From the Driver's Seat: Insights from a Former Co-Founder/Co-CEO of Young Alfred (Insurtech)

The story of Young Alfred's inception, its business performance through funding and sale, differentiating factors in business, operating, and technology models, and key lessons learned.

From the Driver's Seat: Insights from a Former Co-Founder/Co-CEO of Young Alfred (Insurtech)

Many FSI executives dream about digital transformation without legacy shackles. They envision how much value they could create if they could use the latest technologies without office politics and cumbersome intermediaries in the enterprise procurement, architecture, and project management groups.

These executives are part of a prevailing notion that startups are better skilled than incumbents at offering simpler value propositions with superior digital experience and data analytics, as well as maintaining a more effective culture.

How much of that is true, though? For example, in the US home insurance $130 billion market, are the incumbents inferior in those qualities to startups? They appear to be, just based on the names alone: by far, a market leader with almost a 20% share has a "farm" in its name, while the leading disruptors are called cooler-sounding "lemonade" and "hippo." And yet, after many years, disruptors remain 100 times smaller in revenue with worse mobile app reviews and haven't demonstrated much value in their data analytics.

Source: Google Play

Who can better explain this phenomenon than a former insider who just emerged after eight grueling years of launching, scaling, and selling a home insurance startup? Jason Christiansen was the Co-Founder/Co-CEO of Young Alfred between 2016 and 2021. After the acquisition by Credible, he led its insurance business.

Jason recently shared with FSI Digital Transformation Weekly the valuable insights he gained from what he eventually realized was one of the most competitive verticals across financial services and insurance. If you are an FSI executive considering launching a new digital product or founding a startup, this interview will help you validate key success factors in business, operating, and technology models, and identify common mistakes to avoid.

Young Alfred: From Launch to Sale

Jason and his co-founder David Stasie founded Young Alfred while studying in business school. With almost a decade of experience in hedge funds, Jason accumulated some cushion and wanted to pursue a completely different industry as an entrepreneur:

"In 2015-2016, there were frequent headlines that Millennials couldn't buy houses, but it didn't make sense to us. We thought that Millennials would be buying houses and need to be offered a modern buying experience, including the purchase of home insurance. We didn't see home insurance sites for people like us, so it seemed like a huge space to feed our intellectual curiosity and scale up significant value."

Jason wasn't just excited to pursue a huge market; he wanted to introduce a new business model, a price comparison marketplace, that was already proven to be successful in the UK with a 30% share of new purchases. The underlying thesis was in monetizing massive amounts of data by being in the middle between carriers and consumers:

"My prior background with hedge funds was data-heavy, and the home insurance marketplace seemed like a great opportunity to use data for a collaborative information exchange across buyers and sellers in unlocking common value. The business model seemed very attractive due to a high expected retention on both sides, some network effect, and potential flywheel for offering carriers the accurate data to cross-sell other products."

Jason briefly considered starting a digital managing general agency (MGA), especially as VCs preferred it for higher upfront unit economics, but that didn't seem disruptive enough:

“Tesla and Amazon were in the headlines due to their success in doing the best for their customers. Only a digital marketplace aggregating dozens of traditional carriers and insurtechs seemed to have a chance to create a truly superb customer experience, unlike a more narrow insurance MGA. Plus, we wanted to capture more of the market faster with an objective comparison tool, albeit at a much lower margin per transaction.”

Young Alfred acquired its first customer almost a year after incorporation, and a year later had figured out a repeatable business model.

The surprises and learnings began pouring in. Everything took much longer, which was especially painful without a steady passive income and with the young families of both co-founders. But more importantly, the home insurance industry appeared quite counterintuitive:

“We assumed that the carriers would appreciate our channel at a much lower customer acquisition cost and rapidly growing inbound volume, but we didn't realize how risk-conscious large carriers are. They were carefully evaluating reputational and fraud-related downsides of partnering with a newcomer; we couldn’t even get an appointment with some of them, and only two large players agreed to partner with us initially."

A couple of years after the first customer, Young Alfred had licenses in all US states, its marketplace included 30 carriers, and the digital channels acquisition was optimized. The commission-based model at initiation and annual renewal meant that a customer became profitable after a year. With rapid growth, it meant significant cash outflow, which pushed the insurtech to come up with faster revenue-generating opportunities:

“We realized that it would take us many years to reach overall profitability while VCs were increasingly focused on the faster path to a sustainable business model. We added products like auto and umbrella insurance, but the buying cycles were different, so it didn’t generate a significant impact. But we had a good platform and thought that maybe we could be like Stripe for anyone wanting to offer consumer insurance products.”

This concept, now well-known as embedded finance and insurance, was still in the early stages in 2019. VCs jumped on board, intrigued by a much larger market potential and the idea of upfront revenue share without acquisition costs.

Source: Business Wire

By 2021, Young Alfred had grown to include 46 insurance carriers on its marketplace, assisting tens of thousands of consumers in obtaining $6 billion of home coverage and generating tens of millions in revenue. However, the founders and board ended up deciding that a strategic exit to a bigger marketplace in financial services, Credible, was the best path forward.

This decision was influenced by Credible's relationships with lenders and its focus on embedded insurance distribution within the mortgage and home purchase transactions, rather than continuing to scale independently in a very competitive space:

“A 12- to 24-month payback and commission revenues earned over 7 years are just too long for a startup. Investors wouldn't allow you to recognize that revenue today, and you can't easily float the bank account with future revenues. We could have structured the deals differently—insisting on the upfront revenue share over customer long-term value rather than an annual commission. But fundamentally, we went after a very competitive vertical. If I knew what I know now, I would have probably picked a different one.”

I had a similar epiphany after starting a marketplace for cross-border money transfers, SaveOnSend, in 2015. What seemed like a limitless market with unhappy consumers ended up being a hyper-competitive space with mostly satisfied customers.

U.S. Home Insurance: Lean, Sharp, and Unprofitable

Unfortunately, Jason picked one of the most competitive FSI products to disrupt. Our newsletters often talk about the supremacy of the business model in digital transformation and prioritizing areas with significant margins. In the US home insurance, the industry lost money in five out of the last six years.

Naturally, automation could be helpful. For example, insurance agents could be making mistakes in collecting client data, with errors reaching 30% of the applications. However, digitization alone rarely creates enough value to justify digital transformation investments or VC rounds:

"We mistakenly assumed that investors would be okay with the long payback, and that new insurtech entries would continue to have risk appetite and take market share from incumbents. What we discovered instead was that investors are more sensitive to payback periods. Additionally, sophisticated incumbent insurance carriers knew their customers on a micro level, including zip codes and idiosyncratic risks, which ultimately led insurtechs into an adverse selection trap. From the early days, we always sought to learn from our carriers and found them to be quite prudent in risk selection."

Entering an unprofitable niche with sharp incumbents has been challenging even for the most well-known insurtechs. Both Lemonade and Hippo lost 90-99% of their value from their stock highs:

The highly competitive nature of the product implies that easy victories are unlikely, with a struggle for every penny:

“Even such a seemingly commonsensical assumption as bundles being less expensive than buying separately was only half right. In a surprising number of cases, our customers were saving money by purchasing home and auto insurance from different providers.”

Another surprise was that carriers' extensive data analytics capabilities enabled them to know precisely which risks to avoid. Many startups like to claim that they are helping the underserved, but almost no fintech and insurtech has proven that they could do it profitably for high-risk consumers.

“We thought that the carriers would welcome customers who could generate them the highest premium. But they also knew that those customers are much more likely to cause expensive claims and learned to avoid such excessive risks.”

By the way, that is also the reason why even the best incumbents have significantly shrunk their presence in higher-risk states like California and Florida. We discussed in another newsletter how Kin Insurance, a well-funded insurtech, has been trying to address the resulting gap. In 2022, Kin's loss ratio for the homeowner business was 111%.

Operating Model: Staying Focused and Taking Risks

Besides targeting highly competitive, low-margin products, many digital transformation and startup efforts fail due to a lack of patience with the core use case. Fortunately, Jason understood the crucial nature of focus from the beginning, but surprisingly, the pressure to go wide often comes from external stakeholders:

"We wanted to stay focused on growing the core. Our board supported our focus on home and expansion into the B2B2C channel after our Series A. We have heard horror stories from fellow founders who raised massive rounds, and their boards pressured them to spend money on building new capabilities, even when there were unclear performance outcomes."

This would resonate with many regional and product heads in FSIs. Instead of Boards and VCs, they are pressured by the Enterprise C-Suite to pursue unnecessary solutions by including bureaucratic resources in an ineffective company-wide approach.

Focus is especially important because every product or geographical expansion is always much harder than it seems upfront, while there is always a shortage of the best resources. For example, it seems reasonable to assume that launching a tangential product should be much easier due to shared functionality, but it is not so simple:

"It is surprising how different each insurance product is, even for customer acquisition purposes alone. For example, home and auto insurance had completely different data input types and partner connections. By focusing the best engineers on the core product, we never had enough resources to make the bundle offering as best-in-class as the monoline home experience."

Besides the need for focus, another critical component of operating a new digital venture is risk management. A common view of entrepreneurial founders and executives is that they are prone to risky decisions. In reality, they exhibit much more ownership of every dollar spent compared to a typical FSI executive who rarely treats the company’s funds as their own. Such risk aversion could sometimes backfire.

"In retrospect, we were too scrappy and not taking enough risk. We should have definitely spent more on engineers for core products, which would have freed up more of the co-founders' time to apply leverage elsewhere in the business or focus on new initiatives. We didn’t have to make big pivots because we didn’t take big risks, so I plan to break some eggs with my next venture and tighten the product test-learn-iterate feedback loop."

Pushing harder on the core area is a common reflection of new ventures, as some of you might remember from our interview about Life insurtech, MIB.

The final critical component is, of course, the talent profiles. Many startups and digital ventures of traditional FSIs often include managerial types and theorists. Instead, they need to recognize how critical the first ten hires are, who need to fit with the founder culturally and enjoy getting things done.

"Culture fit was a primary factor in our hiring process. We selected for doers who value teamwork and focus on creatively solving problems in a data-driven way. This made scaling the business much easier, as the early leaders would then propagate similar hands-on teams without needing our micromanagement."

Technology Capabilities: The Game of Inches and Less-is-More

If incumbents are good at running the business and have a comparable operating model, are startups at least better at digital capabilities in data and technology? There is a myth about insurtech using the latest and greatest tools for every system as if those don’t require custom coding:

“There were never enough engineering resources. We thought that we could rely more on pre-built functionality and were spending more of our budget on marketing. That backfired as we added more types of end-user devices and suddenly realized that we didn’t have the capacity to QA mobile experiences to the same degree as desktop.”

Even from a customer perspective, a shiny UX is not always a clear benefit. When dealing with financial risks, some consumers ranked other parts of the value proposition much higher:

“For the nicer properties and older demographics, consumers tend to gravitate toward well-established players - pricing is marginally less important to them than messing up their livelihood if something goes wrong. Because large carriers are very price competitive, there wasn’t as much brand markup, with only 20% of our customers buying from a specific brand. For less-known brands, there was indeed a discount of 5-10% to generate interest.”

Hence, all parts of technology capabilities require careful evolution, with sometimes “less being more.” For example, UX is generally considered a strength of startups in financial services and insurance due to its expected beautiful design and simplicity. That is not necessarily a good thing when it comes to risk-based products:

“Insurance carriers have extensive models based on numerous inputs to avoid significant tail risk. Simplifying UX by skipping some questions seems like a good idea that could work for 99% of the cases. But that is not good enough, since carriers could lose all that gain due to the 1%.”

And that is a generally healthy view of all innovation in technology and data since the 1950s. None, not even AI, is a game-changer by itself - it needs to be carefully implemented and would add a few percentage points of improvement over the long term:

“Machine Learning gave us a marginal advantage vs. our initial expectations of massively improving funnel conversion with better data. We discovered that insurance is the game of inches - over 5 years, Machine Learning helped us improve conversion by an additional 1% at scale. But every improvement in economics meant that we could pay 10% more to partners and attract more of them to our marketplace.”

Understanding this point is critical for traditional FSIs that often start the scaling of new technology by setting up a centralized team with 10-50 resources and $10-100 million in budget. In my interactions with those groups, their heads are genuinely hopeful that they are building something helpful and that business lines would soon appreciate those new capabilities, but that rarely happens. Having an enterprise team of 50 AI data scientists is designed to drive negative ROI and happens because of perverse incentives in those FSIs.

By implementing a more focused and gradual approach to digital capabilities, Young Alfred embraced a general context of digital change - it is a slow evolution rather than the revolution expected a decade ago:

“Person-to-person relationships between agents and consumers are not going away, just slowly transitioning to digital-only. Yes, younger consumers are faster at embracing digital channels, but even they at times need a human interaction for more complex questions.”

In conclusion

I trust that this firsthand account will serve as inspiration for more FSI executives to attempt new digital pilots with these learnings in hand. You can directly connect with Jason on his LinkedIn page for further insights. To delve deeper into picking digital opportunities while avoiding the digital bubble, I recommend exploring this newsletter.

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