakes. Why isn’t flood or earthquake insurance bundled into my plan if I’m in a coastal state? The exclusion of certain protections follows the same line of argument. As Cover expands its ability to accurately assess the risk of an individual, not just their assets, it will be able to provide a single insurance policy that protects all kinds of risk in real time at a premium you pay every month.

The world is rapidly changing and yet the insurance market is still stuck in the 1950s. Startups like Cover are laying the groundwork for what we might own 30 years from now when we’re zipping around in autonomous vehicles, living in smart houses, and participating in an economy that prioritizes sharing, instead of ownership. The Cover then (pun intended) will look quite different from what we need today, and the company is already preparing for that future. Cover is building an insurance business that can absorb a higher loss ratio than the industry due to its lower expenses since it is arbitraging broker commission fees, retain premiums because it is capturing and accurately predicting risk, and will be able to retain and upsell customers across insurance needs because of its customer-centric approach. If Cover isn’t a Warren Buffet-esque investment, I don’t know what is.


Thanks to Nikhil Basu Trivedi and Chelsea Miller for reading early drafts of this essay.

  1. http://basehitinvesting.com/wp-content/uploads/2013/05/The-Security-I-Like-Best.pdf [↩]

  2. https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/2017_FIO_Annual_Report.pdf [↩]

  3. https://medium.com/social-capital/truth-consensus-skin-in-the-game-june-16-2017-snippets-33aad38108f3 [↩]