Four Insurtech business models

4 INSURTECH BUSINESS MODELS & CORRESPONDING METRICS

The beginning of 2021 represents; a fresh cycle around the sun, Q3 of the Australian financial year, Q2 of the US financial year and Q4 of the UK financial year.

With 2020 being a disrupted year and the quarters seemingly passing at an increasing pace, there is some pressure on production outputs in 2021.  As such, we thought it timely to discuss the four primary insurtech business models and corresponding key metrics that founders should be tracking. In this blog we will also touch on common mistakes observed in the measuring of performance across each model.

Insurtech business models are often the same or similar to business models adopted by startups in other verticals. For example, a Marketplace business model is used by AirBnB and also Honcho (the insurance reverse auction aggregator).

We derived the foundation of these business model metrics from the central source of truth in start-up land, YCombinator, and make reference to @anuhariharan‘s excellent analysis of nine startup business models across all verticals.

The majority of insurtechs will fit into one of these four business model categories and will discuss each in turn:

  1. Enterprise
  2. SaaS
  3. Intermediary
  4. Marketplace

Enterprise

An enterprise company sells services or software to other businesses (e.g. insurer) on a single-license basis. These contracts have fixed terms, designated contract values, and come up for renewal at the end of the term.
Key Metrics

  1. Bookings: sum of the value of all customer contracts
  2. Total Customers: total number of unique contracted customers today
  3. Revenue: Revenue is recognised when the service is actually provided or rateable over the life of the agreement.

Common Mistakes
– Don’t use Bookings and Revenue (or Bookings and ACV – Annual Contract Value), interchangeably.
– Don’t include LOIs or verbal agreements in Bookings, they’re not Bookings until the contract is signed.
Comment
An Enterprise business model is not scalable like a subscription model as there is no recurring contractual commitment from the client, thus less attractive to start-up venture capital.

SaaS (Software-as-a-service)

A company that sells subscription-based licenses for cloud hosted software solutions e.g. Evari.

Key Metrics

  1. MRR (Monthly Recurring Revenue): revenue recognised for recurring services rendered in a given month.
  2. ARR (Annual Recurring Revenue): measure of the revenue components that are recurring in nature, on an annual basis.
  3. Gross MRR Churn: monthly recurring revenue lost in each month ÷ monthly recurring revenue at the beginning of the month.
  4. Paid CAC: cost per customer acquired through paid marketing channels [total spend on sales and marketing in a given month ÷ total customers acquired via paid channels (incl. via sales), in a given month]

Common Mistakes:
– Recurring should only be used on a subscription basis where the user signs-up on a recurring MoM or YoY basis.
– Do not include one-off fees e.g. consulting work

Comments
Churn helps calibrate the revenue to provide a truer indication of growth and it also helps keep lost clients top of mind as they represent an incredibly important source of feedback.

Intermediary (incl. MGA / Underwriting Agency & Insurance Brokerage)

A company that acts as an intermediary, taking commissions and/or fees for facilitating the transaction of insurance products & services, representing either the insurer or client.

Key Metrics

  1. Monthly Gross Written Premium (GWP): total premium in a given period.
  2.  Monthly Revenue: the portion of GWP recognised as revenue for services rendered.
  3. Monthly Retention: number of clients renewing policies ÷ number of clients who received a renewal offer.
  4. Revenue CMGR (Compounded Monthly Growth Rate): implied compounded monthly revenue growth rate between two disparate months [CMGR = (latest month net revenue ÷ first month net revenue ^ (1 ÷ # of months -1).
  5. Gross Margin: gross profit in a given month ÷ in total revenue in the same month
  6. Paid CAC: cost per customer acquired through paid marketing channels [total sales and marketing spend in a given month ÷ total customers acquired via paid channels (incl. via sales), in a given month]
    MGA only
  7. Claims Frequency (blended): the number of claims ÷ the units of exposure
  8. Loss Ratio: total claims losses ÷ GWP
  9. Combined Ratio: add together (combine) the loss ratio and the expense ratio.

Comments
Reviewing at-fault claims (for applicable product lines) can help guide underwriting decisions and pricing to optimise for portfolio performance.

Marketplace

A marketplace company acts as an intermediary in the sale of a good or service between sellers and buyers, generally collecting a per cent of the total transaction value e.g. Honcho

Key Metrics

  1.  GMV (Gross Merchandise Value): total sales transacted between the seller and buyer in a given period.
  2. Net Revenue: the portion of GMV recognised as revenue for services rendered.
  3. Net Revenue CMGR (Compound Monthly Growth Rate): implied compounded monthly net revenue growth rate between two disparate months [CMGR = (latest month net revenue ÷ first month net revenue ^ (1 ÷ # of months -1)
  4. User Retention: % of customers who go on to make at least one purchase in month 2 or year 2, depending on product/ service cycle.
  5. Paid CAC: cost per customer acquired through paid marketing channels [total sales and marketing spend in a given month ÷ total customers acquired via paid channels (incl. via sales), in a given month].

Where advertising is an additional business model:

  1. DAU (Daily Active Users): total number of unique users active in a 24-hour day, averaged over a given period of time.
  2. MAU (Monthly Active Users): total number of unique users active at least once in the last 28 days
  3. Percent logged in: total MAUs with a registered account ÷ total unique visitors (inclusive of both logged in and logged out) during the same 28 day period)

Common Mistakes
– Not defining what ‘active’ means.