Insurtechs struggle to turn a profit
Two insurtechs that promised to disrupt the insurance industry with slick apps and tech-driven underwriting are now fighting to survive. Lemonade and Root, both founded in 2015 and taken public in 2020, have seen their stock prices collapse by more than 90% from their IPO highs. Profitability remains elusive, and Root just cut 20% of its workforce—330 jobs—in a move that has raised concerns about its long-term viability.
The economics of insurance haven’t changed since Hammurabi
Insurance is an old business. The basic model—spreading risk across a large pool of customers—dates back to the Code of Hammurabi in 18th century B.C. Success depends on balancing premiums, payouts, and expenses. Insurtechs have grown their user bases and revenue, but their losses have grown just as fast.
Root lost more than half a billion dollars in 2021. An analyst at Insurtech Advisors told S&P Global Market Intelligence that the company still hasn’t “tamed the economics of insurance.” More critically, it hasn’t figured out how to price risk correctly. That’s the core challenge. Without it, the rest doesn’t matter.
Lemonade, which sells renters, home, and auto insurance, reported a record $241 million net loss for 2021. Its co-CEO, Daniel Schreiber, framed the strategy as a long game: build a digital-native company, attract young customers, and grow with them. The pitch is simple—better tech, better experience, better everything. But the numbers tell a different story.
Customers love the apps. Investors don’t.
Lemonade says it has over 1 million customers, 75% of them under 35. It grew its customer base by 55% last year. The company now offers home, life, liability, renters, and auto insurance after acquiring Metromile. That should help spread risk. Instead, its loss ratio—the amount it pays out in claims versus premiums collected—hit 96% in the fourth quarter of 2021, up from 74% the quarter before.
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Schreiber blamed miscalculated reserves. “We have a strong record of cautious reserving, but reserving is an imprecise science,” he said. “Adverse developments do happen every now and then.”
Root’s problems are even sharper. It only sells auto insurance, which means no bundling with home or life policies. Its loss ratio was 91% in the last three months of 2021, far above its 65% target. The company reported a $92 million operating loss for the quarter and $485 million for the year, despite growing premiums.
Analysts say the issue isn’t just execution. It’s the nature of the product. Insurance is heavily regulated—pricing, sales, even how policies are structured. Many insurtech founders came from fintech, where rules are looser. They assumed the playbook would translate. It hasn’t.
Policyholders might not even notice the difference. The apps are faster, the claims process smoother, but the underlying product is still insurance. Price is regulated. Coverage terms don’t vary much. And when losses pile up, the math doesn’t care how user-friendly the interface is.
Hype vs. reality
Investors poured $10.5 billion into insurtechs globally through the third quarter of 2021, a 48% jump from the year before. Surveys suggested consumers were eager for alternatives. A Breeze study found 55% of Americans would buy insurance from Amazon over traditional carriers. Two-thirds would consider auto policies from Tesla or Ford. More than half would trust CVS or Walgreens with life insurance, indicating a desire for alternative insurance options.
But the incumbents aren’t panicking. A Seeking Alpha analysis argued that Lemonade isn’t stealing desirable customers—it’s taking the ones traditional insurers don’t want. “The lack of institutional response from the legacy carriers suggests that the accounts won by Lemonade are the accounts the legacy carriers prefer not to insure,” wrote Mathew Queen, CEO of a captive insurance company.
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That’s a problem for insurtechs. If they’re only attracting high-risk customers, their loss ratios will stay unsustainable. And if they can’t underwrite better than the old guard, the whole premise falls apart.
Robert Tomilson, a partner at Clark Hill and chair of its insurtech practice, said the real challenge isn’t just distribution. It’s offering something truly different. “Insurtechs have made their mark in sales,” he said. “But the real test is whether they can create new products or experiences that change the game.”
So far, they haven’t. The largest insurers still advertise the same way they did 30 years ago. That suggests they believe price is the only differentiator. If insurtechs can’t prove otherwise, they’ll keep burning cash—and investors will keep losing patience.
Lemonade and Root both added headcount aggressively until recently. Root’s LinkedIn data showed hiring slow down weeks before the layoffs. The message is clear: growth at any cost isn’t working. They must pivot to something that does.
It is a challenge.
