Insuraco: Smartphone insurance for under-30s

Author: Tom Davies (‘20D)

Case Information

Difficulty level – Quantitative 3

Difficulty level – Creativity 3

Difficulty level – Structure 3

Case led by Mixed

Case type New Product Launch

Industry Insurance

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Case Prompt

Insuraco is a large US insurer that’s looking to grow. They currently sell a wide range of insurance products to US consumers and are
considering developing a new product: $5/month smartphone insurance for under-30s.

Insuraco’s management is excited about the opportunity of selling to this large, under-insured group. However, before they develop the idea
further, they’d like to know whether this is indeed a good idea, and, if so, how they should roll-out this new product.

Information to be used to answer clarifying questions

 Insuraco’s primary objective is to maximize profit, particularly in the first year the product is released
 Insuraco currently sell their products through agents
 Insuraco are only interested in selling this product in the US (and are licensed to do so in all US states)
 Insuraco’s investment income can be ignored in any financial calculations

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Guide to interviewer

• This case tests the candidate on three concepts:

1. Market sizing: The candidate is first asked to estimate the market’s annual revenue
2. Profitability: The case then introduces the “Combined Ratio” (used by insurers to measure profitability) for the candidate to calculate
the profitability of two possible distribution channels
3. Brainstorming: The case concludes by asking the candidate to discuss non-financial considerations of the product launch
• Allow the candidate to explore. They will likely go to market-sizing early, but may need guidance towards customer buying
preferences/distribution channels

Guide for use of exhibits

Exhibit 1 - Present when asked about customer buying preferences or distribution Exhibit 2 - Present when asked to define the
channels Combined Ratio
Key Insights:
Key Insights:
a. The website is more effective at reaching and signing-up customers
a. The Combined Ratio is a “cost-centric”
b. However, selling through agents is cheaper to set-up and operate
measure of profitability
c. Calculations will show that both distribution channels have the same profit in year 1
b. 100% - Combined Ratio ≈ Profit Margin
d. However, the website is more attractive as development costs are a one-time expense

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Sample Framework & Notes

Smartphone insurance for under-30s

Is the market attractive? Can Insuraco enter effectively?

Size & Growth Competition Customers Product Capabilities

- Ask candidate to - No competitors in this - When asked about - $5/month smartphone - Insuraco has good
market size (see next space buying preferences, insurance, covering all experience in pricing
slide) - Most smartphone present Exhibit 1 standard causes of insurance and has a
insurance is included in loss/damage. strong, respected
home/contents - No new, novel types of brand
insurance, which most coverage - When asked about
under-30s don’t have - Considering selling distribution channels,
through a website present Exhibit 1

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Market sizing – suggested structure Sample calculation

• When the candidate asks for details about the market size, • US Population: ~ 320m
ask that they estimate the market’s annual revenue • % under 30: Average life expectancy in US ~ 80 years. Assume
equal distribution across all ages, so ~4m people of each age.
• Sample structure: (30 x 4m)/320m ~ 35%
• % that own a smartphone: Need to account for:
US Population 1) Smartphones are not owned by most children < ~15.
x 2) Smartphones are extremely popular for those > ~15
% under 30 • E.g. assume 0% for under-15s and 80% for 15-to-30-year-olds
x (~40% overall)
Market size: • % that are interested in smartphone insurance: Insurance is
under-30s % that own a smartphone not widely used by this group, so will be low. ~20% acceptable
smartphone x • % that would pay for smartphone insurance: Again, expected
insurance in % that are interested in to be low. ~20% acceptable
the US smartphone insurance
x • Annual premium per customer: $5/month x 12 months =
% that would pay for $60/year
smartphone insurance • ANSWER ~ $100m/year
x
Annual premium per Note: The candidate’s reasoning and structure is more important
customer than their final answer.

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Distribution Channels (based on Exhibit 1)

When the candidate asks about customer buying preferences or distribution channels, present Exhibit 1. They should proceed to calculate the
profitability of the two distribution channels. Additional information (only provided to candidate when requested):
• Definition of the “Combined Ratio” – present Exhibit 2. This is a commonly used metric in the insurance industry
• Definition of the “Conversion Rate” – % of website visitors or agent enquiries that purchase the insurance
Profitability of Website in year 1
a. 120k paying customers expected in first year: 600k visits x 20% conversion rate
b. Average annual profit per customer = $0.75: $5 monthly premium x 6 months (average contract length at end of first year) x 2.5% (1-
97.5% combined ratio)
c. $90k total operating profit in first year: a x b
d. -$10k total profit in first year: $90k - $100k development costs
Profitability of Agents in year 1
a. 50k paying customers expected in first year: 400k enquiries x 12.50% conversion rate
b. Average profit p.a. per customer = $1.50: $5 monthly premium x 6 months (average contract length at end of first year) x 5% (1- 95%
combined ratio)
c. $75k total operating profit in first year: a x b
d. $25k total profit in first year: $75k - $50k development costs
Therefore selling via agents looks like the better option…

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Distribution Channels (based on Exhibit 1) – continued

However, tell the candidate that projections indicate a 10% increase in website development costs will change the conversion rate to 30%.
Does this change their answer?

• 180k customers now expected in first year: 600k x 30% conversion rate
• $135k total annual profit: $0.75 x 180k
• $25k total profit at end of 1st year: $135k - $110k development costs

Therefore, both options have first-year profits of $25k. Ask the candidate what their advice is now…

Additional information (only provided to candidate when requested):

• Combined Ratios and Conversion Rates are expected to remain unchanged in the future
• Future # of website visits and agent enquiries are unknown
• In the long-term, average contract length is expected to be ~3 years

Candidates should note that since Development Costs are a one-time expense, the website should be more profitable after the first year.
However, they should clarify that if the # of visits or enquiries changes in the future (which seems likely) the profitability of the options would
change.

**Bonus points if the candidate notices that an average contract length of ~3 years makes the website even more desirable**

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Next Steps (Non-financial considerations)

Now ask the candidate what other (non-financial) considerations need to be made regarding the roll-out of this new product

The candidate should discuss qualitative considerations in a structured way. Topics could include:

• Marketing/Branding – How are Insuraco going to make insurance (often seen as a stuffy and conservative product) relevant, cool and
desirable to the U30s?
• Marketing: Does Insuraco have the capability to pull off marketing to this age group, or does it need to hire new marketing expertise?
• Branding: Should Insuraco establish a new brand to sell this product, rather than selling under its existing brand?
• Management of existing agent relationships – Insuraco is currently heavily reliant on agents; it sells all its products through them! Will
adopting a new distribution channel endanger Insuraco’s relationships with its agents?
• Competitor response – How can Insuraco defend its turf? We know that the product is easily replicable (insurers already offer it through
home/contents insurance and no new, novel coverages are being offered), so how can Insuraco differentiate its offering?
• Growth opportunities: Could releasing this product “open the door” to further growth? What other insurances could Insuraco sell to the
U30s (e.g. travel insurance, home renters’ insurance, auto insurance)? How can we foster brand loyalty so that we are customers’ insurer of
choice for “bigger ticket” insurances purchased later in life (e.g. homeowners’ insurance, life insurance, medical insurance)?

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Sample Solution & Recommendations

 Recommendation: Sell this new product via a website for a first-year profit of $25k
 Why?: Market is expected to be large ($100m annual revenues), competitor-free and profitable (combined ratio <100%)
 How?: Although the costs of setting up and operating a website are higher than other distribution channels, it is expected to be the most
profitable in the long-run because 1) it signs up the most customers, and 2) development costs are a one-time expense
 Risks: Uncertainty around future # of site visitors and agent enquiries
 Next steps: Conduct market research to understand future trends in site visits and agent enquiries; develop marketing and branding
strategy; manage agent relationships; consider competitor response; explore growth opportunities

Guide: Good vs Great Case

A good candidate will: A great candidate will:

a) Confirm that the opportunity does indeed look a) Identify assumptions that are fixed (e.g. Combined Ratio, Conversion Rate) and
interesting – a big, profitable and (currently) variable (e.g. Av. Contract Length, Future # of Website Visits/Agent Enquiries)
competitor-free market and proactively discuss what will happen if they change
b) Clarify the definition of the “Combined Ratio” before b) Notice that 100% - Combined Ratio ≈ Profit Margin
starting calculations in Exhibit 1 c) Discuss the growth opportunities of rolling out this new product (e.g. developing
c) Identify the website as the favored distribution and cross-selling new products, effect of winning customer loyalty at early age) in
channel the qualitative discussion

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Exhibit 1 – Insuraco’s Potential Distribution Channels – 1st Year Projections

Development Year 1 expected website Conversion Combined

Costs visits/agent enquiries Rate Ratio
Website $100,000 600,000 20.0% 97.5%
Agents $50,000 400,000 12.5% 95.0%
Average contract length at end of first year is 6 months
Insuraco will only invest in one channel for this product

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 Insuraco: Smartphone insurance for under-30s
Author: Tom Davies (‘20D)

Exhibit 2 – Combined Ratio Definition

∗
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕𝒔 𝒊. 𝒆. 𝑪𝒍𝒂𝒊𝒎𝒔 & 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
𝑪𝒐𝒎𝒃𝒊𝒏𝒆𝒅 𝑹𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒊. 𝒆. 𝑷𝒓𝒆𝒎𝒊𝒖𝒎

* Does not include Development Costs

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