At a time when auto insurers are responding to inflation shocks by passing rate hikes at breakneck speed, an insurtech CEO says the automation of the activity is accelerating his company’s actuarial rate indications on regulators’ desks.
“We had a loss ratio that was better than GEICO in the first half of 2022,” and ours continues to fall. And we’re still seeing a lot of the incumbents struggling to actually take price in the market,” Alex said. Timm, Root’s chief executive officer, to Barclays analyst Tracy Dolin-Benguigui at the Barclays Global Financial Services Conference Monday.
While Timm and Root’s chief financial officer, Rob Bateman, also said that having a book of business that isn’t heavy in the strict regulatory states of California, Florida and New York, the insurtech has also helped to avoid cumulative rate hikes of 25 percent achievable on 34 rate applications this When asked by Dolin-Benguigui to discuss success factors, Timm spoke about recognizing the need for rate hikes ahead of competitors and automating actuarial rate formation.
In the second quarter of 2021, “we’ve really seen, I think, what most auto insurers are dealing with today, which is probably the biggest increase in claims costs ever in a relatively short period of time. I think in 60 days we’ll see the used car prices increased by about 25 percent on average,” Timm recalls.
“Since then, we have focused on ensuring profitability. We reacted faster than our competitors. And we believe that last year we substantially reduced our loss ratios for the first time ever. Actually exceeded our loss ratios in the first six months of this year [and] are now superior to several of the top 10 airlines in the United States,” he claimed.
Root’s second quarter financial report reveals a six-month gross loss ratio of 85.6, excluding loss adjustment expenses.
“We’ve been very, very focused on driving profitability by leveraging our technology stack to enable us to quickly get new rates in markets,” he said.
Timm’s reference to technology prompted Dolin-Benguigui to ask for more details — and more specifically, whether Root might be able to acquire the intellectual property involved and “commercialize it to other carriers.”
Timm, who began his insurance career as an actuary, gave his take on the typical process of filing a rate hike with a large incumbent operator based on his experience. It involves a lot of math, he said.
‘You extract data from it. You load it into a spreadsheet. You’re trying to make a chart that a regulator asked for. It may take a week to get it right. Sometimes the data isn’t right and it’s all back and forth.”
“It is a very tough process. Often there are multiple backend systems that hold the data you are trying to marry. It’s a bit of a mess,” he said.
“That’s why you have companies like Guidewire and these other billion dollar market cap companies that are just trying to solve that one problem,” he continued.
“When we started at Root, we actually started with an engineering platform,” he said, noting that Root’s actuaries were considered the tooling team’s customers. Today “we have about 85 percent of our actuarial workflows [that] are 100 percent automated,” he said.
“If you think about it, insurance is just a quantitative problem. I have new data. I always need, in general, to have the same “support documents” to send to a regulator. “I can press a button and that file is created. And once that file has been created, I can pass it on to the supervisor. If they have any questions, we also generate pretty much all of those exhibits in an automated way,” he said.
“That’s really why we’ve been able to position ourselves much faster in this period of what I would call hypertrend or hyperinflation. That’s why we’ve been able to align these states — to assess eligibility much faster than what we’ve actually seen our competitors do,” he stated, directly answering the question about using the technology to make money. earn income from other carriers.
Other major airlines have noticed Root’s speed, he confirmed. “In zeal we have confirmed two things. One is that our technology is modular,” he said, referring to the fact that this assessment or tooling platform can be used independently of other Root technology. “Two is it’s scalable… We know it will scale across a customer base of tens of millions of policyholders,” he said.
“It’s definitely an interesting piece,” he said, referring to an idea conceived by the Barclays analyst. “As we move more towards balance light models, that will be something interesting as well, potentially allowing other carriers to write on our pricing platforms.”
During the session, Bateman also discussed some other minor plays that could be in Root’s future. “We will be looking at other ways we can access paper from other carriers, whether through agency agreements or, as reinsurance markets improve, [through] MGA capacity,” he said, also stating that Root is interested in both premium growth and fee income.
At other points in the session, Timm also discussed Root’s better-known technology game – the modernization of insurance through telematics – and Bateman discussed the work the InsurTech has done to cut costs, with more to come.
As for the improvement in the loss ratio, in addition to rate hikes, Timm said: “We have also really invested in underwriting. Over the past year we have shifted our book of business mix even more towards good drivers. Because we have a higher proportion of bad drivers rejected, we’ve shifted our mix to states that are more profitable,” he said, adding that some states have legal restrictions that make it much harder for carriers to become profitable.
Later, when Dolin-Benguigui specifically asked for more details about Root’s geographic mix, Bateman said the book focuses on file-and-use and use-and-file states. “We’re not big in California, Florida or New York where it was hard to get an award. So for us, with minimal regulatory friction, we’ve managed to not only implement most of our rate increases, but also make our shape changes quite seamlessly. And they’ve been pretty important. To give you an example, in Nevada we took about 55 points, [and] our last rate increase in Louisiana was in the mid-1930s,” he said.
Timm reported that Root has revised acceptance forms in 23 states.
“What about the frequency of rate requests? Is there any backlash from states you go to multiple times?” asked Dolin-Benguigui.
“Nothing has stopped us from getting timely rate increases,” Bateman says.
“There are some states where once one rating plan is approved, the next comes in the same day. And we haven’t heard much consternation at the moment’, agrees Timm.