BRIAN KENNY: On September 2, 1666 in a bake shop on Pudding Lane in London, Thomas Farriner, baker for King Charles II, failed to properly extinguish his oven, sparking a fire that burned for five days, destroying 80% of the city, including 13,000 homes, 87 parish churches, the Royal Exchange, Guildhall, and St. Paul’s Cathedral. Within months, “Insurance Office” for houses, the first homeowners insurance company, began offering fire insurance for those in the throes of rebuilding. Soon, fire insurance established a foothold in the US colonies when a young entrepreneur by the name of Benjamin Franklin created The Philadelphia Contributionship using a model that closely resembles how we buy insurance to this day. Most of us see insurance as peace of mind, protection against a possible eventuality. It’s a promise and a contract that if you pay your premiums, the firm will have your back when you most need it. But what if they don’t?
Today on Cold Call, we welcome Professor Lauren Cohen to discuss his case, “Hippo: Weathering the Storm of the Home Insurance Crisis.” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR podcast network. Lauren Cohen is the L.E. Simmons professor in the Finance and Entrepreneurial Management Units at Harvard Business School and research associate at the National Bureau of Economic Research, and he is a repeat customer on Cold Call. Welcome back.
LAUREN COHEN: All right. Thanks so much for having me. What a great introduction. It’s a perfect introduction to this case in particular because it’s about innovation in insurance, and it just shows that innovation in insurance is not a new thing but it’s been going on for hundreds of years.
BRIAN KENNY: Let me ask you to tell us what the central issue is in the case and what your cold call is when you start this discussion in the class.
LAUREN COHEN: Yeah, absolutely. Here’s the central issue in this case. Insurtech is a frontier market. It’s a new market, and it’s new, disrupting a market that is, as you said, hundreds of years old. The most interesting part about the insurance market is that when you look at the big players, unlike some of these other industries which are kind of evergreen, every 20 years there’s a new leader in this market, that’s not the case for insurance. We can ask why. There are a lot of potential reasons and hypotheses put forward. Perhaps it has something to do with trust, perhaps it has something to do with capital requirements or size or just the size of distributed networks that were needed in the past. That’s going to be an important piece of what Hippo and some of these new insurtech entrants are that others aren’t.
In the past, it’s been a very personal business. You knew the way. State Farm. Just like a good neighbor, State Farm is there, these types of things. They actually lived and died on that model that, “Hey, your insurance agent is your neighbor. They’re at little league games with you. They’re on the PTA with you. You know these people. You can trust them, and you can trust them to not only insure, but to protect your most valuable assets, your family, your house, your car.” This market is now being disrupted by these players that nobody thought would work.
I’ve actually also talked to many of these incumbents, Prudential, State Farm, and when they saw this new model coming in, this almost like touchless, faceless market that Hippo is a part of, and that Hippo, Lemonade, Ladder, I’m going to mention a few names, they may come up again, these are these kind of new entrants. They’re the flag-bearers of this model that says, “Hey, people actually don’t want their neighbor. You know what people like far more than their neighbor as an insurance agent? Nobody. In fact, they don’t want people involved. And, so actually the fewer people that they can be in touch with, the better. That was something that has upended and to this day these major incumbents are having a hard time dealing with, but that was one of the big innovations.
That’s one of the big things Hippo did. Hippo came in and said, “Hey, look, forget about all that rigmarole. Forget about all that paperwork. We’re going to let you have very quick quotes and not only are we going to have very quick quotes, but we are going to be your partner, but silent partner, moving forward.” They’re property and casualty. That’s their main line of insurance. What that means is think of your house and then the casualty is in case you do any damage to someone else’s house, so that’s kind of the big line that they’re in. What they say is, “Hey, look. The reason you should sign up for Hippo is not only are we going to be very easy from the beginning, but we’ll be very easy going forward and not only easy, but we are going to find ways for you to save money. If you install just a few apps, just a few of these devices in your house, we can actually tell you, ‘Hey, look, adjust your thermostat a little bit or it would be great if you can now make these other changes. We can actually scan the room with some of these devices so we can tell, gosh, if you were to replace this piece of equipment which is using a lot of energy with something else and we actually know what else you can replace it with, here’s some examples and here’s some suggestions.’“ They’re literally your friend, but only give you advice on how to save money.
BRIAN KENNY: Right. They become an advisor, which is super interesting. I’m wondering how you heard about Hippo and why you chose to write this case.
LAUREN COHEN: Yeah, I’m so glad you asked that question, Brian. It just shows these kind of complementarities between everything we do here at HBS. Actually, one of the high-ranking members in Hippo took my fintech class. To their credit, which I love to see, he was a lifelong learner, and so he came in and I just got chatting with him on fintech and what they’re doing at Hippo and I said, “My gosh, that’s super interesting what you’re doing.” It was the perfect HBS case and is the perfect HBS case because the jury is still out, and that’s true on all these insurtechs.
Let me just kind of give the landscape of insurtechs. Insurtechs have come in, disrupted, and are stealing the essentially policyholders and new policyholders like crazy. It looks like their model is working, but the model that’s working is the stealing of the people. If you actually look at the losses that they’re incurring… That’s a great part about insurance is that you can actually compare. These are all public documents. You see, God, how good are they at doing this? Their claim is that, “Hey, we use insurtech, we use machine learning, we use AI to be able to essentially assess risks better and price risks better and do this.”
It turns out that’s not true. Up until this point, they actually have larger losses than many of these insurance companies on that so they’re actually not better at the insurance part yet. Yet. But it just shows you the tech that has been insurtech thus far has all been on the UI and UX, so savvy ways to take the insurance agent out of it, so you have a very slick app on your phone or something else. That has been the attack in insurtech, so although the big pitch is, “Hey, we’re going to use all of these things like telematics and other types of things to make your insurance costs better because we can price better.” That has yet to come to fruition. Now, I do have to say in their defense, that is something which takes a lot of time. The incumbent insurance companies-
BRIAN KENNY: I was going to say.
LAUREN COHEN: … have a hundred-year head start on them.
BRIAN KENNY: Of course. Yeah. How do you even penetrate that market? But what you’re describing to me, and you mentioned the fintech course that you teach, sounds a lot like what we’ve heard has happened in the banking industry, both commercial and personal banking, where people have decided… It used to be like… I can say that I’m older and relatively speaking, but I grew up doing banking with my local bank and the people in the bank knew me and I knew them. That’s just not the way it’s done anymore. People are using apps and they’ve disintermediated the personal part of the bank.
LAUREN COHEN: I love you bring that up. In fact, Brian, you’re a wonderful student because you’ve hit on my cold call before I even gave it. This contrast and comparison with fintech in the banking space and the payment space is something which is stark and fascinating here. Within the payment space and banking space to a first-order approximation when you look at market shares, you’re right. We’ve taken out the middleman there, and yet the apps that we have on our phone, by and large the market share, are still Citibank, they are still Chase, they are still these companies, Visa. Yet on this side of insurtech, they’re not. We’ve gone to Lemonade, we’ve gone to Ladder. That’s also true, and let me kind of bring it in this broader space, of robo-advisors too. Robo-advisors came in this space and they said… I’ll give you some of these names, Betterment and Wealthfront. They came in and they said, “Gosh, we’re going to disrupt this market.” The news articles came out and said, “Hey, financial advisors, hey RIAs, polish your CV, buddy, because you’re done. Your career’s over. For a while they did grow and they grew quite a lot, but then they asymptoted, so they leveled off. The reason is that what they found is that they couldn’t break in to a certain level of wealth. Even when the Silicon Valley people, which were where the large amount of wealth was building and where they got a lot of their first clients, when they got to a certain amount of capital, think like Mark Zuckerberg, even they didn’t want to sit across from a computer and say, “Okay, computer. You tell me how I insure this. You tell me how I make sure that this thing I’ve worked my entire life for, what I hope to pass on to the next generation, what I remember all the nights in the office, the blood, sweat, tears I put into it. Computer, I trust you.” No, no, no. They want to sit across from Susan and say, “Susan, you’ve known us 30 years, you know my kids, you came to our weddings. What should we do?” That’s the fascinating part. On the payment side and even on the financial advisement side, that has been a big issue. Not at all on the insurance side. People were totally happy to get people out, and so this issue of trust or whatever it is about this personal relationship, it’s fascinating. One of the most interesting aspects is how quickly it’s left insurtech.
BRIAN KENNY: Yeah. But I think some of that might have to do with, and you alluded to this a little bit earlier, Lauren, is the experience that people have when they file a claim with an insurance company. It’s not fun. Nobody really wants to go through that process.
LAUREN COHEN: I think you might be hitting on something. Look, if you think about the valence of the interactions you have with a bank, with the financial advisers, they’re growing your wealth. Insurance is just kind of bad stuff. You go to them when something bad happens, then you have to argue with them and you bicker back and forth when something bad… You think about health insurance or property insurance. I think you might be right, that valence of the activity, you associate that, and maybe in some ways having that with a computer is less infuriating than having it with a person.
BRIAN KENNY: Talk about Hippo a little bit. How did they even come to be? I’m just fascinated that anybody can start from scratch and create a new entrant into this firmly established marketplace.
LAUREN COHEN: The neat part about insurance is that while it is regulated, it’s regulated at the state level. It’s not a national insurance. What that does is that it really in some ways lowers the barriers of entry of getting in because then you can start in just one state. Instead of getting maybe a higher bar for a federal regulation, it’s just a state by state and so you can decide which state you go into. They each have their own individual levels of regulation, but by and large they want insurers in there. It’s a very regulated market in that they even regulate the price that you can charge, so these insurance rates, so the rates. If you want to change your rate, you actually have to lobby the insurance regulator of your state and say, “Hey, look, I want to change my rate for whatever reason. Losses have been higher than usual and we have to do it.” Now here’s the cool thing that’s happened because of that, and cool in the sense that it allows a lot of entry, is that what that means is that there’s space for new entrants to come in. Because some of these big players sometimes pull out of markets, it leaves white space for someone who’s nimble like Hippo to come in and with relatively small… I mean, you need some asset base, but then you have reinsurers and other types of things, so it’s easier than you might think to get in. But what it’s also done, and we have a… One of my colleagues has some wonderful work on this looking at the insurance market and what that ability to pull out of some markets has done and who that puts costs on. Her name is Professor Ishita Sen. I’ll just tell you a little bit about her work because its apt here. What she’s found is that many insurers are pulling out of the high-cost markets. Think of this like Florida, Louisiana that are getting more than their fair share of hurricanes. Here’s what that does. When they pull out of these markets or if they… It puts a larger cost on the insurers that stay. What the insurers that stay have to do, they then can’t raise rates on Florida too high, so the insurers that stay, they actually raise rates on Massachusetts, on California.
BRIAN KENNY: Spread it around. Yeah.
LAUREN COHEN: So, it turns out you and I in Massachusetts or someone in California or someone in Oregon is actually then paying for the higher rates in Florida so they can spread it around. It has this interesting kind of unintended consequence of the state by state regulation where it actually can push costs in other states.
BRIAN KENNY: I do want to talk more about some of those states because that factors into the case pretty heavily. Hippo’s been around for how long?
LAUREN COHEN: Hippo is quite a new firm, so they’re less than 10 years old.
BRIAN KENNY: Okay. I’m wondering before the insurtechs hit the scene, had there really been much of any kind of innovation in the insurance space? I think they’ve innovated on how they brand themselves because they’ve introduced Flo and the Geico lizard and all these other characters and we see them a lot on TV. They’ve innovated on how they present themselves, but have they really innovated on the business model?
LAUREN COHEN: Yeah. That’s a very savvy pick up, and I hadn’t even thought about it in that way, but you’re right. When we see innovations, they’ve been on the logos and the advertising but not as much on the loss models. There have been some innovations, and they claim to be updating the loss models obviously whenever they can and trying to maximize the loss models, that’s in their best interest, but we haven’t seen huge innovations in the insurance market. One of the reasons is that there have been large incumbents and there have not been new entrants that have really been able to shake things up.
BRIAN KENNY: What are some of the things that Hippo does that are different that they can point out as a value add to clients?
LAUREN COHEN: Yes. Their biggest value adds are this idea that they bring in technology and they bring technology in in a way that’s not disruptive to your life, and yet it’s additive to the insurance experience. They’re going to be silent partners that observe what you do and try to make your life better in that sense, make your life less costly. They understand what consumers want, and that is the claim that they’re making.
BRIAN KENNY: Okay. Who buys that claim? Who’s their ideal customer?
LAUREN COHEN: Yes. What they have had to do here… The thing about insurance thus far is that it’s a very sticky market, and incumbents know this. In many states, you have to get insurance, this type of insurance, property and casualty. You don’t have to get it because the state requires it, but it’s because to get a mortgage many banks require that you get this. That has been a big tailwind to property and casualty insurance which means that essentially anyone who wants to buy a house with their mortgage, which is nearly everyone who buys a house, they need to get this kind of insurance. That’s allowed Hippo to strategically come into markets. Now, their entry decision because it is so hard to get new insurers has been to come into markets that are risky, so they have entered into risky markets, think Florida, think Louisiana, think these other places. Those are wonderful markets until a disaster happens.
BRIAN KENNY: Yeah, which is happening more and more frequently.
LAUREN COHEN: Yes, exactly. That is the issue that they are running into in that they’re facing these disasters. They have faced a double disaster recently. This was during the pandemic, and this was through no fault of their own. What happened is that… This is a neat part of an insurance contract. When you have an insured entity, a property, they promise to rebuild the property, but by promising to rebuild the property they don’t say, “We promise to give you a certain amount of money and then you can rebuild if you want to.” They say, “We’re going to rebuild the structure.” Now, what that does is that puts all of the pricing risk and cost risk on them, and that’s what happened during the pandemic. Imagine you get a hurricane during the pandemic when there were supply chain issues and lumber increased in value, increased in price by 5x, then all of that cost increase, it was borne by Hippo. It wasn’t borne by you. You didn’t have to pay because Hippo had promised to rebuild your house. They promised to give you a new house, not “We’ll give you the value of your house. No, no, no, we’ll build your new house.” If it costs five times as much to build your house, well, they’re out of luck. By bearing that risk, that really bore down on Hippo.
BRIAN KENNY: Mm-hmm, and so Hippo finds themselves in a situation where they’re losing money, not making money.
LAUREN COHEN: Yes.
BRIAN KENNY: How do you turn that around?
LAUREN COHEN: Yes. What they’ve done is they’ve been very strategic, to their credit, about both moving into new markets, again continuing to expand, continuing to increase revenue, and by essentially trying to cut costs to the extent they could, which are finding other places to get those materials. Now material costs have come down, thank goodness, and also one thing that happens as you get older as an insurance company is that you do get more data. To your point, when someone has a hundred-year head start, yeah, of course they have a hundred years to build a better model, to get better data, to have realizations, but over time that head start can be ameliorated. That’s what these companies are doing. So as they get more data, their pricing algorithms are getting better and so they are soaring toward breakeven. That may not sound like much, but all of these insurtechs, that’s what they want to get to because nearly all of them are unprofitable, to your point.
BRIAN KENNY: It’s a wonder that any insurance company is making money given the impact that climate change has had on weather patterns. If it’s not a hurricane, it’s a tornado. If it’s not a tornado, it’s softball sized hail that’s damaging vehicles and homes, so I would say it’s not for the faint of heart. Anybody who ventures into this space really has to think hard about what they’re doing and why they’re doing it.
LAUREN COHEN: You bring up a great point. It’s going to be one of these things that we as a country and a society are going to have to decide if it does get too expensive like you’re talking about, and gosh, it just so happens that no private sector firm can charge a reasonable price to someone to do this, then do we want to as a country help out with that? That’s starting to happen. There are public options, and there are public options in places like Florida and some of these other very high-priced states for if prices get too high and all the insurers say, “Okay, look at this price.” Let’s say their expected cost is $4500 per year and they’re only allowed to charge by the regulator $3000 per year. Then they say, “Well, gosh, we’re not going to charge 3000 when we know it’s going to cost us 4500. For everyone we sign up, we lose $1500. We’re just going to pull back and we’re going to leave the state of Florida.” Well, they’re not going to leave the Floridians high and dry, so there are public options for them that will be right at that cap, but those are subsidized options, to your point. Then it’s not the private sector, it would be the public sector coming in.
BRIAN KENNY: You mentioned that the new entrants like Hippo are able to gain a foothold in a place like Florida because the incumbents are pulling out, but is that really the place where you want to gain your foothold?
LAUREN COHEN: It’s one of these a needle eye equilibria or knife edge equilibria. It’s one of these. There are few markets that are like this, and I’ll tell you how I learned about this kind of market where vintage matters and entry matters. I was sitting at the San Francisco airport and I was just at one of the little food courts there waiting between flights, and I was having lunch with a JetBlue pilot. He just happened to be sitting at the same table. I leaned over, I said, “Look, I have to tell you, JetBlue is an absolute joy to fly. He said, “Look, here’s why. I’ve flown for these other airlines.” He said, “I would love to say JetBlue has a recipe the others don’t. It’s not that. It’s just that none of these airlines actually own their planes, but they have long-term leases, twenty-year leases, with Boeing or Airbus. JetBlue is just newer. They just were around less time, so the age of their airplanes is let’s say five years old on average, where the age of American’s is 15 or 20.”
BRIAN KENNY: Yeah. Interesting.
LAUREN COHEN: He said, “In 10 years, JetBlue’s going to be just like them, and so it’s going to be this next new entry.” He was right. JetBlue’s planes got older and worse, and it just takes more maintenance cost and the older materials and these types of things. It’s being new is just a comparative advantage. There’s interesting kinds of markets where being new actually give you a cost advantage. Insurance is one of them, and insurance is similar in the sense that now Hippo carries all these overhead costs from the pandemic, from the last two hurricanes, from these other costs, so they’re already down. They’ve already dug a hole. Think if you and I wanted to start a new insurance company. We could come in without any of that on our books, and so we could use that to our cost advantage. We don’t have to charge as high prices because our prices don’t have to make up for past shocks, even though the shocks were not our fault. But if you as a new entrant can come in at a time when there aren’t hurricanes, a little window when there aren’t, then you can build up huge treasure chests that will allow you to then expand to other states.
BRIAN KENNY: Sure. I do like some of the things the case describes about Hippo and the sort of preventative approach that they’re taking. This is where I get back to the question I asked earlier about who their ideal customer is because not every customer would want to do the kinds of things that Hippo is expecting their customers to do, such as installing certain kinds of light bulbs. Can you talk a little bit about some of the things that they sort of… How they advise their customers?
LAUREN COHEN: They describe their ideal customer as someone who is willing to be that partner. Even though Hippo is a silent partner, they don’t want all of their advice to fall on deaf ears.
BRIAN KENNY: They don’t want people like me who are going to file the thing away and not think about it. They want people who are actually going to pay attention.
LAUREN COHEN: Yes. Yeah, yeah. They want a partner to do this, and they try to incentivize them, which is to say they try to say, “Hey, look, you won’t just thank us on your energy bill, but your insurance premiums can go down.” They try to make this incentive aligned, so much like a Root Insurance is doing with telematics, i.e. put something on your dashboard and then if your driving suggests that you are less risky, then they’ll charge you a lower rate. They do want people who will be active partners in this, and their idea is that who is this person going to be? Well, it’s going to be someone who’s a digital native, it’s someone who is comfortable maybe because they’re getting these types of notifications from lots of other of their apps and taking them, so when they get the Instagram or they get the TikTok video, they’ll actually follow advice from there. That would be their ideal partner in the space.
BRIAN KENNY: Yeah. That makes perfect sense. Talk about the impact of AI on their business, but I guess on the industry more broadly because AI and machine learning certainly seems like it could be a boon for the insurance sector.
LAUREN COHEN: I do study AI in lots of my work, including in this insurtech sector, but how it’s more broadly applied across fintech and just across different kinds of patterns that need to be recognized. Look, all AI and machine learning are, and I use these in my own research, they’re just fancy pattern recognizers. That’s all they’re doing. They’re just taking a corpus of data. Think of these new large language models. They’re taking language data, text data, and trying to predict what the right text to whatever text you input is. AI can be helpful and machine learning in trying to predict things like what’s the probability that a family of three that has a child this age or that lives in this type of neighborhood or that lives in this type of weather pattern will have a negative realization within the next week, within the next year? That said, natural disasters are by their nature unpredictable. In that sense, the nature of what they’re trying to predict is incredibly hard for machine learning and AI to get a hold of.
BRIAN KENNY: Yeah. We talked a little bit about Hippo’s potential paths to profitability. I’m wondering if you just pull the lens back a little further and think about all these insurtechs that have entered the space, are they flashes in the pan? I mean, will it turn into a situation where they get gobbled up by the big players and they use them for whatever benefit they get but they hollow out the core? What do you see… I’m going to ask you to predict 10 years down the road, 15 years down the road. Will these companies still be around?
LAUREN COHEN: Yes. Look, that is a great question. You can call me an optimist, but I’m a data-informed optimist on this. I will give you my prediction. My prediction is that they are not going anywhere. I’ll tell you why. The advantage they do have is that it turns out they have stumbled on a model that consumers want, that consumers like, so they have now a foothold. They’ve gotten a foothold into this industry. If right when they started Prudential and MetLife would’ve gobbled them up, bought them, acquired them or put out their own version of this that consumers liked, they would’ve had a chance. But they didn’t do that.
These big companies, I’ll tell you it’s hard for them to innovate. To shift that whole market model that they have, like your insurance agent, for them to say, “Okay, we’re going to fire all of insurance agents and we’re going to go to electronic.” That’s nearly impossible, and so they actually can’t compete or the horizon on which they compete is five, 10 years from now, and at that point they’re going to be overtaken by these companies. These companies, they truly do have incredibly good data scientists, and those data scientists are getting more data so even though they may not be able to predict the next hurricane, they are getting more data on human behavior and that is much more predictable. What they’re finding is powerfully around the edges, like installing those light bulbs. That they can move, and those little things, they add up.
BRIAN KENNY: Yeah, it’s a matter of changing people’s behavior too, which is never easy to do, but once it starts and you’ve got a generation of new homeowners that are kind of moving in that direction, maybe it catches on. Lauren, this has been a great conversation, as I knew it would be. It’s always fun to talk with you about your cases. I’ve got one more question for you. Quite simply, it’s if you want our listeners to remember one thing about the Hippo case, what would it be?
LAUREN COHEN: Okay. The one thing that I would want them to remember about the Hippo case is that new technology, and in this case it’s AI and machine learning, even if it’s revolutionary, revolutions don’t happen overnight. They can take time, and so even if you’re right it might take you five years, 10 years, 15 years for those revolutions to turn into the real positive promise that they have.
BRIAN KENNY: It’s a great point because we talk so much at Harvard Business School about disruption. The whole notion of disruptive innovation started here, and I think people think about disruption as happening in an instant, but it really doesn’t. If you look back, the disruptions that are probably most known for, the train displacing horses and things like that. Those took a long time to unfold, but in hindsight it feels like they happened quickly.
LAUREN COHEN: Absolutely. Yeah.
BRIAN KENNY: Lauren Cohen, thanks for joining me on Cold Call.
LAUREN COHEN:Yeah, this has been my pleasure. Thanks so much for having me, Brian.
BRIAN KENNY:If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work, find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at coldcall@hbs.edu. Thanks again for joining us, I’m your host Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.
