Root’s successful financing round shows how much room savvy insurtechs have to grow.
After a financing round that yielded $100 million, Ohio-based Root Insurance plans to expand its telematics-based approach to car insurance. Lead investor Tiger Global Management was joined by returning investors Redpoint Ventures, Ribbit Capital, and Scale Venture Partners — each of which was part of an earlier $51-million venture capital drive in March.
The $100-million financing round pushes Root’s valuation to roughly $1 billion, according to the company. Currently operating in 20 states, Root plans to leverage this funding to set up shop in all 50 states and Washington, D.C. by the end of next year. To support its growth, the three-year-old insurtech startup plans to bring on additional engineers, actuaries, claims reps, and customer service agents.
Going on a Test Drive
Before quoting a premium to customers, Root requests a two-to-three week test drive while the company gathers information from its mobile app. After reviewing the data, the insurer then provides a premium quote. The company estimates that its policyholders have seen their auto insurance rates cut in half compared to traditional insurers.
The Root app allows drivers to purchase coverage and manage their policy online. It also adjusts risk through its artificial intelligence algorithms, and awards discounts to policyholders who drive cars with advanced safety systems.
In the first quarter, Root wrote nearly $8 million in direct premiums, a leap of 200% from the previous quarter. However, an article in Carrier Management noted that the insurer reported a loss ratio above 100 in the same quarter. In 2017, the insurer paid out $1.36 for every $1 in earned premium on a net basis.
In response, Root CEO and Founder Alex Timm said the startup takes a conservative approach to reserves, and doesn’t underprice its insurance to grab market share. “Over the long term, prioritizing underwriting and pricing accuracy will lead to superior performance,” Timm wrote during a Reddit Q&A in April.
VC Investments in Insurtechs Up
Root’s capital raise mirrors similar deals between insurtech startups and venture capital firms. In early August, pay-per-mile auto insurer Metromile pocketed $90 million from investors. On a larger scale, Willis Towers Watson and CB Insights counted 66 insurtech investments in the first quarter for a total of $724 million, up 16% from the previous quarter.
Venture capitalists aren’t the only investors aiming to make a play in the insurtech sector. In fact, several established insurers have launched venture capital arms to invest in insurtech startups. Just recently, MassMutual Ventures invested in online insurer Quilt, through which it plans to offer longevity products.
Similarly, Metlife struck up a partnership with Blend Labs, an online mortgage originator expanding into the home insurance marketplace. Allianz, Nationwide, Liberty Mutual, and USAA have either started VC units or put funds into emerging insurance tech platforms. In July, for example, Next Insurance, a digital insurer specializing in small business, netted $83 million from Nationwide and Munich Re.
These deals prove that VC outfits see potential profits in insurtechs. At the same time, established insurers are acknowledging that they must digitize their own operations in order to attract and retain customers.