As InsurTech Root focuses its attention on signing up partners for embedded insurance relationships, telematics is taking a back seat to other pricing factors.

But the company launched as a telematics-based auto insurer intent on giving the best drivers the best rates back in 2016 can still go head-to-head with incumbents like Progressive on segmenting risks, Root Chief Executive Officer Alex Timm suggested during a webcast virtual fireside chat at the Jefferies Insurtech Conference yesterday.

Fielding questions from Jefferies Analyst Yaron Kinar about what Root has learned from an existing embedded partnership with Carvana and about how Root’s telematics program stacks up against some enhancements Progressive is bringing to its existing telematics program, Timm also said his company can take on the best preferred drivers—and the worst nonstandard drivers—while still catering to the preferred end of the market.

While Root isn’t using telematics to price new customers going through a three-click process of adding Root auto insurance to their purchases of used cars from Carvana, it’s on the road map, Timm said.

“Telematics is a tool, and not all tools should be used all the time, right?” Timm said. “Although we’re always going to encourage customers to opt into telematics, we also believe that we can underwrite profitable levels, as we’ve shown now through Carvana, without telematics. But it’s certainly something that we look to encourage and it’s certainly something we continue to want to double down on,” he said.

Bullish on Embedded

Timm made those statements after responding to a question from Kinar about learnings from the Carvana deal that Root might be able to apply to two new embedded insurance partnerships. The InsurTech co-founder said one of these new deals is inked already and another likely to be signed soon. While not asked or volunteering to name the entities, he did reveal that none of the three partnerships are exclusives on either side—for Root or it partners.

“The important thing is we’ve really built a system that we believe can underwrite all risk profitably, whether that’s a nonstandard risk, whether that’s a mid-market risk or whether that’s a preferred risk,” the InsurTech leader said as he talked about leveraging the engineering and underwriting work that the carrier has done with its first embedded relationship.

“Through the Carvana work, we basically ‘API-ified’ our entire tech stack, so now it’s very easy and very fast for engineers to effectively plug-and-play with insurance and with the Root technology stack.”

Expanding on the promise of embedded insurance across the industry, Timm said, “We think that in 10 years’ time, and actually even sooner than that, you’re going to see a material market share shift into the embedded channel. That’s because it just works better for consumers.”

“Talking to consumers at the time when they really need insurance — like when they’re purchasing a vehicle — is a lot better customer experience than being bombarded with advertisements to try to get somebody to a website [that describes] a product they’re not very excited about in the first place,” he said, asserting that “eliminating the degrees of separation between that moment of need and then delivery of the product” will represent “the next big secular shift” in the auto insurance market.

Progressive vs. Root: Continuous Monitoring

As for the shift toward telematics, Kinar asked Timm about recent moves by Progressive, a pioneer in the space, to moving from limited period monitoring for pricing to continuous monitoring, accompanied by increases in participation discounts (up to 15 percent from 10 percent) and maximum discounts and surcharges (now 45 percent and 60 percent, respectively).

Related article: Telematics Master Class: How Progressive Offers Competitive Prices

Assuming other incumbents will follow suit, Kinar asked whether these moves will erode any advantage that Root has now in telematics.

“As telematics becomes more adopted, and more consumers are using it, that’s actually a good thing for Root because we are such a telematics-forward [company. But] I will point out, you know, that that is nowhere close to the actual indicated cost curve,” he added, referring to the surcharge number. “When you look at the bad drivers, that 60 percent number should be closer to 200 percent,” he asserted.

Root, he said, is “actually underwriting out those poorest risks. And we do it very quickly. Some of the worst risks we can identify within a couple of weeks from downloading our app and we can actually get them off our book,” he said.

Timm also said that Root has had continuous monitoring live since 2016 but hasn’t found driving behavior data beneficial for pricing beyond the test period for new business and does not typically use it to reprice policies at renewal. He said that continuous monitoring is possible because Root monitors driving with a mobile phone app instead of a dongle (telematics plug-in device)—an expensive device the carriers using them ask customers to return after limited monitoring periods.

(Editor’s Note: In 2016, Progressive launched the Snapshot app, allowing customers to use a mobile phone app instead of having to plug in a Snapshot device.)

“We never said, ‘OK, now we’ll turn permissions off.’ There was no reason to do so,” he said, explaining that direct customers earn a quote after a test period. “That’s how you maximize the value of segmentation. But then thereafter we continue to leave the permissions on and we’ve looked at how our risk parameters drift over time. Do they get better? Do they get worse?”

“There’s more limited value to the data at that point,” he said.

While Root doesn’t use continuous monitoring data for renewal prices, “we’ve done some things with underwriting,” Timm said. “Folks who get much, much worse after they buy—it’s very rare, so we haven’t really needed to do that too much, but we will react at times.”

Continuous monitoring is actually more helpful on the claims side, Timm said. “You can detect a lot of claims fraud using the mobile device, whether it’s, ‘Hey, you said you were at this location. It doesn’t look like you were,’ so you could push back on some claims, [or] whether it’s, ‘Hey, it looked like you were doing circles. So, we have some suspicion that you were maybe driving for Uber or Lyft. And so it looks like it probably isn’t a personal auto claim.'”

“That’s really where we see most of the value of the continuous monitoring versus sort of changing prices dramatically on customers term over term,” he said.

Ahead of the Curve

Timm and Kinar also spoke about efforts Root has made to lower its loss ratio, and while Root is targeting growth through its embedded partnerships going forward, at one point, Kinar noted that the company has shed about one-third of its policies in-force since the time of its initial public offering in 2020. Timm went on to describe Root’s swift reactions to inflation trends.

“We are really focused on building a strong customer base, and one of the things that we’ve done when we saw trends change, really in 2021, and we saw used car prices increase almost 30 percent in 60 days, is we were really aggressive on changing our contracts. We filed new contracts in the vast majority of our states. Those contracts changed more than 20 different factors in terms of what is insured and how it is insured.”

“We’ve changed our underwriting standards, including how we leverage vehicle inspections, and we’ve also significantly changed and improved our segmentation. And as part of that, as we’ve improved segmentation, we have actually seen ourselves become more competitive on preferred customers relative to nonstandard segments. That being said, we think we can make money and build a great book on a nonstandard customer segment, and we also believe that we can apply it to a preferred customer segment. We think when you are a direct carrier, you have to be able to do both,” he said.

Kinar specifically asked Timm about 53 rate filings that Root implemented in 2022 with an average rate hike of 37 percent. One way to interpret the significant actions is to say that Root was able to identify trends quickly and to react to them quickly. Others might argue that the rate increases “that are well in excess of the industry average” reveal that the quality of the company’s pricing and segmentation was challenged to begin with, the analyst observed, asking Timm to react.

Said Timm, “The industry didn’t do a good job. The industry needed to take a lot more, right? And they now still do. [Yes], we took way more than the industry, but my gosh, look at some of our competitors right now and where the industry is. Their loss ratios are still at historic highs.”

“So, I think pointing to Root and saying [that] we have difficulties underwriting and pricing—I wouldn’t say we’re at the head of that line.”

Timm went on to provide some context about Root’s learnings, excluding the noise of COVID lockdowns and then supply chain issues that drove loss ratios upward industrywide. “Root used to, in a bumpy manner, get about two points of loss ratio improvements every quarter since we’ve launched the company. That is a function of growing our dataset, training our dataset. We’re still seeing material improvements with UBI 5, which is our UBI model that’s currently in development…We’re still seeing really large improvements in our predictive power. So, we do believe that we’ll continue to get better and that’s part of the learning curve.”

“We can argue about where we started, but there should be no doubt about where we are,” he said, prompting Kinar to highlight Root’s improving loss ratios—down 17 points on an underlying basis for the fourth quarter of 2022 compared to fourth-quarter 2021, and also improving 7 points for the full year. Kinar asked Timm to rank the drivers of the improvement, offering factors like rate increases, seasoning of the book and mix shift as possibilities.

“Base rate was clearly very needed. We’re seeing that across the industry. We were just very fast with it. We recognized the trend and we reacted quickly, and so that certainly is very impactful. I think the second is likely segmentation. We really materially improved our segmentation through the last year, as we do every year. And so we’ve continued to launch new models with all of those rate changes. They weren’t just base rate filings — that’s kind of easy. They were actually segmentation filings.”

Timm ranked underwriting changes next. “We have just gotten much better at controlling some of the risk up front. [In] states that were slower to respond to our rate change requests, we were able to actually apply more stringent telematics underwriting standards,” he said, giving the example of only letting in the best 20 percent of drivers. “Those are some of the levers that we started to pull and those were very material.”

While California has been slow to respond to rate hike requests for all auto insurers, Root is still trying to get a 60 percent rate increase approved on a small book of California business, in contrast to the strategies of other insurers who are applying for smaller back-to-back jumps. Specifically, competitors are filing multiple 6.9 percent increases because requests of 7 percent or more get more scrutiny in the state, lengthening the time to implementation. (Related article, “Why Not Go Direct on Homeowners, Allstate CEO Asks”)

That approach “just won’t work,” Timm said, responding to competitor strategies. “Right now, inflation trend is probably still 8-9 percent. So, when you’re looking at what you expect for medical cost inflation and parts inflation, 6.9 probably isn’t even looking forward enough. Even if you were rate adequate today, taking 6.9 probably wouldn’t even keep your head above water.”