Crowdfunding: Wrisk

[Freetrade_Team]

The Wrisk team at Christmas

Wrisk are an insurance startup ramping up for a crowdfunding round on Seedrs - they’re currently in pre-registration so we thought it was an appropriate time for a stock take (that’s the series name - this is now a series)!

Who are they?

Wrisk is an insurtech (that’s insurance + technology) startup that promises to reinvent the insurance experience.

The team features some insurance heavyweights, with the co-founders being CEO Niall Barton, a highly experienced insurance exec and the chairman of Markel Reinsurance, and CPO Darius Kumana, former Head of Digital at insurance giant Markel.

It’s one of the classic fintech stories: industry veterans with years of experience are frustrated with the status quo and decide there’s a better way to do it.

We could probably class Wrisk as a ‘populist fintech’. This is not pejorative - lots of good fintech companies are. We can contrast these with ‘business transformative’ or ‘technology transformative’ fintechs, which radically change the business model or develop new deep technology.

Most challenger banks are populist fintechs. Populist fintechs tend to operate in these environments:

• Industry dominated by large legacy companies with trust deficit
• Poor incumbent consumer technology
• Commoditised experiences

And they tend to have these characteristics:

• User-first approach
• Funs up previously lame experience
• ‘Take back control’ message
• Friendlier pricing or fee structure

Wrisk aligns with all of these aspects.

What do they do?

Wrisk sells insurance policies over a smartphone app. The product is stated to be targeted at “the connected generation”. Currently, the app only offers contents and gadget insurance (jewellery, guitars, phones, hats) but more variety is being planned for the future.

According to Head of Marketing Sima Patel, Wrisk’s USPs are simplicity, transparency and personalisation.

For simplicity, Wrisk have reduced the extensive data collection that traditional insurers use to create their policies to a mere 6 questions.

On the transparency front, their big innovation is the Wrisk score: a personalised measure of your risk for particular events. Like a credit score, but for personal risk.

It’s a similar calculation to what actuaries at insurance firms might use to measure your risk level, but Wrisk’s big change is to put it in the hands of users and display it transparently. The app asks you various questions and adjusts your score and policies based on the answers.

And for personalisation, Wrisk are hoping to allow users the ability to centralise all their insurance transactions and choices, based on that individual Wrisk score. So if you need travel or car insurance, you’d be able to just add it to your package by answering a few extra questions.

There’s also a degree of flexibility: users can buy their insurance on a monthly, rather than yearly, basis and cancel anytime without fees.

Finally, Wrisk are also BMW’s (and Mini’s) exclusive car insurance provider for the UK. This doesn’t mean you have to use their insurance if you buy a BMW or Mini, but it’s the option they’ll give you at the showroom or on their respective websites.

A note on the insurance biz

To massively simplify a complicated industry, insurance is generally split between insurance agents/brokers and underwriters. Underwriters are the underlying insurers who take the risk of having to pay out claims and the benefit of collecting premiums.

Their model depends on collecting more in premiums (payments from customers) than they pay out in claims.

Underwriting is a complex business - fundamentally, it’s all about risk management. So underwriters will often have their own insurance on their insurances policies: it’s insurance policies all the way down.

Life insurance operates slightly differently. Wrisk don’t offer life insurance so we won’t go into the complexity there, but it’s interesting!

Meanwhile, agents and brokers just sell insurance policies to customers and collect commissions for doing so (either from the premiums or directly from the underwriter). They sell policies on behalf of underwriters without taking on the risk of paying claims themselves. They act on behalf of the customer and the main thing a broker needs to worry about is making insurance sales.

However, there’s also a kind of hybrid between the two called a Managing General Agent (MGAs). These are agents who sell insurance directly to customers but also have some underwriting authority granted by their underwriter. This means they get to design their own policies and decide what customers they’ll take on. Unlike a broker, an MGA acts on behalf of their underwriter.

It’s like the difference between being a simple royal advisor and the full-on Hand of the King. Remember when Game of Thrones was good? Ah well.

Just as charismatic as Sean Bean

Some MGAs also share some of the risk of paying claims. However, this is not the case with Wrisk, whose insurance is underwritten by a partner. Wrisk collects revenue for selling insurance on their behalf.

Wrisk, like many insurance startups, operates as an MGA because this gives them the ability to create flexible, streamlined insurance products.

Their main underwriting partner is Munich Re - a huge underwriter based in Germany.

Some fundamentals in insurance:

Insurance industries are governed by flows of money/capital into the industry. When less money pours into the industry, underwriters have less money to back policies. This means they can afford to charge more in premiums since relatively less money is chased by more demand from customers.

These higher rates attract more money to the industry, increasing the supply of insurance capital and leading insurers to lower their premiums and relax their standards to attract more demand. The subsequent lower returns will then push capital out of the industry, creating a cycle. Cue Lion King theme.

The circle of insurance in graph form

• Insurers make money when they collect more in premiums than they lose in claims.

• Managing the insurance cycle is a major challenge for underwriters.

• Insurance companies also tend to correlate positively with the economy: when times are good, people insure against loss.

• Plus, during up times, insurance companies are paying out less in claims

• Insurance companies need lots of highly skilled talent and there’s lots of demand for technically adept workers too.

• The industry is currently talent short - though this may have less impact on a small, exciting startup.

Analysis

So Wrisk: populist fintech insurance app. The investment story is that insurance is tedious and lumbering right now, it’s time for an agile business with a product that puts consumers first to take their lunch.

What are the positives in this story?

The model is there

You know who runs a huge insurance business? Warren Buffett.

Why? Because, while running an insurance firm is a complex affair, the business model itself is conservative and usually cash-generative. That cash-generating aspect also means that insurance companies can also operate investment arms to benefit from their upfront cash flow. Now that might not necessarily play out for an insurance startup, but there’s a degree of mitigation there.

Unlike, say, challenger banks, there aren’t big question marks on how a consumer insurtech could make money and, as long as they have customers, Wrisk will be revenue-generating immediately.

We don’t have hard numbers from Wrisk and, like many startups, they could well lose money for several years as they try to expand. However, their MGA model is a time-tested business model.

Offering the service through an app is not economic alchemy and they don’t need to invent a business model from nowhere.

Wrisk wants to be broad, the startup competition is narrow

Most of Wrisk’s startup competitors in the UK are focused on a particular vertical: insurance for bikes, insurance for renters. This might be a good strategy as it gives you a clear single problem to solve for a defined community. Nonetheless, it’s inherently limiting.

Wrisk, on the other hand, are clear that they want to be a one-stop shop for all insurance types.

Now Wrisk aren’t there yet on breadth of products and if they want to continue their approach of offering bespoke products for different insurance types, that’ll mean significant talent, data and technical investment.

However, a full suite of insurance products is a much wider and more flexible market than any single vertical.

Distribution Opps

Insurance is one of the most cross-sold and widely distributed products in the world. This is because it’s:

a) Relevant to most purchases

b) Difficult to deliver completely in-house

In other words, there’s almost always an opportunity to sell insurance and it’s often not worth the trouble of the primary seller to do it themselves.

This means there’s a huge range of distribution options for insurance companies to sell their products and the wider their suite of products, the wider the potential distribution.

With its flexible offering, it’s easy to see Wrisk white labelling their product to power a challenger bank’s insurance options.

The BMW partnership also demonstrates that there are big companies keen to partner with an agile player to deliver a more impressive insurance experience.

Pie for everyone

Unlike many fintech verticals, which may want to crush the legacy businesses, insurtech agents can have a mutually beneficial relationship with the current powers-that-be. As reflected in Wrisk’s partnership with a major underwriter, underwriters can chum along quite merrily with a tech-positioned broker or agent.

The underwriter doesn’t necessarily care who’s selling their policies as long as risk is managed properly and premiums come in.

Maybe at some point, an insurance startup will want to disrupt underwriting too and capture the whole value chain. But it seems less likely than a startup bank challenging to own every part of the banking experience.

Expansion potential

Wrisk also note their ambition for expansion. Insurance is already one of the most globalised industries in the world. The products are fairly simple and customer service is less intensive than for other financial businesses.

While a Hard Brexit will slow any European expansion plans somewhat, fundamentally exporting insurance is not that hard.

The Question Marks

Does anyone care that much about their insurance?

As mentioned above, Wrisk is a populist fintech, like challenger banks. Challenger banks have two major advantages:

• People (have to) use their banks all the time.
• People really hate banks.

Insurance, on the other hand, doesn’t really fire anyone up. In fact, it’s famously boring. Does anyone have, need or want a deep relationship with their insurance provider?

It’s driven largely by price on big comparison sites (sites which btw aren’t conducive to app downloads). There is a real trust deficit - in fact, giant Aviva has launched a product specifically to address this - but it’s not as intense as that of banks.

Insurance is usually a one-off purchase rather than a continuous interaction. Even if the experience of buying from a legacy provider is frustrating, it’s not the kind of constant drumbeat of irritations that drives people to challenger banks.

And, other than car or life insurance in particular circumstances, people don’t have to buy insurance.

Consumer-facing proposition isn’t strong or clear enough yet

Those lower stakes seems to be reflected in Wrisk’s slightly lukewarm positioning, compared to the idealism and sense of purpose of the best challenger banks.

The Wrisk’s mission is stated thus: “Wrisk is on a mission to change the way people think about and buy insurance. We see the need for insurance to be connected to our lives, devices and to treat us as individuals.” That’s OK, but the truth is that consumers don’t think that much about their insurance at all.

While insurance could definitely be simpler, more flexible and more transparent, Wrisk have yet to wrap those advantages in a really compelling identity.

Wrisk’s offering genuinely does seem like a better way to buy your insurance, but they need to a) make it more desirable to buy insurance and b) emphasise why a better insurance experience is that consequential for customers.

They could also do more to capitalise on the trust deficit afflicting legacy players. While Wrisk emphasises transparency, that mission of bringing fairness and idealism to insurance is not that prominent.

Pleasing everyone

While Wrisk’s mission is about customer centricity, arguably their most valuable relationship is with their underwriter. Since Munich Re is underwriting the insurance, Wrisk don’t face any direct risk from paying out claims.

However, Wrisk do have to make sure their products perform as expected or their underwriter will re-examine their relationship. It’s up to Wrisk to make sure their custom policies can navigate the insurance cycle. An insurance exec, Tim Rourke, commented on this issue last year:

“A firm’s technological ability or agility within a specific niche cannot by itself be the panacea to securing a high and profitable market share.”

Ultimately, as much as they need to satisfy customers with innovative experiences, Wrisk also need to satisfy their underwriter that these products deliver for them.

Maintaining and investing in superior and effective data operations will be vital for them.

The claims process

At the moment, while Wrisk control the user experience of making a claim, they don’t have final say on paying claims out. Instead, that’s dealt with by a claims management partner. This is very common for MGAs or brokers, since claims management is an expensive, expert process. Very few, if any, small insurance intermediaries fully handle claims in-house.

That said, since claims are one of the biggest pain points for trust, this does limit Wrisk’s ability to revolutionise all aspects of insurance - at least, for now.

Though Wrisk do have influence over the claims process through a close relationship with their claims manager, that’s inherently less transformative than a full in-house solution.

So right now, Wrisk’s disruptive impact is on distribution, product range and user experience.

The final word

Wrisk is an interesting business. Their model and the breadth of their ambition to centralise insurance in one smooth app are impressive. However, they’ll also need to find the balance between aggressive growth and delighting customers with satisfying their more established partners - who are ultimately putting up the insurance capital.

Wrisk could end up combining the conservative solidity of the insurance biz with the exciting potential of a crowdfunding opportunity and delivering the best of both. Or it could turn out that an agile startup tends to trip up in an environment that demands detail and caution.

Let us know your thoughts!

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This is not investment advice and Freetrade does not facilitate crowdfunding investments - if you’re interested in crowdfunding, you should make your own investing decisions after reviewing all available materials on the crowdfunding site, as well as the site’s own information on the risks, and considering your personal circumstances, or seek independent advice.

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