how-does-root-insurance-make-money-the-root-insurance-business-model

How Does Root Insurance Make Money? The Root Insurance Business Model

Root Insurance is an app-based car insurance provider founded by Alex Timm and Dan Manges in 2015. Since the age of fourteen, Timm, who has worked in insurance, wanted to streamline the insurance application process for both the consumer and the insurance company. The company makes a profit if the value of insurance premiums exceeds compensation payouts. While the company does have some overheads, its costs are much lower without the need to maintain physical branches.

Origin Story

Root Insurance, formally known as Root Insurance Company, is an American app-based car insurance provider.

Root Insurance was founded by Alex Timm and Dan Manges in 2015. Timm, who has worked in insurance since the age of fourteen, wanted to streamline the insurance application process for both the consumer and the insurance company.

Indeed, the whole process is handled on a smartphone. Users must first download the app and scan their license. The software then adds personal details to the insurance application automatically.

But it is the way the app assesses driving capability that is particularly interesting. Whilst the driver is on the road, the app gathers data on acceleration, cornering, braking, and other sensors to gauge driving skills. It also measures risk parameters such as how much driving is done at night. This allows a more tailored car insurance quote that promotes company values of fairness and simplicity.

In October of 2020, Root Insurance became a publicly listed company. It was the largest such IPO to ever occur in the state of Ohio.

Root Insurance revenue generation

While Root Insurance uses a somewhat unique risk assessment method, its revenue generation model is not unlike many other insurance companies.

That is, the company makes a profit if the value of insurance premiums exceeds compensation payouts. While the company does have some overheads, its costs are much lower without the need to maintain physical branches.

As noted in the previous section, Root also offers rental and homeowners insurance.

Rental insurance

Starting from $6/month, renters can get insurance cover for their household possessions. Cover is provided in the event of theft, personal injury, or damage to the home resulting from fire or water. Temporary accommodation for up to 12 months is also available in the event the primary residence is uninhabitable.

Here, the exact premium broadly depends on the number of bedrooms and assets in the home and whether the landlord needs to be added to the policy. As of the time of writing, rental insurance is only offered in 9 American states.

Root Home

Root Home is the name given to the Root insurance for homeowners. It is similar to rental insurance in that it covers incident damage, property that is destroyed or stolen, medical payments, and temporary living expenses.

Net investment and fee income

Root also makes a small (but by no means insignificant) amount of revenue from net investment income.

Net investment income is money received from investments such as bonds and stocks before taxes have been applied. The company is likely investing a small portion of each insurance premium it collects.

In 2019, the company also made 3.3% from fee income. The nature of these fees is undisclosed.

Key takeaways:

  • Root Insurance is a North American app-based insurance provider. The company was founded to streamline the insurance application process by Alex Timm and Dan Manges in 2015.
  • Root Insurance earns money by charging its customers a monthly insurance premium. While car insurance is the primary product, rental and homeowner insurance is also now available.
  • Root Insurance also makes from net investment and fee income. Collectively, these two fees accounted for over 5% of total revenue in 2019.

Related Case Studies

Insurance Companies Business Models

how-do-insurance-companies-make-money
The insurance company revenue model revolves around a claimant receiving compensation in the event of an accident, illness, death, or damage to an asset resulting from theft or a natural disaster. In return for continual insurance cover, the company charges a regular fee – otherwise known as a premium. In essence, insurance companies make money by carefully considering the risk of each policy. They bet that the holder will continue to pay for insurance coverage and never be required to make a claim.

Root Insurance Business Model

how-does-root-insurance-make-money-the-root-insurance-business-model
Root Insurance is an app-based car insurance provider founded by Alex Timm and Dan Manges in 2015. Since the age of fourteen, Timm, who has worked in insurance, wanted to streamline the insurance application process for both the consumer and the insurance company. The company makes a profit if the value of insurance premiums exceeds compensation payouts. While the company does have some overheads, its costs are much lower without the need to maintain physical branches.

Next Insurance Business Model

how-does-next-insurance-make-money-the-next-insurance-business-model
Next Insurance is an insurance technology company founded by former co-workers Guy Goldstein, Alon Huri, and Nissim Tapiro. Drawing from the popularity of so-called insurtech companies they launched a website in 2016 with $13 million in funding. Next Insurance began by offering insurance tailor-made for photographers and personal trainers. Next Insurance makes money via the premiums it charges to customers every month.

Real-Time Insurance Business Model

real-time-insurance
A real-time insurance business model enables Tesla to build its own insurance arm, by dynamically adjusting the premiums, based on real-time driving behavior. Reduced insurance premiums hooked with the leasing arm, enable Tesla to scale its demand side of the business.

Lemonade Business Model

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Lemonade is an insurance tech company using behavioral economics and artificial intelligence to process claims efficiently. The company leverages technology to streamline onboarding customers while also applying a financial model to reduce conflicts of interest with customers (perhaps by donating the variable premiums to charity). The company makes money by selling its core insurance products, and via its tech platform, it tries to enhance its sales.

Read Also: How Does Lemonade Make Money, How Does Next Insurance Make Money, How Does Vroom Work And Make Money.

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