Metromile Stock: A Pay-Per-Mile InsurTech Play
Everything is moving towards personalization. Precision medicine, on-demand manufacturing, and the new credit score are all good examples of how technology is allowing for a better product-market fit across many industries and use cases. Today, we’re going to talk about how big data can improve the auto insurance experience for consumers. In past articles, we looked at two publicly traded insurtech companies working on this – Root and Lemonade. Today, we’re going to look at Metromile (MILE).
About Metromile Stock
Metromile first came across our radar back in 2016 in a piece titled Metromile: Pay As You Go Auto Insurance. Since then, the company raised around $463 million which included their proceeds from going public using a special purpose acquisition company (SPAC). When that SPAC merger took place earlier this year, we decided not to cover it because a cursory look at the glossy deck didn’t show much promise. Recently, one of our premium subscribers suggested we take another look, and we’re glad we did. What we found in the regulatory filings was a company that’s facing some serious hurdles that could affect all insurtech companies using big data to offer consumers a better deal on car insurance.
Metromile’s Value Proposition
The Metromile value proposition starts when a customer requests a quote and then decides to adopt the service. An on-board diagnostics (OBD) device is then plugged into their car’s OBD port where it begins to collect data.
The result is a value proposition that can be broken down into two broad areas – pay-per-mile insurance and data science for better pricing. For the consumer, it translates into lower-cost car insurance because of one key metric.
35% of drivers drive more than half the miles and cause more than half the losses.Credit: Metromile
With Metromile, you only pay for the miles you drive. That’s a model that’s easy enough to copy for any insurance company, so the real value-add is being able to avoid insuring the minority of drivers who are responsible for more than half the losses. The problem is, plenty of companies are already working on this.
No Barriers to Entry
Measuring how safely someone drives isn’t a novel idea. Just look at how much Zendrive was able to accomplish with a simple app. Another successful smartphone app, Cambridge Mobile Telematics, can measure just about any aspect of driver safety, even being able to tell when you get into an accident, or whether or not you’re the passenger or driver.
We recently visited an insurance agency in Podunk Washington to learn about how accessible some of this technology might be to your average car driver. As the saleslady explained the policy, she pulled out an OBD device and suggested we could save a whole bunch of money on our auto insurance if we allowed the insurance company to monitor our driving habits. There are no barriers to entry keeping any insurance company from doing what Metromile does. That’s why they’re expanding into an “enterprise” segment that offers their platform as a service to existing auto insurance companies. Given just how fragmented and highly competitive the auto insurance market is, that just might work. There’s just one problem that’s lurking around the corner.
The California Problem
In most countries around the world, you’ll find opposing tribes that take the piss out of each other. In England, it’s northerners vs. southerners, and in America, it’s blue vs. red. People who complain about blue states are typically people in red states, but people of all political affiliations should raise the alarm when a state starts to impose rules that destroy shareholder value.
In the State of California, it started with hiring quotas. Whether or not you sit down or stand up to take a number one has zero relevance on your ability to perform a job competently, but not in the State of California which now mandates gender discrimination. Thankfully, they’re now being sued for also trying to mandate racial discrimination. Destructive legislation like this is making it impossible for companies to hire the best person for the job. It’s no surprise then that the State of California is interfering with how Metromile runs their business:
Due to Proposition 103 in California, our largest market, we are currently limited in our ability to use telematics data beyond miles-driven to underwrite insurance, including data on how the car is driven.Credit: Metromile
In other words, the entire value proposition of Metromile just got thrown out the door. And it’s not just the State of California. Last year, the National Association of Insurance Commissioners, or NAIC, announced the formation of a new Race and Insurance Special Committee which is considering “prohibiting the use of credit scores in the underwriting of auto insurance,” among other things. Why more people are not objecting to such outrageous proposals is beyond us, but if this goes through, all the insurtech stocks out there using big data to add value to the consumer by reducing premiums will be in a world of hurt. For Metromile in particular, the California problem impacts 58% of their revenues.
Not being able to use someone’s driving habits or personal information as input to making underwriting decisions leaves Metromile up a creek. They simply become a company that counts the number of miles you drive and little more than that. We haven’t even begun dissecting their financial filings, yet we already have enough information to make a decision.
To Buy or Not to Buy
There’s absolutely no reason to invest in an insurtech company that’s not allowed to use big data to select which drivers they want to insure. As investors in at least one large insurance company, we selfishly could care less if insurtech companies go bankrupt as a result. If it puts more money in the pockets of large insurance companies, and less in the pockets of the consumer, our dividend checks will reflect that.
Those who choose to advance and promote regulatory policies that damage insurtech business models do not have the end customer’s best interests in mind, contrary to what they claim. Instead, safe drivers are expected to keep subsidizing the minority of drivers who are responsible for all the losses. That’s the sad reality of what’s happening here, and we’re not interested in speculating on what the regulatory outcome might be. The direction this whole thing is currently taking is indication enough that insurtech companies are too risky for our tastes.
When evaluating the merits of any given stock, you need to think two steps ahead of where the company might be, based on what limited information you have today. We call this the “case study approach.” Metromile started out with a great idea, but they appear to be pivoting in the face of uncertainty. Their move to reinsure their policies and grow their enterprise offering leads us to believe their business model is still pivoting. In the face of the looming regulatory uncertainty, we’re avoiding the stock going forward.
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