Openly: Is premium (high-value) home insurance the beachhead to penetrate the greater ~$110b home insurance market?
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Home insurtech companies Lemonade ($LMND) and Hippo are attracting a lot of the hype with their recent offerings and sky-high valuations. But while these new-age insurtech companies are pouring millions into marketing, there’s a quiet startup called Openly, fresh off a $40m Series B led by Advance Venture Partners, lurking in the insurance back-channels, taking (what they believe to be) the least risky path to becoming a billion-dollar home insurance company.
Their thesis is simple: focus on a high-retention, low-volatility consumer segment (rich families) and an overlooked distribution channel (independent agents). From there, take a proven insurance product (premium home insurance), provide better coverage along a few axes, digitize it, quote it faster, and enable independent agents to close deals faster.
With Openly, it’s a case study on finding the right wedge into the $108b home insurance market. Though premium (high-value) home insurance is a relatively low-volume market, it provides a substantially stable base for Openly to branch into higher-risk segments. Openly’s approach may not be the sexiest, but when the market closes at the end of the day, they may be having the last laugh.
The Problem
Premium home insurance (a $6b+ niche out of the greater $108b home insurance market) has been overlooked by larger carriers. High-value homes often have complex underwriting requirements (as compared to the standard home) leading to an inefficient and opaque shopping experience.
It’s easy to see why VCs believe the $108b U.S. home insurance is for the taking: insurance incumbents are notoriously bad service providers and have inefficient operations (leading to inflated premiums):
Poor service providers: The NPS score in 2020 for the industry was 17% in 2020 (where 50% would be excellent). Moreover, industry-wide churn sits at ~24%, primarily due to customer service issues.
Inefficient operations: The promise of insurtech is to eliminate the waste: improve underwriting accuracy with ML and improve claims through automation. The average expense ratio is ~27% for P&C insurers, so in a perfectly automatable world, premiums could be 27% cheaper on the whole. Through investing in automation, insurers are expected to see a $1b reduction in annual expense costs per $1.3b in upfront investment1.
The question that lies for home insurtech companies like Lemonade, Hippo, Kin, and Openly is how do they get there? Which channel and consumer segment will provide the smoothest path to carving out a substantial piece of the $108b home insurance pie?
The home insurance market can be divided up by asset price as well as distribution channel. While Lemonade and Hippo pour millions into advertising to compete in the D2C lower-to-median value segments and Kin goes after catastrophe-prone housing, Openly is going after the premium (high-value) segment sold through independent agents. After all, the independent channel makes up ~32% of all home insurance policies sold.
What is premium home insurance, anyways? Premium home insurance covers standard homeowners risks (e.g. burglary, fire) but also expanded coverage specific for higher end properties ($750k+) such as higher valued items (e.g. higher coverage limits for jewelry), guaranteed replacement costs, extra coverage for natural disasters, and even personal cyber insurance. The higher the value the home, the more specific the coverage.
When it comes to premium home insurance, consumers still want better prices and better coverage (though it’s worth questioning how price-sensitive high-net-worth individuals are). According to our own consumer survey, for owners of homes valued $500k+, they listed cost and better coverage terms as their two main drivers when choosing policies. One clear place to improve in terms of coverage terms is guaranteed limits, according to Ty Harris, CEO of Openly:
Most cases, the limit of coverage for every single home isn’t turned up to $5m. Let’s say the underwriters are wrong and your house burns down, you don’t get enough paid out to you. We take that risk upon ourselves and forego trying to guess the limit homeowners need. We price the house based on underlying characteristics that are more indicative of future-looking risk. (Harris, CEO, Openly)
When it comes to the independent agent channel, incumbents and agents have been slow to automate, leading to a poor shopping experience:
Incumbents overcomplicate [premium] home insurance. If you’re getting a $1.5m home insured, there are a lot of hoops to jump through –– many based on science from 30 years ago. For the most part, it’s human underwriters digesting the data points and coming back with a quote 45 minutes later. (Harris, CEO, Openly)
Premium home insurance is a specialty insurance product –– typically underwritten by more diverse carriers like AIG and Chubb. Incumbents may not have considered it to be an area that needs investment through automation due to the fact that it’s a low volume market –– however, such neglect leaves this specific consumer segment unable to quickly and efficiently compare prices while shopping for premium home insurance. Moreover, when you’re an independent agent and you need to make your potential customer wait an hour or two before quoting them, every minute wasted is a minute that customer can go somewhere else.
So how big is the premium home insurance market?
While the greater homeowner insurance market is $108b, the premium home insurance market is a smaller fraction. Openly insures homes typically in the replacement cost range of $400k to $3m (it’s important to remember that replacement cost ≠ home value). There are a few different ways of looking at the market:
Incumbent share: The 4 largest premium home insurers – Chubb, AIG, Pure, and Vault combined for $4.6b in annual premiums in 2018, with Chubb and AIG combining for 87% of that share2. Chubb, AIG, and Pure primarily sell through brokers.
Million-dollar homes: Total U.S. housing inventory by value bracket is hard to come by, though it’s reported that there are ~3 million homes nationally valued at over $1m. At $2,000 for an average premium, that’d be $6b in annual premiums. Though, given that Openly insures more properties down market, their serviceable addressable market is larger than that.
While $4.6b - $6b may not look like a large market size, for Openly, it’s just the start. Premium home insurance is a means to an end in building an efficient and stable insurance business so that they can expand their risk appetite and move into higher volume segments.
The Solution
Openly leverages advanced tech to write premium home insurance in a quicker and more accurate manner.
Openly is a tech-forward home insurer writing policies for high-value homes. They operate as a managing general agency (MGA) backed by the carrier, Rock Ridge Insurance Company. As an MGA, Openly can underwrite policies on behalf of Rock Ridge and receive a commission on each policy sold.
Guaranteed limits. Unlike traditional premium home insurers, Openly underwrites policies with guaranteed replacement costs of up to $5m, no matter the size. Openly also covers traditional points such as dwelling, structure, belongings, loss of use, legal liability along with other add-ons such as equipment breakdown, water back-up, and personal cyber.
Openly’s tech-forward approach helps reduce the time and friction with acquiring a policy and helps increase customer satisfaction through building trust and relationships with their policy owners.
First, Openly’s automated underwriting system is able to give customers a quote within 10 seconds (instead of 45 minutes) with just the following data points: name, date of birth, and address. The homeowner can then buy the policy within a minute (if they want to use simple signage).
Secondly, Openly easily integrates into agency functions. (Digital) agents interact directly through Openly’s API for easy quoting and Openly has built-in functions for streamlining claims management, opening up a direct communication channel to the policyholder.
Leveraging the middleman. By focusing on distributing through independent agents (both in-person agencies and digital agencies such as PolicyGenius), Openly doesn’t have to invest behind large marketing initiatives.
Openly doesn’t have to conduct extensive brand and customer acquisition efforts. Instead, they can rely on the great business that its partner agents and brokers have assembled over years of client services. Instead of spending on marketing, Openly can focus its resources on superior products and coverage for its customers. (Zach Bratun-Glennon, Partner, Gradient Ventures)
We were drawn to Openly because its go-to-market was a B2B2C approach rather than a D2C approach. More than a third of all home insurance policies are sold through home insurance agents. All innovation, up until now, has been for the D2C market but not for independent agents. (Courtney Robinson, Partner, Advance Venture Partners)
As stated above, ~32% of home insurance premiums were distributed through agency writers (agents, brokers, MGAs). Also worth noting here is that large carriers have in-house agencies where they offer potential buyers multiple quotes. Openly can conceivably sell their products through these in-house agencies. (And for more tailwinds: Nationwide completed its full transition to independent agents last July.)
In competitive markets, sometimes incremental improvements is all it takes to get customers to choose you over the incumbents.
Looking to the Future
Openly is going after a relatively low volume market to start. However, the promise of better stability can enable Openly to more easily expand down-market into the broader home insurance market.
Looking at the premium home insurance market alone, it’s a long (but not impossible) path to becoming a $1b company.
How much revenue does Openly need to be a billion-dollar business? As a revenue target for Openly to hit, we look to Tokio Marine’s acquisition of Pure Insurance for $3.1b in 2019 as a comparison.
In 2018, Pure had $963m in premiums under management – equating to a 3.2x revenue multiple3. We are aware that Lemonade and Hippo trade at significant premiums to 3x (Lemonade at > 40x 2021 revenue; Hippo at almost 60x), but we think it makes sense to take a more conservative approach to underwriting the future. And so at 3.2x, Openly would need to generate $312m in premium revenue to hit a $1bn valuation. (If you think Lemonade’s and Hippo’s valuations are where Openly ultimately lands then they only need $20-25m of revenues to get a $1bn valuation.)
First off, we know the revenue potential is there for premium (high-value) home insurance. Per above, the four top high-net-worth insurers generated $4.6b in homeowner premiums in 2018. The required $312m premium revenue to support a $1b valuation is just 6.8% of that. 👀
However, the rate at which Openly captures that revenue may require patience. We assess this by looking at Openly’s two main consumer segments: (1) those buying a new property and (2) those switching policies.
The first segment (those buying new properties) is straightforward to estimate. Over the past 3 years, the average number of $500,000+ homes purchased was 125,000 per year. At an average policy of $1,500, that’s $188m in premiums each year.
We know Openly isn’t capturing all 100% of that $188m in new premiums each year. Given there are 4 main players in this niche, let’s assume Openly takes 15% of the market ($28.2m in premiums per year). It’d take Openly ~11 years to reach that $312m premium target.
Now, what about the second segment: those switching policies. Our survey showed that 17% of homeowners switched policies in the past year (and other sources have industry churn at ~24%).
While we don’t have a holistic view of housing data by value, we use income level as a proxy. Looking at the top 5% of families by income level applied to the total number of single-family households (83 million), we’d have 4.2 million total high-value homes. Assuming 17% churn each year, that’d be 705,500 new potential policies ($1.05b in premiums) Openly can capture each year.
However, the churn rate is lower in higher-value markets. Rich families are less sensitive to premium prices and generally have high retention rates. Chubb’s retention rate was 95% for major accounts in 2019. Even if churn was one-fourth industry standard, that’d still be ~$260m in premium revenue Openly can capture, speeding up its path by more than 2x to a $1b valuation.
The path to $1b is there, but it may not be immediate (as it’s starkly dependent on Openly’s ability to capture a substantial part of a decently low volume market).
The ability to move down market is imperative. Over the past 3 years, there were, on average, 104,000 homes sold annually valued $400k-$499k. This could expand Openly’s revenue pool by $156m, almost doubling its potential.
Yet, there’s a reason why Openly started with this niche (despite it being low volume) and that’s because….
New entrants are often left with the high-risk assets to underwrite. Openly’s focus on premium home insurance will enable them to build a better underwriting engine to move down-market and handle standard home insurance claims.
For any new entrant in insurance, you get pushed to take the risks nobody else wants. There’s a big winner’s curse to that, no matter how good your models are. If you’re getting the policy nobody else wants, you will become, for example, a non-standard auto writer, even though you didn’t intend to be one. By focusing on up-market single family homes, we reduce the risk of that happening. Other insurtechs have inadvertently become non-standard writers –– such as catastrophe specialists for places like Florida, California, and Texas. (Harris, CEO, Openly)
In other words, high-value single-family homes are not risky bets when it comes to home insurance. These families tend to be rather self-selecting (and Openly, as the underwriter, can be ever more discerning as they only offer a price to two-thirds of applicants). These are customers who value protection, reliably pay their premium, maintain their homes, and behave safely.
Lemonade and Hippo are going after the larger home insurance market, exposing themselves to a more diverse consumer base. Other startups like Kin may be pigeon-holing themselves by serving the riskiest properties of them all: catastrophe-prone homes. Moreover, Openly is primarily insuring in “safe” mid-western states (such as Illinois, Kentucky, Ohio, Wisconsin), largely not catastrophe-exposed.
According to Harris, it’ll be easier for Openly to move into the broader home insurance market than for a company like Kin. While a company like Kin is overfitting its underwriting engine to provide better coverage to catastrophe-exposed properties, Openly is trying to perfectly fit its engine to be leveraged in more diverse circumstances. (No disrespect to Kin who’s serving a large and much in-need segment).
For Openly, the strategy is to build a solid foundation and to own an overlooked distribution channel: independent agencies. There’s a pathway to becoming a billion-dollar business here, though it may not be the fastest.
At the end of the day, Openly is run by true insurance veterans, who are primed to mitigate as much risk as possible and plot a smooth path to a substantial, non-risky balance sheet.
Thank you to Ty Harris of Openly, Courtney Robinson at Advance Venture Partners, and Zach Bratun-Glennon at Gradient Ventures.
In case you missed our last post: Kettle: the startup crazy (and smart) enough to underwrite the $10b+ wildfire re/insurance market
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Have any other questions, comments, or feedback? My email is harry@radicleinsights.com. Please reach out 🙏. Would love to hear your thoughts!
Ernst & Young. (2020). 2020 US P&C insurance performance analysis. https://assets.ey.com/content/dam/ey-sites/ey-com/en_us/topics/insurance/ey-acord-pc-analysis-2020.pdf?download
J.P. Morgan. (2018). P&C Insurance: Finding Opportunity in the Business of Risk, but Value Scarce.
For reference, Chubb trades at 2.3x forward-looking revenue.