The Fintech Parallel Part III: How Insurtech Applied CMA Thinking to Risk Management
When entrepreneurs realized insurance was solving the wrong problem entirely
In the first two parts of this series, I explored how retail and business banking fintechs rediscovered the Cash Management Account playbook: start with customer needs rather than industry structure, integrate services around complete outcomes, and use technology to eliminate friction that doesn't serve customers. But perhaps nowhere has this approach been more revolutionary than in insurance—an industry that had become so focused on post-loss claim processing that it had forgotten customers actually wanted to avoid losses in the first place.
The insurance industry in 2015 looked remarkably similar to 1970s banking: organized around provider convenience rather than customer needs, with complex products that customers couldn't understand, adversarial relationships during the moments when customers needed help most, and business models that often conflicted with customer success. Just as banks had optimized around regulatory constraints rather than customer value, insurers had built entire industries around risk assessment, claims adjudication, and agent distribution—solving yesterday's problems with yesterday's tools.
Then a new generation of entrepreneurs began asking different questions: What if insurance companies prevented losses instead of just paying for them after damage occurred? What if buying coverage took minutes instead of weeks? What if claims processing happened automatically without human intervention? What if the business model aligned insurer success with customer protection rather than creating adversarial relationships?
The answers would create some of the most valuable insurance companies in history while demonstrating that even the most regulated, relationship-dependent industries could be transformed by applying first-principles thinking to customer problems.
The Insurance Industry's Original Sin
To understand why insurtech companies succeeded so dramatically, you need to understand how fundamentally broken traditional insurance had become from a customer perspective. The industry had evolved around three core assumptions that made perfect sense in 1900 but created massive dysfunction by 2015.
First, insurance companies assumed that their primary value was accurate risk assessment and pricing. Enormous resources went into underwriters, actuaries, and risk models designed to predict which customers would file claims and price policies accordingly. But customers didn't actually want to be risk-assessed—they wanted to avoid bad things happening to them in the first place.
Second, the industry organized around claims processing after losses occurred. Sophisticated systems existed for investigating claims, determining coverage, negotiating settlements, and managing disputes. But customers would much rather prevent their house from flooding than negotiate with adjusters about water damage coverage after the fact.
Third, insurance distribution relied on agents and brokers who supposedly provided expertise and advocacy but often created additional friction between customers and coverage. The agent model worked when insurance was complex and customers needed education, but it became a barrier when customers wanted simple, transparent coverage they could purchase online.
These structural assumptions created perverse incentives throughout the industry. Insurance companies made more money when they collected premiums without paying claims, creating inherent conflicts with customer interests. Agents made money by selling complex products with higher commissions rather than simple coverage that met customer needs. The entire system was optimized around industry economics rather than customer outcomes.
According to J.D. Power's 2019 Insurance Shopping Study, customers rated the insurance shopping experience lower than almost any other financial service, with particular frustration around complex applications, opaque pricing, and adversarial claims processes. The industry had somehow managed to make essential financial protection feel like punishment for responsible behavior.
Lemonade's First-Principles Revolution
When Daniel Schreiber and Shai Wininger founded Lemonade in 2015, they brought a completely different perspective to insurance. Schreiber had previously built Powermat, a wireless charging company, while Wininger had co-founded Fiverr. Neither had insurance industry experience, which turned out to be an enormous advantage.
Their insight was that customers didn't want insurance products—they wanted protection from financial catastrophe. This led to a fundamental question: what would insurance look like if it was designed around loss prevention rather than loss processing?
Lemonade's approach started with modern underwriting that used behavioral data and AI to assess risk in real-time during the application process. Instead of lengthy applications asking about decade-old habits, their system analyzed hundreds of behavioral signals during the application process itself—typing patterns, response times, answer consistency—to evaluate risk more accurately than traditional questionnaires.
But the real innovation was proactive prevention rather than reactive claims processing. Lemonade's AI identified patterns that predicted claims and proactively contacted customers with prevention advice. Weather data triggered alerts about approaching storms with protection recommendations. Neighborhood crime trends generated security suggestions. The goal was preventing losses rather than just compensating for them after they occurred.
Perhaps most importantly, Lemonade restructured the fundamental business model to eliminate conflicts of interest between customer claims and company profits. They structured as a B-Corp, legally requiring them to balance profit with social benefit, and created their "Giveback" program where unused premiums went to charities customers chose rather than insurance company profits.
The customer experience transformation was dramatic. Policy applications completed in 90 seconds rather than weeks. Claims processed in seconds through AI analysis rather than months of investigation. Customer satisfaction scores significantly exceeded traditional insurance companies while fraud rates dropped due to increased transparency and ease of legitimate claims.
Current results demonstrate the model's success: over 2.5 million customers, $1.008 billion in premium, and achievement of positive adjusted free cash flow in 2024. More importantly, Lemonade proved that insurance could be profitable while genuinely serving customer interests through prevention-focused approaches.
Next Insurance's SMB Revolution
While Lemonade focused on consumer insurance, Guy Goldstein and Alon Huri identified a parallel dysfunction in small business insurance. Traditional commercial insurance forced small businesses to purchase coverage designed for much larger companies, with minimum premiums, complex applications requiring agent assistance, and coverage options that didn't match actual small business needs.
Their 2016 founding of Next Insurance addressed the fundamental mismatch between how small businesses operated and how insurance was sold. A freelance consultant needed professional liability coverage but couldn't justify the minimums and complexity of traditional commercial policies. A food truck needed coverage that traveled with their business rather than being tied to fixed locations.
Next Insurance's breakthrough was building insurance specifically for small business operations rather than adapting large commercial products. Policies became available in minutes starting at $10 monthly, addressing the scale mismatch that traditional insurers couldn't solve profitably. Industry-specific products for contractors, consultants, and retailers provided relevant coverage without paying for unnecessary features.
The distribution strategy proved crucial. Rather than competing with agents, Next Insurance partnered with platforms where small businesses already managed operations: Amazon Business Prime offering 10% discounts to members, deep integration with Intuit QuickBooks, and partnerships with ecosystem players like Gusto, Square, and Toast.
This embedded approach made insurance procurement seamless rather than requiring separate vendor relationships. Small businesses could purchase coverage within the software platforms they used for accounting, payroll, and operations, eliminating the friction that had made professional insurance inaccessible to smaller companies.
Munich Re's full acquisition announced in March 2025 validated the embedded insurance model, with Next Insurance having served over 600,000 small businesses and generated $548 million in revenue. The company proved that technology-enabled distribution could capture significant market share from traditional agent-based models by making insurance accessible to businesses that traditional insurers couldn't serve profitably.
Hippo's IoT Prevention Strategy
Assaf Wand and Eyal Navon founded Hippo in 2015 with perhaps the most radical reimagining of insurance business models: what if insurance companies prevented claims instead of just paying them after damage occurred?
Traditional homeowners insurance operated reactively. Customers paid premiums, filed claims after damage, then negotiated with adjusters about coverage and payouts. This adversarial model provided no incentive for insurers to help customers avoid damage in the first place, creating fundamental conflicts between claim payments and company profits.
Hippo's innovation centered on IoT smart home integration with complimentary sensor kits for real-time monitoring and risk mitigation. Water leak detection systems alerted homeowners immediately rather than allowing damage to accumulate. Security monitoring and HVAC optimization helped prevent common causes of insurance claims.
The business model innovation involved three revenue streams: core insurance, profitable services business, and Insurance-as-a-Service platform for other carriers. This diversification enabled revenue beyond traditional premium collection while providing value-added services that customers actually wanted.
Proactive risk management aligned company incentives with customer outcomes in ways that traditional insurance couldn't achieve. Preventing claims benefited both parties rather than creating conflicts between claim payments and company profits. Smart home technology enabled this alignment by providing early warning systems that traditional insurance couldn't offer.
The evolution demonstrates insurance's potential transformation from reactive claim processing to proactive risk management. Current results show $1.3 billion total generated premium in 2024, $8.5 million positive adjusted EBITDA in Q4 2024, and nearly 30-point improvement in gross loss ratio during 2024.
Hippo's approach represents insurance's evolution from reactive claim processing to proactive risk management, using IoT technology to prevent losses rather than just compensating for them after they occur.
The Universal Pattern: Prevention Over Processing
Looking across Lemonade, Next Insurance, and Hippo, the same customer-centric approach emerges that defined successful banking fintechs: starting with what customers actually want rather than how industries have traditionally organized themselves.
Traditional insurance organized around risk assessment, claims adjudication, and agent distribution because those were the technical constraints of 1900. But customers never wanted risk assessment—they wanted loss prevention. They never wanted claims adjudication—they wanted guaranteed coverage. They never wanted agent relationships—they wanted transparent, fair pricing.
Each successful insurtech company redefined insurance around customer outcomes rather than industry structure. Lemonade built prevention plus parametric claims around customer protection. Next Insurance created accessible coverage around small business operations. Hippo developed IoT monitoring around homeowner success.
The common thread was recognizing that customers wanted coordination of risk management services rather than insurance products. Just as the CMA had integrated financial services around customer wealth management rather than banking products, successful insurtech integrated risk management around customer protection rather than insurance coverage.
The Embedded Insurance Evolution
The success of direct-to-consumer insurtech has created the foundation for embedded insurance that integrates coverage directly into other services and platforms rather than requiring separate insurance relationships.
Tesla's integration of insurance with vehicle purchases demonstrates this evolution. Instead of buying car insurance separately after purchasing a vehicle, Tesla owners can access coverage designed specifically for their car, with pricing based on actual driving behavior and safety features rather than generic risk models.
Similarly, travel platforms like Expedia and Airbnb now offer embedded travel insurance at the point of booking rather than requiring separate coverage purchases. E-commerce platforms provide shipping insurance integrated directly into checkout processes.
This embedded approach represents the logical conclusion of the CMA strategy applied to insurance: eliminate the friction of managing separate coverage relationships by integrating protection directly into the activities that create risk.
The Traditional Insurance Response
Traditional insurance companies have struggled to respond effectively to insurtech innovation for many of the same structural reasons that banks struggled with fintech. Legacy systems built around agent distribution and manual underwriting couldn't easily adapt to digital-first, prevention-focused approaches.
Organizational structures designed around product lines and geographic territories created conflicts when trying to build integrated customer experiences. Regulatory frameworks built around traditional distribution models complicated direct-to-consumer approaches. Revenue models that depended on agent commissions and claims management conflicted with the transparent, prevention-focused pricing that customers preferred.
Some traditional insurers have made progress through acquisitions, partnerships, and internal innovation programs. State Farm's venture investments and Progressive's usage-based insurance demonstrate recognition that customer expectations were changing. But the fundamental challenge remains: traditional insurers face the constraint of their own success and struggle to abandon profitable legacy models.
The Lesson for Insurance Innovation
The insurtech revolution demonstrates that even highly regulated, relationship-dependent industries can be transformed by applying first-principles thinking to customer problems. Success requires understanding what customers actually want to accomplish—protection from financial catastrophe—rather than what industries have traditionally sold—insurance products.
Lemonade succeeded by focusing on loss prevention rather than claims processing. Next Insurance won by making coverage accessible to small businesses that traditional insurers couldn't serve profitably. Hippo captured market share by aligning insurer incentives with customer risk reduction.
Each company built sustainable competitive advantages by developing technology and business models that traditional insurers couldn't easily replicate. Prevention-focused approaches, embedded distribution, and aligned incentives created value for customers while building profitable businesses.
For entrepreneurs building in insurance, the lesson is clear: start with customer protection needs rather than industry product categories. Build integrated solutions around complete risk management rather than individual coverage types. Use technology to prevent problems rather than just process them after they occur.
The companies that master this approach will define the future of risk management by making insurance invisible infrastructure that enables customer success rather than necessary overhead that customers hope never to use.
Next in this series: "Cross-Platform Integration: How Fintech Learned to Play Together" — How successful fintech companies are building ecosystems that combine banking, payments, investing, and insurance around complete customer financial lives.