Overlooking loss ratio behind insurtech underperformers

Loss ratio performance can give the best insight into how successful an insurtech may be and is an increasingly accurate metric as insurance products become personalised, Insurtech Gateway Australia CEO Simon O’Dell says.

Loss Ratio is “a sound proxy” for the performance of key functions within an insurtech, including underwriting and portfolio monitoring, he says.

“Poor loss ratios ultimately indicate poor insurance fundamentals and investors and the broader market are beginning to understand this,” Mr O’Dell said, noting big-name insurtech IPOs in the US such as Lemonade have performed below expectations and lost a “newsworthy amount” of shareholder value.

“Loss ratio is a metric that can be overlooked in the industry, however this metric may be the one thing that determines the path to success or failure for emerging insurtechs,” he said.

“The industry wants to understand exactly what went wrong with companies such as Metromile and Root. From our experience it is often at the early stages where it can go wrong, and it starts with the founders.

“It takes discipline to forego the forbidden fruit, the allure of top line metrics, to respect insurance fundamentals and temper growth by promoting risk metrics.”

He says the primary reason behind the faltering post-IPO performances is that venture metrics fail to pick up on loss ratio – “an insurtech nuance, a metric specific to the insurance industry that no other start-up sector needs to consider”.

“Due to being in the insurance industry, loss ratio is a metric that should not be ignored, regardless of the stage of growth.”

He notes Lemonade’s fourth quarter loss ratio was 96%, up from 77% in the prior quarter, due to under reserving. The industry standard for an acceptable loss ratio is 40-60% depending on the product line.

“It is discipline and respect for insurance fundamentals that enables an insurance business to track and reserve for claims adequately,” Mr O’Dell said.

“For every part that an insurtech seeks to pursue high velocity growth at the expense of a balanced combined ratio, the sensitivity of claims reserving and other key insurance fundamentals increases exponentially.”