Insurtech eliminates the causes of a high loss ratio

According to an analysis by S&P Global Market Intelligence, Root Inc.’s claims ratio has been well above the industry average for several years, but there is some optimism that insurtech could turn a corner.

Loss rate remains high, but improving

Root has come a long way since posting a full-year 2017 loss ratio of 138.18%, more than double the P&C industry average at the time. The insurtech posted a loss ratio of 85.54% in 2021 and said in January that it was continuing a cost-cutting campaign by laying off around 330 employees, or 20% of its workforce.

The loss ratio trend may have peaked and pricing actions will help improve the company’s loss ratio, insurance chief Frank Palmer said in an earnings call.

Comments on the peak in the loss ratio trend are “not out of the realm of possibility,” Kaenan Hertz, managing partner at Insurtech Advisors LLC, said in an email. Root has reduced its insured base, minimized the direct channel and reduced expenses, which should help the loss ratio, Hertz added.

State-by-state loss reports

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Root posted an 87.5% loss ratio in Texas, its largest state with direct premiums earned of $143.6 million. The insurtech, however, suffered direct losses of $125.7 million in the Lone Star State. The insurtech had direct incurred losses of $75.2 million and $40.6 million, and had loss ratios of 98.5% and 103.0% in Georgia and Louisiana, respectively.

One of Root’s top priorities is to reduce “cash burn”. In addition to the layoffs, the company also implemented a 50% reduction in sales and marketing expenses in the second half of 2021, said Dan Rosenthal, chief revenue and operations officer.

Hertz said Root was now “lighter and better positioned” to rebuild after the moves, adding that the recent hire of a chief financial officer with an insurance background would help them put the “right checks and balances” in place. .

The insurtech expects gross written premiums to decline significantly year-over-year in the first half of 2022, although CEO Alex Timm does not expect the drop in new business to significantly increase the cash consumption. Timm added that the company believes the opposite will happen because new business typically with a higher first-term loss ratio causes “a bit of pressure” on cash burn.

Hertz doesn’t expect insurtechs to significantly slow the amount of money they use, saying the only real leverage they can pull is marketing. But lower marketing spend will likely lead to reduced bonuses, which will “exacerbate” their ability to raise new capital, Hertz noted.

“In some ways, they’re stuck between a rock and a hard place,” Hertz said.

Sallie R. Loera