Insurtech, the catch word for cutting-edge technology in the insurance industry, has a new entrant in Root Insurance. It was co-founded by Alexander Timm, who has been working in the insurance industry in one capacity or another since he was 14 years old. The company, which offers auto insurance, made its official debut in October after 18 months of development.

This form of automated insurance selling and underwriting is quickly catching on with several different companies in the industry. Standard & Poor’s recently issued a report on these startup ventures that promise to bring major disruption to a business that has traditionally been done on a face-to-face basis. (For more, see: How Insurers Can Benefit From Smart Technology.)

Future Potential

The Standard & Poor’s report on insurtech companies was somewhat reserved in its analysis of their potential to upend the insurance business and supplant traditional agents as the standard medium through which policies are sold. “We do not expect traditional insurance business to be fully replaced by insurtech companies, as the insurance sector is highly regulated and capital-intensive, with barriers to entry. Instead, we are seeing larger established insurers actively invest in setting up insurtech joint ventures through which they can take advantage of their proprietary data, rather than outsourcing to pure technology-based entrants,” the report states.

Nevertheless, companies like Root see huge growth potential lying just ahead of them. Root Insurance was created with $7 million of capital supplied by Drive Capital along with a debt facility from Silicon Valley Bank.

How Root Works

The company is able to provide a completely automated process for buying auto insurance. It also promises to save good drivers substantial amounts of money if they are willing to download the company’s app into their smartphones so that the company can monitor their driving on a constant basis. The app can do this via an accelerometer and other sensors that are built into the app which can sense how fast the driver is going and assimilate other data as well. This additional information about how a driver drives enables the company to offer substantial discounts to the best drivers on the road. “For the best 30% of drivers we cut the price [of insurance] in half. For the best 70% of drivers we’re the cheapest in the market,” Timm told TechCrunch. (For more, see: How Technology is Quickly Disrupting the Insurance Industry.)

Root also differs from other insurers in that everything that prospective clients need to do to sign up is handled on a smartphone. Customers simply download Root’s application, scan their driver’s license into the app and let the app fill out their application for them. Timm told TechCrunch that the average customer can save 20% by signing up with Root. In fact, the company has issued policies with premiums that are as little as $12 per month. Timm’s ultimate goal is to issue one single, simplified insurance contract.

But Standard and Poor’s still isn’t ready to declare startup companies like Root as the future of the insurance industry. They see them more as a component of what will come rather than as the successor to the current business model. In their report, they state, “Compared with established insurers, we regard many insurtech companies as very small, with weak business positions, relatively limited data-sets, and relatively scarce financial resources. Moreover, insurance industry expertise is required to exploit big data analytics to produce more-accurate risk classifications.”

The Bottom Line

Companies like Roots Insurance will undoubtedly have a major impact on the insurance industry in the future, but their services will most likely supplement rather than supplant the traditional business model that is in place today. (For more, see: The Insurance Industry's Future in Visual Tech Investment.)