Insurance, But Faster: NEXT's Formula for Success

Good morning. In this newsletter, we love to take a closer look at how startups succeed in competitive markets and take away learnings for our own work. Today is a great example, and I wonder if I should create a series about successful innovative strategies in competitive spaces. Please let me know.

I don't work in insurance, but the company caught my eye. Why? If a digital-first company can win in insurance, it is doing something that might be interesting to learn and apply in other industries. As I did my research, it began to make sense, and their playbook emerged.

The Insurance Bottleneck

Starting in an underserved market can give a new business fast traction if it solves the unmet needs well.

My first thought was that insurance is clearly not an underserved market. So they must have some other strategy.

Underserved Markets Make Sense

• Less competition

• Unmet Demand → Faster Traction

• Niche Success

I wasn’t sure any of these three would be true for an industry as old as insurance, but I was wrong. NEXT Insurance found a place within the insurance space with these three characteristics and successfully applied its technology in this space. But this only works paired with a very deliberate strategy.

NEXT Insurance's strategy was to shrink the overall market into a small, digestible, underserved niche with less competition and unmet demand. It focusses on the insurance of small and micro businesses.

Insurance > Digital Insurance Products > Digital Insurance Products for small and micro businesses.

How could it be that this segment has not been addressed already?

It wasn’t a very profitable business because large overhead costs shrunk premiums to a minimum that wasn’t attractive to large insurers.

It is an excellent example of how new technologies turn unattractive customer segments into a goldmine for companies applying these disruptive technologies.

One man’s trash is another man’s come up.

The Problem that Creates a Gap in the Market

The insurance industry has traditionally been slow when it comes to underwriting. Underwriting is when an insurance provider takes on risk (of possible loss) for a fee.

To take on that risk, the insurance will be damn sure to know every possible data point that could add risk to a business. The process of finding all the potential dangers takes weeks or even months. It is specific to the business, location, owners, medical history, age, credit history, etc.

It involves manual inspections and data analysis, takes a long time, and thus causes high operational costs aside from managing the flood of ongoing claims processes that add to the costs.

There are already digital insurers that accelerate the underwriting process. However, these automated evaluations usually focus on low-risk customers with clean “happy path” evaluations. The evaluation of a small business is just as involved, but the insurer's reward is low premiums. It's just not worth it.

All of the above is why larger insurance providers try to stay away from small businesses like they were the COVID bat, avoiding any contact at all.

And this creates an underserved market niche within the insurance industry.

The Solution and Opportunity

Data centricity and Artificial Intelligence have been massive forces of disruption in the insurance space in recent years, affecting everything from customer services to fraud detection to new product introductions. (Source: Insurance Sector Trends 2024)

Streamlining operations can keep costs low, and creating large datasets enables a fast screening process, which, in turn, makes less profitable segments more attractive.

NEXT Insurance was born in the era when data collection and data aggregation became more of a priority. More data and ways to process and analyze that data became available. Starting from a clean slate, let them focus on that and make it the company’s DNA to put data and automation in the center of their business.

The solution is a data-centric model that speeds up the evaluation process and eliminates as many manual steps as possible.

About NEXT Insurance

• Founded in 2016 and raised a total of $1.146 billion since

• Latest funding in Nov 2023 for $256 million

• Latest valuation (Pitchbook) is $2.5 billion

• Annualized gross written premium revenue $920 million (Dec 2023)

• 500,000 active customers (Dec 2023)

• CEO Guy Goldstein is a former jet pilot and sold his previous company Check to Intuit for $360 million in 2014

What Makes Their Strategy Successful

A very focussed approach to the target niche and technology setup, with a purpose in mind from the ground up, gave them several strategic advantages.

Strategic move #1 - Clean slate advantage

Training an AI model is no longer a challenge. Getting clean data, however, is. And driving the change to a digital-first mindset across an organization is a monumental task.

So, while genAI opens up all these markets for new opportunities, established companies can not react as quickly. More data doesn’t necessarily give you an advantage only if it is better and more organized to be used.

Setting up a data model purpose-built to support AI training, fast iteration, and a clear focus on one market segment is a huge advantage for digital-first competitors.

They set up the data, kick off their AI model training on top of it, and iterate fast. How could this not succeed if paired with a smart commercial offer?

Strategic move #2 - Laster-focused on the niche

The offering is very clearly positioned.

NEXT doubles down on an underserved niche. Instead of competing head-to-head with Allstate or Lemonade across all segments, they focus on small businesses, which gives them and their customers clarity.

Strategic move #3 - A data-first mentality enables them to offer unmatched service

It usually takes days or weeks to process an application. NEXT can process applications within 10 minutes. This is a win-win situation for both sides. It eliminates almost all operational costs for the business, which results in better prices and faster service for customers.

Strategic move #4 — Personalized product combinations like never before

It didn’t immediately click for me, but the full automation and focus on a niche brought out a benefit I had completely overlooked.

Imagine a lawn care business in Minnesota from October to March. It’s a bad deal for a small business to pay insurance premiums year-round when it only operates for six months of the year. However, diving into the math of these customizable models is not viable for large insurers. Full automation enables a pay-as-you-go flexibility that these businesses will love.

These quick turnarounds and little manual work to calculate a personalized insurance product offer another benefit:

It lets them offer a broad range of personalized insurance combinations that make sense for the customer. It’s like an insurance configurator that, within minutes, gives you a quote based on the options you selected.

Doing the math around a specific business with a tailored, user-based policy only makes sense if you don’t have to spend weeks evaluating it. The premiums will be even lower, but volume will make up for it.

Strategic move #5 - Embedded Insurance. 

In the classic “meet your customers where they are” mentality, NEXT partners with other small business software providers. For example, by partnering with Intuit’s Quickbooks, they can be part of a full-service accounting platform that SMBs already use.

LegalZoom is a platform that makes it very easy to set up a new business. A natural next step is to set up insurance. Since NEXT has built digital-first, with embedding its offer into other SaaS platforms in mind, it can claim its place in all kinds of digital flows where small businesses can discover them. It likely sees a large part of its growth coming from these integrations.

Conclusion

While writing this, I wondered why larger companies wouldn’t move faster to adopt these new technologies and enable themselves to pick up this underserved business.

Then I remembered what Jim Collins referred to in his book “Good To Great” when he discussed how Walgreens reacted to the “dot-com” threat.

Similarly, in our times, most successful large companies in this space will eventually leverage data and data models more and more. They are going about it in a crawl, walk, run scenario, easing into new technologies and slowly rolling them out across their business. It is a slow process because it will dramatically change company operations. Change management takes time.

This gives technology-first companies an opportunity. NEXT Insurance saw this and conquered it by leveraging new technology, driving change in the industry, and developing new products without wasting time.

Larger companies will eventually catch up. However, if a company executes like NEXT, it can hit a $2.5 billion valuation with $920 million gross written premium revenue before large companies turn the course and start tackling this part of the market.

There must be hundreds of stories like this, with AI disrupting everything. I’ll keep searching and will keep the collection growing.

Have a great rest of the week,