Hippo’s McCathron: Insurtechs’ focus on loss ratio means less innovation

Hippo president and CEO Rick McCathron has commented that the trend of insurtechs focusing on underwriting profit comes at the cost of leading to less innovation.

Speaking at Reuters’ The Future of Insurance USA conference in Chicago, McCathron suggested that the relatively recent trend of insurtechs focusing on profitable loss ratios is the result of the broader technology investment environment.

“I think macro trends do actually matter,” he said during a panel discussion titled “From Insurtech 2.0 to 3.0: What Comes Next”.

“There is a lot of conversation about insurtech companies are finally recognising that the loss ratio matters, that profitability matters. It matters more because the current environment demands less innovation, more profitability.”

He continued: “One of the questions that nobody ever asked when we started Hippo was, ‘How long until you get cash flow positive?’ In fact, if you gave an answer that you will be cash flow positive in three years, the response from the investor would have been, ‘Why? No, I want you to spin money. I want you to innovate. I want you to invest.’”

The executive continued that around the time that Hippo went public in 2021 “everything pivoted and everything shifted”.

“That has impacts on all insurtech companies at their various stages,” he said. “Now what you're seeing is companies like Root that they finally have an underwriting profit, Hippo that's near profitability, Lemonade that just brought in their earnings expectations for adjusted Ebitda profitable by the end of this year.

“So you're seeing all these companies have to react and strike that balance between innovation and profitability. If you have a lot of cash, you can still innovate. If you are needing more cash, you better get profitable really, really quickly because it's really hard to raise capital right now.”

McCathron believes that venture capitalists investing in early-stage companies do not want them to be cash flow positive quickly.

“They're investing to take an idea that could be a $20mn, $30mn, $40mn, $50mn idea and convert it into a billion-dollar unicorn,” he said.

He added: “All insurtech companies are trying to compress the timeline in which incumbent or legacy carriers have done what they're doing. That takes an investment and that takes focusing on the longer term as opposed to short-term profitability, which is a clash right now for insurtech companies who are really trying to innovate.”

On the same panel, Kyle Nakatsuji, CEO at Clearcover, said that as the leader of a private company, he is not subject to the same scrutiny from shareholders. But he noted that in both cases it is “still about playing the long game”.

“Your job is to try and find that balance of creating economic surplus through immediate action and long-term action. Frankly, in our business as a start-up when you're brand new – and we're still relatively young, and even though Rick’s company’s bigger and public they're still relatively young in the grand scheme of things – there's a lot of low-hanging fruit that passes that hurdle rate. So a lot of things Rick can work on and we can work on that will generate a return that is well clear of what we think it should.”

He added: “The constraint comes in when the market says, ‘I don't care what the return profile looks like, hold on to your cash, please, I want you profitable now.’ That's an ongoing debate. I think that's where we are now. That’s a trade-off everybody has to consider. But as a private company, we get to make different choices than public companies.”

Discussing the difference between insurtechs and traditional insurers, McCathron noted that the degree of innovation at the former is far greater.

He said that starting around three years ago “we actually started getting very high pedigree insurance individuals that reached out to us, people from huge insurance companies that you've all heard of”.

“They would say I've been trying in my organisation to get these things done and I just cannot fight the tide. It's so frustrating. So we were able to get a ton of super qualified insurance people because I think most recognise insurtech is here to stay, whatever generation you want to call it, and it has done a lot despite the fact some insurtech companies haven't been successful.”

He added: “Think of the innovation that large carriers are doing now that would not have been done if they didn't have these insurtech companies nibbling at their heels. So now I think what we're finding is a lot of people that are pedigree insurance people are saying, ‘Let's build something together that improves and modernise the current experience but recognises underwriting matters, claims handling matters, risk selection matters.’”