By Avi Tuschman
Headlines in the Wall Street Journal and New York Times recently announced that Alphabet’s third-quarter net profit decreased by 27%, compared with last year. On a call with analysts, executives from Google’s parent company explained that this precipitous drop occurred due to “less ad spending for insurance, loans, mortgages and crypto.”
One of these advertising categories is very different from the others, and arguably more interesting and consequential. But first, it’s easy to understand the decrease in advertising for the last groups on this list: the crypto bubble burst back in June, so there are fewer crypto ads. As for mortgages, average rates have ballooned from historic lows to upwards of 6, 7, and even 8 percent; as a result, demand for mortgages and other loans has fallen — with ad spend in these verticals also following closely behind.
Now we’ve reached the category that appears to be a significant cause of Alphabet’s falling ad spend: insurance. Unlike speculative crypto or interest-sensitive large investments, insurance is an ongoing necessity; consumer renewals for P&C products come up every six to 12 months. In addition to this guaranteed purchase, P&C insurance has become an increasingly competitive field, with more challengers and direct-to-consumer digital offerings. Cancellation rates for these lines are relatively high as well, so the need to replace churned customers in insurance books also incentivizes paid acquisitions via ad spend. And normally, Google’s core products like Search and YouTube are among the best and most efficient in the world for lowering the acquisition cost of new customers.
But here’s where things get especially interesting: insurance is a fundamentally different type of product from those sold by Alphabet’s other advertisers. With most other products, simply attaining more customers at the lowest acquisition cost possible is the goal. New customers with a high lifetime value (LTV) are better, but most any new customers grow a business and its profitability. Insurance, on the other hand, is categorically different because of the high variability in each new customer’s profitability – or loss. The actual cost of the product for each individual is known only to a limited extent, and only after applications are begun and expensive rating variables have been purchased.
Who will lose money, and who will be profitable, is not known at “top-of-funnel”, where lead prioritization and ad targeting occur. Understanding insurance-specific loss and profitability outcomes is critically important, because small increases in the percentages of high-loss customers can make an insurer’s book of business lose more money than it collects from premiums. With more growth pressures than ever, and inadequate risk selection applied by most insurers at top of funnel today, more than half of P&C insurers are trading below book value; there are simply too many carriers that have loss ratios over 100%.
In insurance, there are only a small number of newer insurance businesses that are built to be highly digital and direct-to-consumer, and which rely heavily on Alphabet products like YouTube and Google Search. These companies have struggled with exceptionally high loss ratios because they do not have a good way to target by actuarial loss using these acquisition channels. By the time leads come in, and filed rating models are applied, far too many unpriceable risks have come onto the book through digital-advertising channels, applying perilous amounts of pressure on insurers’ losses.
The largest, incumbent Fortune 500 insurance companies, which have the largest ad budgets, do not rely quite as heavily on digital advertising because they have agency distribution and other sources of leads outside of Alphabet products that provide new business of somewhat better quality on average. Digital advertising for them is almost more an exercise in branding than acquiring high-LTV customers. Therefore, cutting spend on Google products is akin to buying fewer super bowl commercials. And that’s exactly what the largest insurance companies are doing today. Why? Because most insurance companies are now trying to save costs. They find themselves embattled by monetary inflation, increasing frequency (more accidents) and severity (more expensive claims costs), increasing litigation costs and other types of “social inflation.” Moreover, current market conditions have made it harder now for insurers’ investment income to make up for lackluster underwriting income.
Insurance is one of the oldest, most successful, and most profitable industries in the world. These large carriers will mostly be okay, but they would be well advised to find stronger, faster, and more certain ways to increase profitability, while keeping insurance affordable and available. Doing so is important for their financial health and to maintain, defend, or grow market share in an increasingly competitive industry. The top 10 carriers in each line of business will not be the exact ones five years from now, given the rate of change. From Google’s perspective, on the other hand, a meaningful percentage of the largest advertisers are insurance companies, some of whose yearly advertising budgets exceed $1 billion. Losing a portion of these large ad budgets is painful. Google is also losing theoretical ad revenue that it could win if it were able to target by insurance profitability.
The solution, of course, is to make advertising spend more efficient for insurance companies. Doing so requires being able to target and prioritize by actuarial loss at top-of-funnel. This is exactly the new capability that Pinpoint Predictive has brought to market for our quickly growing clientele of home, auto, and small-business carriers. We’re also proud to have developed the first deep-learning-powered loss predictions for P&C insurers. These provide unmatched predictive power earlier than ever. Our platform also generates the fastest predictions in the industry, providing back custom, turnkey predictions within a couple of days. These immediately deployable predictions are accompanied, quite uniquely, by lift charts, explainable analytics, and ROI calculations.
It’s important to highlight that these new capabilities also achieve two important wins for consumers: (1) greater efficiencies in a competitive market will ultimately be passed on as savings to the consumer. In the words of Michael Lorion, CEO of TRUE and President of Homesite, Pinpoint delivers “an important step forward in predicting behavior and ultimately reducing frictional costs and premiums”; and (2) there will be an increasing number of options to purchase coverage online with greater speed and convenience, much like how we buy many other products today via e-commerce.
Avi Tuschman is the Founder & CIO of Pinpoint Predictive (www.pinpoint.ai).