What Root’s IPO says about the future — and potential ills — of personalized insurance

Root is an auto insurer eye-ing a $6B+ IPO. Its personalized pricing technology tells us a lot about the future of insurance.


October 27, 2020

(Editor’s Note: A previous version of this article referred to insurtech firm Lemonade as “Lemon”. Sorry!)

Today’s a big day for insurtech (AKA “insurance tech”), which ranks with “Brangelina” as one of the least likable portmanteaus out there.

Root — an auto insurer that has raised $500m+ — is slated for an IPO at a valuation of $6B+.

It’s the 2nd big insurtech IPO of 2020 (Lemonade went public in July) and shines a light on what the future of insurance might look like.

The company’s beef with traditional insurance

In his analysis of Root, finance writer Marc Rubinstein highlights that the insurance industry rests on 2 pillars:

  • Law of large numbers: Accurately predicting claims is easier with a larger (rather than smaller) book of business — all things equal.
  • Risk pooling: The insurance model relies on a larger group of people paying premiums (but not filing claims) to cover claims that do get filed (and result in large payouts).

Root’s S-1 filing essentially says that this mode of insurance is unfair to good drivers that have to pay high premiums to cover riskier customers.

Root’s motto is simple: ‘Better drivers deserve better rates’

The way the company delivers this service is equally simple. A user downloads the Root app, which tracks 200 factors including:

  • Standard details (age, gender, ZIP code)
  • More advanced analysis (braking frequency, turning speeds, phone usage while driving)

The insurer crunches these numbers and can offer relatively cheaper policies for those who drive like Miss Daisy.

Per Rubinstein, this personalized pricing is indeed “fairer, as Root highlights… [and] can influence behavior positively.”

But… there’s always a but

Quoting the book Weapons of Math Destruction, Rubinstein shows how potentially damaging Root’s insurance model can be.

Instead of balancing society’s risks, personalized pricing can “pinpoint those who appear the riskiest customers and then either drive their rates to the stratosphere or, where legal, deny them coverage.”

If companies like Lemonade and Root are indeed the future of insurtech, we’ll have much more complex issues to deal with than an unappealing portmanteau.

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