Hello and welcome to the LA Venture podcast. This is Minnie Ingersoll, host of the podcast and Partner at TenOneTen. TenOneTen is a seed stage fund here in LA. All opinions expressed on this show by me and my guests are solely our own. If you are interested in LA Venture, go to tenoneten.net/podcast, where I've made a sortable list of all of the great LA VCs who've been on this show.

Galen Schaffer is a Senior Vice President at Eos, a Series A fund, investing in the future of insurance. After our prep call, Galen had me convinced that insurance is the most fascinating industry, full of fulfilling career options, and something we should all be so eager to learn about today.

Galen Schaffer, fair summary that you are fired up to talk about insurance?

Oh, absolutely. Minnie, a joke I make with my husband pretty often is he's an accounting professor and I am in the insurance sector. And so compared to everyone else in LA I would say we are the most fascinating people in the room.

And yet you really did convince me that it is like, you know, it's full of these lifetime people who've spent their whole lives in insurance and why would they go anywhere else.

Yeah. Yeah. Well actually a really good conversation if you ever meet an insurance person is asking them did you choose insurance or did insurance choose you? Because an astonishing number of people are born into the space, or they were sort of picked up in college through an internship and 30 years later they're an SVP of, you know, actuary team, the underwriting team. And like, you know, it's incredible how you can fall into that space.

Great. I can't wait to hear all about it. I thought though that we would maybe start with the basics of EOS, and then we can talk about careers in insurance.

Awesome. Yeah, so EOS Venture Partners is an early stage InsureTech specialist fund.
We have a relatively broad appetite within insurance. That means we invest across personal commercial lines, life, and health. And we also invest across a wide variety of business models from sort of straight technology players to MGAs to even balance sheet opportunities.

Do you have a favorite? Do you, like, you prefer, you know, casualty insurance or something
insurance?

Yeah, I would say, uh, you know, plain vanilla personal lines is a highly competitive space. And so we have different thesis within different lines that are particularly exciting to us. For example, cyber and particularly cyber claims has been a really big thesis area of interest recently.

And you typically lead rounds?

We typically lead at the Series A, so our average check size is 5 to 10 million. I think a few helpful things to know about our fund is that the majority of our investors are carriers and reinsurers, and they invest with us in order to get access to the early stage ecosystem.

So within where you're investing, are there a lot of things that are just spanning these different types of insurance or is it very specialized?

That's a great question. I think maybe let me break apart what InsureTech is a little bit and then I can talk about, you know, a few sort of areas of that grid that really excite us.

When we think about insurance, we sort of subdivide it into three ways, right? There is the line of business you're in. So personal, commercial, life, and health. There is the part of the value chain you're operating in. And then there is also your economic model - so what type of player you are.

So let me break apart all of those. So personal lines: you have your home, your view auto, and then you have your pet and your like warranty products and your personal cyber.
It's everything. Sort of you as an individual when you. Think about, about sort of protecting yourself, your assets, your livelihood. Then there's commercial lines. Commercial lines broadly are bucketed into your standard commercial lines. So your small business owners, your bot policy, you know, or your specialty commercial lines. So specialty commercial. That's really fun. That's like Lloyd's of London stuff.

You know, like equine policy when Angelina Jolie insured her lips I think, or I think, you know, when celebrities ensure parts of their body that goes through Lloyds of London. Oh,

And Lloyds of London is just a particular insurer who does all the weird stuff.

It's such a great question. Is Lloyds of London an insurer? Not really. It's a group of syndicates. It actually used to - in the old days - be a bunch of people, wealthy individuals, who would back certain underwriters, it was the first insurance exchange, basically. Oh. And right now people basically only go there for specialty insurance, but it's basically the hub of all specialty insurance globally. And you'll have various syndicates that operate there. You'll have a, a lead, a follow, and you, you have underwriters who are really big names in this space who are known for writing particular risks to write really well.

Fascinating. okay. But I cut you off. What were you saying?

Yeah. So you have your personal lines, your commercial lines. Yep. And then you also have your life and health space. That's essentially your lines that you write. And then within that you can sort of layer over that sort of verticals of where in the value chain you operate. Do you operate in product and pricing? Are you creating new products? Are you creating new ways to price or sort of technology solutions that help actuaries in that area?
Are you attacking distribution - so supporting the agents? Are you working in underwriting? And you know, underwriters are the people who say actuaries, thanks for these boxes. Now I need to put people in these boxes. Or are you working in claims and servicing, so after a loss event happens, you know, the adjusting of that loss, the paying out of the
claims. Mm-hmm.

And so when we think about this space, we typically always have that grid in mind, you know, and so for example, as I mentioned earlier, cyber claims is a really big priority for us. So that's gonna be a 30 billion sector by 2027. Rapidly growing. Massive liability for a lot of companies. A lot of very interesting government regulation also going on right now around, you know, we require businesses to have cyber insurance. Right now it's optional. Many businesses go uncovered, but increasingly there's a tension that this is a massive risk point in many organizations as we shift from a world of physical assets to a world of intangible assets. And in a world where most of our value as an organization and society is online, how do we ensure adequate protection of that?

So we dove really deeply into the claims part of that, into what happens post-breach, and how can you manage and mitigate risk and better resolve incidences after they happen?

What are the interesting parts that happen after a claim has been made, and how do you resolve that?

Cyber in particular is a wild space because it's actually run by what are called breach counselors who are specific law firms who run the entire process under privilege. And it's a nuance within our legal system that because of this sort of liability that opens up when you have a data breach, it's nearly always a requirement that the law firm manage that entire process.
So a law firm will come in and they'll be the post-breach coach. They'll bring in a DFIR firm, which is digital forensics and incident response, and that firm will come in, they'll basically secure the perimeter. So they'll be like, who's in there? And then they'll start sort of, I would say the technical term is kicking the bad guys out and making sure your systems are secure.
In many cases, we're seeing ransomware as a service, which is that your data will be encrypted. Someone will be like, give us a few million dollars to unencrypt your data. If you have backups, sometimes you can say no thanks, and you can back it up yourself and you won't need to pay that. Very often we are seeing companies pay that ransom. So you'll have a crisis communicator come in, you'll have a ransomware payment company. You'll also then have your cyber restoration firm come in and your cyber restoration firm, which will, after the perimeter's secured, after you kick the bad guys out, will then bring your company back up to sort of full business.

Like how much is that happening?

Oh, all the time. You have no idea. All the time. And this is because there's no requirement in the US for this to be reported centrally. I mean, it's funny, we actually recently invested in a company Phoenix 24 that does cyber restoration post-breach.
And they're brought in by the DFIR companies. And the reason they're doing so well is they bring companies up more than 50% faster than their competitors, which really reduces the business interruption costs. And business interruption is the cost insurers pay for however long you're down. So essentially you're on the clock getting paid as your website is non-functional.
So the faster you can bring someone up the less loss you have. And so these guys have been just, blowing it away these last few months in terms of the number of breaches that they've been handling. And it's partially cuz they're an amazing company, but it's partially also that cyber incidences are significantly on the rise.

So interesting. Well, let's stay on types of companies you like to see. What are your other areas that you're most excited about as a firm or individually?

Yeah, I would say, you know, maybe one is new risk areas, like cyber. IP and intangibles is also a really good example. As I talked about before, you know, as we think about the world shifting from a world of physical goods to a world of intangible assets, where most of a company's value could potentially be in its branding, in its patents, you know, in its network. How do we appropriately quantify and value that?

I would say other areas that really excite us as a fund are new methods of distribution and of effectively accessing customer segments that have an appropriate risk profile. I would say embedded insurance is a word that people really like to throw around a lot, if you've heard that. That can mean a wide variety of things. You know, you could be marketing to a specific affinity channel. You could be actually at the point of purchase, you could send someone through an abbreviated underwriting journey. I would say my best form of embedded that I've seen is when you're able to really target a specific affinity channel that has certain risk characteristics that is otherwise really expensive to target to.

And what's a good example?

I would say a good example of this is the PEO segment, and so many of these are small and medium enterprises that use PEOs for their payroll and their benefits. Why not use them to sell insurance? It is really, really expensive to access a smaller, medium enterprise to sell them insurance.

And I imagine just so much is changing in distribution with, I mean, does social media play a role here? I don't think of insurance as being, uh, like fast moving early adopter of different technologies, but you tell me if I'm thinking of it right.

Yeah. You know, that's such a good question because. Some of the traditional D2C players in insurance did sort of rise to prominence by reaching out to the consumer directly and by having a direct digital first connection to them.

Lemonade, Hippo, Root, Metromile, I mean, even if you look at them now, like Lemonade's marketing is beautiful. They do it so well. I think the challenges with these companies, and you can see this when you look at the stock market, is just that since they're SPACs, they've fallen 85 to 97%. Their loss ratios are significantly above the industry norm, which means that they're not appropriately pricing policies for the risks that they're taking on, and their expense ratios are also significantly higher.

And so I think what we've realized in the insurance industry, you know, taking a step back from the recent sort of D2C wave, is that it is very expensive to market to people online and to sell them insurance. Actually, insurance keywords are some of the most expensive AdWords that you can buy. And so if you can find a channel that has a lower CAC because you know, the PEOs, for example, are targeting through an affinity group or for example selling them an ancillary product and sort of tying insurance into that product, then that's a way of sort of sidestepping the direct competition you would get from a digital distribution channel, like Google Adwords or something similar.

So what is your take? I mean, so is the summary of these sort of modern, the lemonades of the world? Is it they were newer to insurance and they didn't quite have underwriting. Right. And they didn't quite have CAC, right?

Yeah. And like The story isn't finished yet, but I think all of these companies started with a particular thesis that I'm not sure has ended up becoming true in the market. And I think that it's a helpful lesson for a lot of early stage InsureTech founders when they're thinking about their initial thesis and how they're testing that and seeing that in their underwriting results.

So, for example, Metro Mile and Root both said, ‘great, what if we integrate telematics into our personal auto pricing? Because we do that, we therefore ought to have, you know, a lower loss ratio, we ought to have better expenses because we're gonna have stickier customers. You know, we're gonna be attracting better risks over time because of this model.’ This hasn't turned out to be the case with either of those companies. Both of them had, I would say, relatively disappointing loss ratios.

That doesn't mean telematics is bad. You know, Progressive, for example, is one of the leaders in personal auto through a telematics-first strategy. It just means that these new entrants, you have to make sure that your story lines up with your numbers. And that's the problem with insurance, which is that you sell the product before you know the cost of the product. And so you can get in a lot of trouble very fast if you try to grow fast and you're actually selling everything at a loss.

And yet, where I was when I was saying how sort of digital forward are they- I still think of the fact that I still mail a check in the mail.

Oh my gosh, that's so classic. Yeah.

I completely agree with you. I think that's why we're so excited about this sector as a whole, because you know, you always find a way to make it positive. I like it. You have to be positive in this sector. Right now, it's definitely, I don't wanna say InsurTech is in its infancy. I would say it's in its toddler years.

I mean, if you look in the back offices of many of these companies, you will still see people manually keying in incredible amounts of material. We are making phone calls to change people's addresses. Great. We are asking for wet signatures in the life insurance industry.

People talk a lot about fluid list underwriting.

Oh man. I need to, I need to take a step back. Yeah. So when you write a life insurance policy, very often you need things like blood or spit in order to have a more accurate view into someone's actual longevity.

I had no idea that's what you meant by fluids.. It's like literal, actual fluids. And it's wild to think that you as a, 35 year old person, have to go to a doctor's to get a competitive life insurance quote. And it's funny because you step back and you're like, wow, there have been a ton of companies that have entered this space.

Ethos bestow ladder, you know amazing brands, amazing digital experience. But when you set a crack open the hood of their underwriting, it's all simplified issue term life. Which essentially, yes, you can do it online. Yes you can do it in five minutes, but you're paying a lot more for that policy than you would if you went through a full underwriting process because they're putting you in sort of larger risk categories.
and what's holding people back from modernizing a little faster.
Yeah. I think it, depends online, it depends on area of modernization, but I would say overall the insurance sector is a sector that's built on strong regulation and also strong caution. I think of really good example of this is maybe going back to term life. I am writing a 30 year term life policy for someone, right?
I'm not gonna change that underwriting very fast because I'm setting that rate into stone. And so when you think about all of the innovations that theoretically could happen, for example, using genetics or epigenetics, or potentially giving someone a Fitbit and saying, Hey, if we track your steps, we'll give you a slight discount.
The question is, do I wanna commit to that discount for 30 years? That's an incredibly high bar from an actuarial standpoint. And so the sector as a whole, I think, leans towards conservatism because it's very easy to sort of loosen one of these variables to sell a lot more policies. And then to realize only 10, 15 years down the line, that you've actually messed up your mortality tables and you're sort of losing money with every policy that you sell.
Okay. So insurance reinsurance, these are huge industries.
How does that affect exit opportunities for these companies?
Yeah,

insurance companies are really big, but the challenge with InsureTech when you think about this space is the exit universe. Because while these companies might be really large, that doesn't necessarily mean that they can buy a technology company.
Or buy an M G a.
And so when you're looking at this from a carrier perspective, especially a public carrier, they're valued based on their price to book.
And so unless something is accretive to your book value, that's a little bit challenging from an acquisition standpoint. Let me be sort of specific about what I'm talking about here.
Okay. The InsureTech sector has put a lot of funds into companies that we call MGAs. These are managing general agents. They're essentially capital lightweight to only underwriting pen. So coalition next. Spot. I mean, lemonade Hippo used to be this type of structure. But you know, if you look at the sort of top 50 funded InsureTech companies, I would say the great majority of them are MGAs.
We have not seen any non-distressed MGA acquisitions, any,
and I was recently looking at this cuz I was just like, why are these structures not being acquired? And I think it's, for a few reasons, right? These structures in general, MGAs have been going through a boom time of being acquired actually but not VC backed MGAs.
And I think that's because VCs have overvalued these companies compared to how they've typically traded. So you've seen some of them getting valued at six to eight times gross written premium. Whereas in the sector, I would say the market clearing price is more like, One to one and a half. Right. So there's been significant overvaluation of the mga, I think in a belief that a digital mga, so a technology enabled one, would have better loss ratios, better customer acquisition costs.
Still doesn't justify that type of, you know, premium two venture returns demand a certain growth rate. Right? And when you're growing that fast, there's a temptation for the underwriting pen to slip a little bit, and a temptation to accept a wider variety of risks then maybe the people behind you would be comfortable with.
Mm-hmm. And so even though the incumbent insurance sector is large, we haven't necessarily seen the type of acquisition appetite that we would expect from an industry that large.
So what are potential, if they're not buying the MGAs, how are you thinking about what sort of companies would get acquired or what exits do look like?
ah, gosh, it like really differs by sector. So for example, broker technology, highly inquisitive space, actually. Okay. If I were a seed stage investor, I would be investing in broker tech left and right. The varis, the, you know, verti fours, the applied of the world, you know, they will pay all day every day, 50 to, you know, $150 million for an acquisition, even if that acquisition has relatively minimal or early revenue because they're able to then sort of push out that product across, you know, all of the a m s systems that they have live and really sort of cross all that shit out of that.
Cross sell the heck out of that,
can cross sell the shit out of it.
You know, but then when you think about it as like a series A investor, that's a little bit more difficult because that means my acquisition cap is around 200 million. Mm-hmm. technology players really exciting for us.
You know, guidewires Duck Creek was acquired recently, but there are a number of sort of large insurance technology players that always have their eye out for sort of who's doing something really interesting in that sector. The TPAs as well, these are companies that manage claims and are also very technology enabled.
They are, have a highly inquisitive appetite. I also am waiting and I'm very excited for when. The payroll players come into this. And so the ADPs of the world, given that they are so deeply integrated into small business operations already, I think they can make very strong steps towards becoming brokers.
I think also, you know, the sort of sales forces of the world, I think there are a lot of ways in which traditional software players have an amazing potential distribution channel and could potentially make acquisitions. On the distribution side, though, we haven't seen very much motion there. And you know, again, it's sort of waiting for that exit universe to
exit.
Sure. Can you tell me about misconceptions about InsureTech or things that startups should look out for.
I think a misconception about the industry and that I see from a lot of really early stage founders is they think that they found a magic number, which will give them unique insight into someone's claims performance. Right. And so maybe they're a wearable technology.
Maybe they have amazing geospatial data. Maybe they have an incredible model that like is way more accurate than existing models to protect climate risk. Okay. So I call this like the magic number problem.
And with early stage founders, there's always like the initial question about, okay, will insurance companies buy my magic number?
Will they pay me money for this number? Or should I create an MGA and do underwriting and capture the full economics from this magic number?
Mm-hmm.
And whenever I've seen these situations
it, always a bit challenging cuz sometimes people do have very magic, very exciting numbers. But very often traditional carriers have looked at many of these types of data and have decided for a wide variety of reasons that they're not as useful or as predictive as you might think that they would be.
And so I would always say, you know, misconception people have is that sort of. Novel data is impactful data.
And so I would have a very high bar for what types of information can actually be predictive of loss outcomes. Wearable technology, I think, is one of these areas that the industry has really struggled with because conceptually you're like, oh, this is amazing.
Like, I'm gonna have a worker in a warehouse where, you know, a device, I'm gonna know when they fall, I'm gonna know when they overheat, I'm gonna know when they move outside a particular bounded area, right? And in that case, my worker's comp policy can be 15% cheaper, 20% cheaper. Um, just haven't seen a strong pickup.
Of these types of devices.

are there any interesting streams of data that has actually gotten some pickup?
Yeah. Auto telematics has been the story in personal lines auto for the last 15 years.
And so I'm not sure if you or any of your listeners opt into a telematics policy, but if you look at the major personal lines, players in the sort of leader board of the top 15, the two who have gained the most market share one is progressive. And they've had a telematics first approach where they not only reward you if you're a safe driver, but actually over the last few years they've started actively penalizing those people who are unsafe drivers
do you do something different with your insurance than the rest of us?
Yeah, actually I do have a particular perspective What I think everyone should do is I think everyone should aggressively shop their insurance every year.
wow. Okay. Uh, you know, I mean you don't have to actually, I've been with Geico I think for the last 10 years. But I do shop it and it is the best rate.
And by shop you just mean like go to someone else and say, what would you gimme for like my car insurance?
call Your independent agent. Right. Not to like shout out to independent agents out there, but like, They're the best, you know, and they can shop multiple carriers.
The major thing though, is I think you should understand like what your holistic financial situation looks like and therefore what type of coverage is appropriate.
For example, if you can choose, we have a very high deductible auto policy because we tend to keep a lot of cash on hand, you know, and so we essentially self-insure that first few thousand dollars. Our car is a 2003 Honda Accord. So we actually have no damage cover on our own car. So if anything happens to our car, what's our car worth?
It's $2,000. Like, it's fine, And, uh, I do not have life insurance. I think that's helpful to know. So should we
Uh, I think unless you have dependent,
oh yeah, I have this.
Then you might wanna consider that, but then I think you should think about your holistic financial picture.
Okay. No, that's helpful. Let's talk about you in LA and the LA insurance industry. Why Des Moines? Why la I mean, I know you're not in Des Moines, but like I understand it's the hub of insurance.
I don't really understand why.
Yeah. So I originally came to LA because my husband picked up a tenure track job as a professor here.
So I did not come here for insurance, but the insurance here is wonderful. So there are a number of funds. Allstate has a few people here. Munich Re has some people Mtech also located here. West Cap, a Growth stage fund
We have a few major carriers here as well. Could we be the next Des Moines?
You know,
that's
I,
I'm always asking.
Could we be the next De
That's what I'm hoping for.
Long la
Long LA
anything you would've done differently in your career.
that's such a great question because I feel like I took a very non-traditional path to where I am today. I spent the first three and a half years of my career at the Harvard Business School writing cases for their strategy unit. I published on the insurance sector as well as other sectors.
And then
I picked up my M B A from m i t, and I spent the last four and a half years at McKinsey and I specialized in insurance pretty rapidly.
You know, loved the people, loved the space.
do you love about the people in insurance?
I
think in insurance there's like a really great mesh of head and heart, which is really exciting to me where you both need to adequately price the risk, but you also care deeply about the people that you're serving and you wanna make sure that you're protecting them in their time of need.
Right. And so you're creating this incredibly complex, challenging financial product, and you're designing it in a way, I mean, for life and annuities players, you're protecting people 25, 30 years down the line, you know? And that is at once like an amazing math exercise, but incredibly mission driven when you're talking with the people who are doing it.
That's, I mean, not, I just hadn't thought of that the mission really comes through for a lot of these people.
Oh, all of these carriers when you talk to them, are incredibly mission driven.
wow. I thought they were like, I just had sort of an actuary who was pushing numbers on spreadsheets
It, well, there's that too. I mean, actuaries are, they're tough people to have a cocktail party with, you know?
Okay. Just checking.
Yeah,
no, no, absolutely. But I mean, at all of these companies, like the front line is the most important line For all of these carriers, you know, how can we help our policy holder? How can we be fair to our policy holder?
How can we protect them in their time of distress?
I mean, if you actually look at it like whenever there's a natural incident, a hurricane, a flood the insurers are there. I mean, they're there financially, but they're also very often there physically.

Wow. A whole new perspective for me on the insurance in history. Okay. Shifting gears, Galen, what adjectives would your friends use to describe you?
It's only the intern second day here, so he is learning a lot about me through this conversation. I would say my friends, uh, describe me as curious and relentless.
I'm always exploring and asking questions, but I can be a lot.
And so I would say, for example, you know, when I'm working with founders, when we're deep in diligence, right?
I wanna understand both the market, the overall narrative, how you fit, but let's crack open that Excel model. Mm-hmm. Like, let's make sure I really understand your unit economics, where that's coming from, where the assumptions are coming from. As my husband would say, I, I'm a lot, but I would say I'm still a lot of fun.
yeah. You have to find people who like a lot,
Gillian sounds like you've found the perfect role for you.
You know, I feel so grateful to be where I am today.
And you just have so much depth on one thing too, like insurance is one of those sectors where the deeper you go, the more there is to know.
And so I, you know, actually one thing I've started doing, I've started tweeting a lot.
And to me that's been an a phenomenal way of finding out how much I don't know about everything, and then learning from people who do like, okay, for example, I was so into the life settlement space for a while.
Mm-hmm. Because you have these permanent life policies, right? You have this enormous cash value in these policies. How do you access that before you die? You can take out a loan from the carrier very often that's not at incredibly competitive terms. You can also surrender the policy to a cash value. But again, that's sort of a one-to-one marketplace, not very competitive.
And so I was posting about that for a bit, and then a bunch of X equity analysts where like, Hey, that's a great way to go broke. There have been a lot of bust in that sector, particularly in the nineties, you know, sent me off to read a few books and then, you know, now I'm still excited about the potential for a life settlements marketplace, but now I have a very high bar because typically people who are willing to relinquish their life policies know very different things about that, their mortality outcomes.
And so typically there's some lemon problems that happen in that
Sure. No, that makes sense. So cool, I would love, I could just talk to you for hours about this. But anyways, I will wrap it up from the podcast and just say, thanks for coming and doing this.
Oh, Minnie, thank you so much for having me.