Paul Ricard: Hi, everyone, and welcome to Oliver Wyman's Reinventing Insurance podcast. I'm your host, Paul Ricard. Welcome to Reinventing Insurance. Today, I welcome Karn Saroya, who is a serial InsureTech entrepreneur and is going to tell us all about it in a second. Welcome, Karn.
Karn Saroya: Thanks for having me, Paul.
Paul: So why don't you start by briefly introducing yourself, Karn?
Karn: Yeah. I've never been described as a serial InsureTech entrepreneur before. It is very specific.
Paul: How does that sound?
Karn: I don't know how it makes me feel, honest. Yeah, no, I am a serial entrepreneur. I started my career as an Oliver Wyman consultant in Financial Services, and then got the bug to start building things of my own accord with friends from high school and from university.
Ended up building an e-commerce marketplace called Stylekick, which served basically high-end fashion to about a million active users on a small screen. So I built a true e-commerce marketplace. We ended up being acqui-hired under Shopify, so as part of Shopify worked on experimental consumer-facing products, kind of the precursor to the Shop app, and a number of other things.
While we were there, while it was amazing, that team was super strong, especially being nascent in Toronto, applied and joined Y Combinator with a relatively early idea for a consumer insurance product called Cover that started under the basic premise of “Take a picture and get something insured.” So take a picture of your car or your cat, or something like that. And the idea there was build a lead gen business.
We had a skill set and a toolkit to drive millions of people through our apps. We built really elegant products. Over time, it became super clear that we needed to own more of the Customer Experience, and eventually ended up scaling a national insurance agency, and then an MGA business focused on a certain subset of our customers.
Out of that, I learned a lot more about insurance. We got to understand the insurance value chain at a much more detailed and intimate level, having spent seven years scaling an insurance business. Got to meet an incredibly broad variety and large number of very smart people, and keyed in on what we wanted to do next, which was build a fully collateralized on-chain reinsurer, which we took significant inspiration from our partners when we were scaling up Cover. And that's kind of been the journey over the course of the last 10 years building three businesses.
Paul: Super excited to have you, Karn, and as we were prepping a little bit for this episode, I think we dug into so many exciting things. I trust that our audience has a lot to learn about. First of all, your journey, and also your take on what's up with the InsureTech space, and your broader thoughts on the insurance industry. What are the cool, exciting technology breakthroughs that you're watching out for?
I mean, obviously last year, Web3 was kind of all over, and it's been more or less in the press with everything that has happened – Generative AI and AI more broadly has been taking over as, I feel like, the number one topic in the press. What's catching your eye? What do you think people should really pay attention to now?
Karn: Well, I think while you've had a couple of blowups in crypto – and generally speaking, that's kind of taken a little bit of steam out of that engine for a little while – what it's done is forced people to go back to the bunkers. You can no longer build things that are predicated on Ponzi economics, so trading of digital assets against one another that don't have a basis or claim to real economics in the real world.
Now what you're seeing is kind of tokenization of real assets, of real estate, of liquid asset classes. You're seeing folks think about –
Paul: You were telling me about tokenization of bottles of wine, I think, that time.
Karn: Yeah, yeah, bottles of wine. If you think about when people care about providence, real assets should be moved with their digital representations to prove providence or title. This should happen for everything. There's just no question about it.
I live here in San Francisco. I think we're increasingly excited about autonomous vehicles and the shift of fleets, hop in a cruise and it freaks you out initially, but eventually you just don't care that there's nobody in the front seat and things are driving.
Insurance itself – I’ve worked with AGI and these large language models – has a lot of structured data. If there's a place for this to happen and it's probably in insurance, because you don't need necessarily need to index all of the world's knowledge. You've got a very niche set of data held within these clusters in these organizations that should be willing, if they're thinking about what happens into the future, conversion of these technologies, be acting right now, spend the money, spend the money on compute, train these models. It should be happening right now.
So, lots of exciting things happening. I think AGI, once you get past the 20% hallucination rate of the output of some of these models, it's only going to get better. There's just no question about that. And then it's going to become a question of how adaptive are you as an individual and as a company to effectively being extended as a human being, scaling as a human being with discreet new functions that enable you to do awesome things in very short periods of time.
Paul: My personal take is Generative AI, at least at this point in time, should probably be in this direction where it's not necessarily a replace, but it's an augment, right? And you get to really focus the highly valuable and expensive human time on verifying, reviewing, augmenting what the Generative AI.
Karn: Yeah. You think about who works at insurance companies and reinsurers. A lot of what they do is not necessarily pure science. There's a lot of art to it. And so I generally agree that yes, it's an augmentation process and the people that are coming up with unique insights are going to be valued much more highly. Somebody needs to create the training data.
Paul: What's up with the InsureTech space and your broader thoughts on the insurance industry? Let's start with Cover, right? So tell us a bit more about this. I know you were saying already, “Hey, it started with lead gen, it became more of an agency.” So what prompted that evolution? What did you get right along the way? What were some of the tumbles? Tell us a bit more about this.
Karn: Yeah, sure. The entire evolution of Cover was kind of born out of what we thought that the customer wanted over time. And so initially when myself and my co-founders, who knew nothing about insurance, candidly, built Cover, and it was a simple camera app.
The idea was, “Hey, if we can find novel ways to attract customers, we can eventually find novel ways to sell them insurance, or connect them with agency partners or the like.” And that just, as a general premise, turned out to not be true.
Digital channels lend themselves to a particular type of customer that have generally different expectations around speed of conducting a transaction, general ease of use, being able to avoid talking to people, if necessary, texting people. And so, the evolution from a lead gen application to a national insurance agency was basically we need to control the Customer Experience to the extent that we can.
And so we did that, and that constituted somewhat like of a soft pivot because we had to go get licensed to understand the insurance business outside of pure distribution. And that was no small lift. There was a pretty heavy lift to get appointed across the country, to get licensed across the country. But it did open up our ability to turn ourselves from an Eat What You Kill business into one that was more of a recurring revenue business, with a much more tangible relationship with the end customer.
Paul: Let's go to the next chapter for you with Re, so maybe why don't you tell us a little bit about what Re is and how it came about, and maybe how it builds on some of these lessons that you're sharing as well.
Karn: Sure, sure. So as part of the journey of building Cover, I got to meet a lot of really smart people in reinsurance. You go to a InsureTech Connect or you go to any of these conferences, the reinsurers are really, really well represented, and you start to think about “Why are they there, why do they care about all these really tiny, small startups?”
And I think the truth is that, while the primary insurers are the reinsurers' customers, they're actively looking to foster the next generation of potential customers and build direct relationships with them in a way that probably wouldn't be possible if people weren't standing up businesses from first principles.
So, as a result of this, I got to meet a lot of really smart people in reinsurance. Got to know a little bit more about the culture around performance, both financial and from scaling an organization. We're lucky enough to have some fairly competent reinsurers on our reinsurance panel that were open about helping me scale and understand the reinsurance business.
And effectively what we learned was that, “Hey, there isn't that much technology, especially outside the top four reinsurers, that's supporting these types of businesses.” And internally we were very, very interested in DeFi generally speaking. And we're thinking about how do we bridge these two general interests.
So you look at the overall market, you have these monolithic re-insurers: Munich Re, Swiss Re, you have marketplaces like Lloyd's of London. And we ended up thinking about, well, hey, there's this massive pool of potential capital that we can access that's looking for a return that is not correlated with what's happening on the Nasdaq, not correlated with what's happening within crypto asset markets, and a reinsurance market that kind of under our feet was shifting because of social inflation, catastrophic losses. And so it was an opportunity from a dislocation perspective for us to stand up a new market effectively.
Paul: You're using Web3 or decentralized finance technology to essentially enable that many to many relationship between those looking for capital to back their risks and those having that capital, and all of this being available on a smart contract means that all of the terms and conditions are out there on your platform. It's all transparent versus –
Karn: Yes! That's correct. Yeah. So the idea here is transparency begets liquidity. Our partners on the cedent side, the insurance company side, want to know that we've got the capital that backs the programs sitting around in the 114 trusts or what have you. The investors want to know what risks we’re on. And regulators, rightfully so, probably deserve tooling that helps them understand exactly what's on risk and what capital is backing those risks at a given point in time, right?
So these type of tools don't exist, and are now going to exist or in the process of existing. And, because you've effectively turned these insurance programs and these reinsurance treaties into smart contracts, you can do really interesting things like tokenize the underlying, recreate the entire insurance link securities market on-chain in a relatively trivial way. You can do things like tokenize your surplus capital so you can effectively enable asset-based lending in kind of a crypto format.
Paul: What's up with the InsureTech space? And I think we talked a little bit already about lots of things have happened, we've had some giants that got amazing valuations and IPOs, and tumbled on the other side.
And right now, obviously we're in a different economic environment as well. Can you expand a little bit on why that has been, why things turned out the way they did, and potentially what's the right model going forward from your standpoint?
Karn: So I think the technologists building InsureTechs are directionally correct with what they're building. They have not done well at the basics. By the basics, I mean mapping to economic outcomes that make sense. So if we're just to paint InsureTech broadly, the 2.0, a significant amount of the scale that came out of these companies is by underpricing insurance.
And I think, on the venture side, what was super exciting was “Hey, top line's growing really, really quickly” and “Hey, we can get behind this because now there's optionality.” You have a larger customer base. Perhaps the narrative was like there's unique tooling or unique distribution that's kind of coming out of this.
But if you peel it back, a lot of these folks are effectively in a commodity business, competing on a commoditized basis with folks who are generally price sensitive. If you look at any of these models with renters, homeowners, homeowners to a lesser extent, but auto insurance – homeowners certainly within the catastrophic sense – they're competing on price.
And so where do you go from there as a new market entrant who's going to be paying the penalty for adverse selection as you're trying to scale up a book of business? And I think that was lost on people for quite some time.
I don't know that I believe and/or lend heavy credibility to MGA businesses, or startup InsureTech businesses that come out out of the gate without significant expertise on the underwriting side that say that they're going to beat the market. I feel like it's just difficult.
You could argue that you can scale a business that's much more efficient, from a headcount or administrative expense perspective. You're sock full of technologists that build elegant experiences and eventually all of that kind of converges, you get mean reversion and people are forced to catch up.
But without the basics, like getting the LTV to CAC right, making sure that your loss ratios are respectable, that you've got a compounding book of business, the retention is on point, that you're able to move from a single product to multi-product, that you're able to solve other problems outside of the insurance realm for your customers, I just don't see that happening.
And I think what needs to change from the last five years to the next five years, you have to get out of the hype cycle. You can't just get away with “Hey, here's a general idea that I have as a InsureTech founder. I'm going to put out a press release about it and never deliver.” That has happened over the last five years repeatedly and had been repeatedly forgiven. Probably a zero-interest rate phenomenon.
The next five years is largely going to be about execution. What actual tangible value are you creating if you're a SaaS business with companies, incumbent insurance companies and your customers? If you are an upstart and a competitor, if you're a substrate business like us, what is different? Are the economics, do they have a reasonable chance of ever converging to something that is a going concern? And I think that's going to be the mindset here because the cost of capital is no longer de minimis
And so, I think there's going to be a significant rise in the success of folks who are focused on operating excellence, and the pendulum is probably going to swing more in the direction of profitability versus growth. Don't get me wrong – the expectations for growth and the ability to inaudible quickly are still very important. But without the seed of profitability or the path, if an entrepreneur does not have a good understanding of what levers are necessary for them to get to profitability, it's going to be challenging.
Paul: And when you talk about operating excellence being the focus, do you feel like there is room for either or potentially both new insurance businesses that are going to be offering retail or commercial solutions or, to your point, I mean, SaaS technology providers that actually work with the incumbent base on these same problematics?
Karn: I think they're going to be both. It's not as if this is Thanos and there's going to be a snap of the fingers, and half of the industry disappears overnight. These businesses were built to compound over time and have a certain durability to them that in many other industries it's just not possible.
And so the problem and the solution is: Time Is Your Friend. So I think it really comes down to who continues to have urgency around fundamentally changing the DNA of their business, if you're an incumbent. Who has the urgency of solving those problems for those incumbents, or if they want to go with the higher risk, higher reward potentiality, then build something from scratch that is competitive, or acts as kind of a foundational layer for the entire industry.
Paul: You mentioned – obviously you have strong ties with the Y Combinator, you obviously are engaged with a range of investors. Do you see the mindset having changed the same way on the investor side towards InsureTechs?
Karn: I would say four months ago, things came to a screeching halt, and not just necessarily in the InsureTech space. You'd look at FinTech valuations and anything that's, you're building a neobank or something that's predicated on revenue being driven by interchange fees that were being valued, like SaaS revenue.
I feel like with a -80, -90, -95% dotcom outcome – dotcom bubble-like outcome, folks are probably going to look at quality of revenue, and things of that nature moving forward. Fast forward to today, still kind of on shaky ground, but folks are cutting checks again.
I think that we need to be able to disconnect the real things that are happening, like the amazingly interesting things that are happening within Web3, with AGI, and the convergence of all of these trends, it's an exciting time to be alive, and it's an exciting time to be building things. Generally very optimistic. And I think that if you're going to bet the next 10 - 20 years of your life, you're going to do it in technology. There is no other place that I would place my chips. It's a significant concentration bet, certainly for me over the last decade, and will be so for the future.
Paul: If we talk about the risk landscape and the insurance landscape, I mean, obviously to your point, interest rate and macro environment is wildly unpredictable these days. There's more CAT risks or more frequent CAT risks than before.
There's a lot of uncertainty in many different fronts. What do you see happening in the insurance industry? Who do you see as winning or potentially losing? How do you see the broader insurance space evolving?
Karn: I was thinking about this in the context of the reinsurance business. Folks are going to want to be more diversified. If you're a cedent, or you're a primary insurance company and you seek reinsurance, I think you are likely to err towards greater diversification, new sources of capital that are persistent and reliable in a demonstrated way.
And I think insurance companies and reinsurers are pretty good at asset liability matching and managing duration risk, but an increased emphasis on that in a market where there's significant rate volatility, right? Because the rate volatility, the underlying ability to earn a return on your investible flow dictates some of your business strategy around pricing and underwriting to some extent.
And so we will see. You can assume shifting sands for the next little while, and folks are just going to have to be pretty laser focused on risk management and diversification.
Paul: Where are you at today with Re and what's your ambition over the next 12, 18, 24 months?
Karn: So it's been a quick start. We went from 0 to 35 million in premium in a couple of months. Probably could have written five, six times that. For lack of, one, some of what we talked about before, scaling too quickly can be dangerous. We've been able to attract pretty significant expertise in the reinsurance realm into Re.
The other learning that I got out of Cover was that I probably should have hired – we ended up hiring a fair cross section of the Mercury insurance team at Cover to run insurance operations, and I think definitely were exceptional and changed the business in a good way, and I wish that had happened a lot earlier.
At Re, similar premise here. I don't think that a bunch of technologists entering a business that is largely an apprenticeship-driven model are going to be able to overturn the tables, right out the gate.
And so, what we've endeavored to do is bring on folks that have deepened expertise in this space, that have indicated or at least demonstrated a way, for us just that they're adaptive enough to understand what we're building and they can work with us hand in hand and kind of go there.
But as of today, Re backs tens of thousands of small businesses. It backs workers' compensation programs. It's looked at agricultural deals, it's looked at cyber liability deals. The Wall Street Journal headline is “A DeFi protocol could back a quarter of all American households.” And that's really exciting, because we can do this kind of with a global mandate now.
Paul: That's pretty cool. And so we talked about a few things. You were talking about vertical integration, going big quicker, and you talked about here hiring the kind of industry expertise early on as well. Any other serial entrepreneur secrets that you're kind of applying to Re from what you've learned beforehand?
Karn: I said this a couple times, but everything is kind of compost. So, the beauty of serial entrepreneurship is that you have these learned secrets, and part of it is constructing a business, and the individual functions and cutting through the noise, and getting really focused on what is it that you want to execute on. And that's just the general construction of the business.
And then if you've got years within a particular industry and you've fought for years – you've surrounded yourself with people who have spent years building something like their lives depended on it – inevitably you're going to be able to uncover things that you can build into.
Probably the most critical thing has always been hiring. And I mean this not in the sense that it's hard to find good people – it is hard to build a cultural composite of people that drive a performance-related culture. And for me, when we first started we were just thankful to get engineers and to get product managers – folks that were aligned with the vision of what we wanted to build and were able to ship.
Over time, culture fit, the scalability of individuals under duress, demonstrated duress, really mattered. The ability for folks to hire to a particular bar, because eventually it becomes a distributed practice. The ability for people to performance-manage people up or out became very, very critical.
And I think that that's probably, outside of founder conflict building startups, it's usually who are you hiring, who are you firing, who are you elevating, and how quickly are you doing it? And that's been like the number one thing that I think drives. Because, I mean, we're adaptive, we can build anything we want to, we can pivot, but you need coordination and capability to be able to do that. And eventually that falls away if you're not controlling culture and hiring practices.
Paul: You've been keeping ties with a lot of the Oliver Wyman community and investing, I think, into several companies that are founded by former Oliver Wyman consultants and OW Alumni now. Care to tell us a bit more about that?
Karn: Yeah, sure. I mean, it is partly part of the communities you're a part of. So, I loved my time at Oliver Wyman. I got to meet folks that I'm still friends with today, some of whom I've invested in, did Y Combinator almost outside of that, do a ton of Y C-oriented investing. I'm Canadian so I end up being one of the ports of call for Canadian founders that are applying to Y C. So I get Canadian deal flow.
And so largely where do you end up being embedded? It kind of helps drive deal flow. And generally speaking, found that folks who are starting out either the first, second or third – it doesn't really matter where they're kind of at – tend to prefer operators over traditional investors generally speaking because we, if nothing else, are empathetic and can map war stories.
Because nothing maps one to one, but the stories that you tell and the experiences that you can share are helpful for pattern matching and getting people to avoid making costly mistakes as they're kind of scaling up in business. And that's kind of my viewpoint for folks we bring onto our cap table as well. I very highly prize operating experience.
On the Oliver Wyman specifically though – I feel like there's such a strong financial service practice, and solving a very broad variety of problems for actors within insurance and banking, there should be a huge number of SaaS businesses that are being spun up by OW Alumni.
And generally speaking, I'm super supportive of it because they get to see firsthand what needs to be fixed, and the scalability of the solutions that you put in lead to fairly sizable businesses and fairly quickly. So, I'm actually more excited to see a deal flow from folks who are in management consulting and in financial services thinking about the tooling that needs to be built.
Paul: Well, that was a super-rich conversation, Karn. Thank you so much. My final question for you that I always like to ask is: What are your final words of wisdom for the audience?
Karn: Spend your time doing things you really like to do. I think one of the things that I've kind of taken away from meeting lots of execs in the insurance and reinsurance spaces, hey man, there's very little that – from a gap perspective – there's the expertise, you have capability and coordination, the ability to execute, just go do the thing you want to do.
Sometimes it's just better to spend your time doing as opposed to kind of dreaming, and eventually you got to take the leap. And we've talked about this before – it's super painful. It's kind of an irrational thing to do, because the risk adjusted returns to doing these things, dreaming them up and making them real, are not very good.
But if you can derive utility from thinking through these unstructured problems, building things that solve problems, pushing forward kind of the frontier, then, man, it's a good reason to be alive. That's how I think about these things.
Paul: Terrific. Well, Karn, that was absolutely terrific chatting with you today. Thanks so much for your time.
Karn: Of course. And thanks for having me.
Paul: Well, that was Karn Saroya, who is, I'll say it again, a serial InsureTech entrepreneur, co- founder of Cover.com and Re.xyz. Go check them out. I'm Paul Ricard. Thanks for listening and I'll talk to you next time. For more information about our Reinventing Insurance series, you can find everything on our website at www.oliverwyman.com/reinventinginsurance. Thanks for listening and I'll see you next time.
This transcript has been edited for clarity.
