The most common refrain of startups is that insurance is broken and their solution will fix it. Oui, c’est vrai.

But two companies have their act together more than almost any other insurers: GEICO and Progressive, the No. 2 and No. 3 auto insurers in the U.S.

GEICO is famous for its lean expenses, while Progressive runs a loss ratio about 6 points below the industry average of 69.

It wasn’t always this way. Back in 1996, Progressive was No. 7 and GEICO was No. 9. There are few other examples in insurance of companies so steadily and regularly gaining market share across decades.

In our first article about 2017 results for Root, Metromile and Lemonade, we showed how startups historically have only won where incumbents leave the door open. Progressive and GEICO are not leaving the door open, at least in personal auto as a standalone line. Progressive, in particular, has been quite experimental throughout its life, pioneering telematics in the U.S. and experimenting with various ways of paying for auto insurance and using telematics, as some startups are now doing, but with none of Progressive’s advantages.

So why do startups try to compete with such well-run companies? We think there are several belief (or hopes):

• A belief that they can duplicate public filings to set rates. As noted above, it’s harder than it looks. Even professional comparison rating websites have trouble estimating a person’s actual premium, and in a thin-margin business, small differences matter.

This is not a new story. Esurance’s first me-too nearly 20 years ago didn’t work particularly well. Progressive, having outperformed the market for decades, knows that their filings are carefully scrutinized. Like a game of cat and mouse, they have become expert at fooling competitors who try to replicate their filings, which run thousands of pages and are deliberately obscured and complicated.

And rate filings are only one aspect of underwriting. Credit models, underwriting rules, and marketing plans for attracting the best customers may not be public and may be difficult to replicate. The result is that unwary and inexperienced competitors may grow by unknowingly writing the risks that their competitors didn’t want.

• A belief that there are profitable untapped segments that incumbents won’t cannibalize.Progressive and GEICO are very intelligent companies with a long history of innovation and extremely detailed customer segmentations. It defies all logic to suggest that there is a large segment of customers in a fragmented and highly competitive market that are being greatly overcharged simply because these companies refuse to offer them good rates to avoid cannibalization.

• A belief that they can easily acquire customers through direct channels. Direct distribution is not new in U.S. auto—GEICO and Progressive both spend billions of dollars a year in advertising and have extremely sophisticated digital marketing. To this end, one of Root’s interesting innovations is its referral program, which we showed in our last article to be quite powerful. (And we probably underestimated its power, since we didn’t account for multi-car policies.)

• A belief that they can be “good enough” at claims.Scale matters in handling claims, whether it is hiring and managing high-quality defense counsel, detecting fraud patterns, or negotiating with vendors such as garages and roadside assistance services. Further, incentives for third-party administrators must be carefully set to avoid excessive claims cost and customer dissatisfaction. For example, when a TPA is paid per open claim, speed of settlement may suffer, which can lead to regulatory fines or bad faith judgments—not to mention customer annoyance.

In an industry where 96 is considered a best-in-class combined ratio, even a little bit of claims leakage can be quite hurtful. Metromile is exploring the reinvention of the claims process through the usage of telematics data. Considering the international best practices of doing this, the size of their portfolio might not allow them yet to have enough claims to train an algorithm for a reliable crash kinematic reconstruction.

• A belief that “we only need 1 percent of a $220 billion market to be huge.”So 1999…

This analysis isn’t to suggest that it’s impossible for a startup to win in auto insurance, but that the moat around GEICO and Progressive in personal auto is wide and deep.

Related Articles

In Part 1, the authors present overall loss ratio, expense ratio and combined ratio results from statutory filings of the three insurers. “Between An Ant and A Grasshopper, Lemonade’s Results ‘Most Improved’ for Q32018″

In Part 2, “Getting to the Root of the Problem: Why One InsurTech’s Loss Ratios Still Disappoint,” the authors take an in-depth look at results for one of the three carriers.

In Part 4, they revisit a comparison of results for VC-backed startups and startups backed by traditional incumbent carriers. “Startups vs. Incumbents Revisited: Q32018“