KOBA Insurance is a startup providing tech-enabled pay-per-km motor insurance in Australia. It is targeting the motor insurance market for less frequent drivers i.e. FIFO workers, people with work from home arrangement etc. According to KOBA Insurance, drivers travelling less than 7000km per year could save up to 25% on existing fixed comprehensive car insurance if they use its product. Instead of using the existing pay-as-you-go model in the market, KOBA Insurance is using a tech-enabled solution to provide a true seamless pay-per-km motor insurance experience. It is currently in the beta testing phase, and expected to do a public launch in October 2021. The current crowdfunded capital will be used to fund the “Product Fit” phase where it aims to acquire its first 1,200 customers for an annual recurring revenue of $1,000,000. The phase will also be used to prove its business model and insurance thesis.
Unique Approach to the Pay-as-you-drive (PAYD) Insurance Model
Instead of using the existing pay-as-you-drive model, KOBA Insurance has developed a tech-enabled solution, leveraging the IoT technology already available in most cars to provide a true, seamless pay-as-you-go insurance solution.
How does it work? It developed a device called KOBA Rider, which can be plugged to the on board diagnostic (OBD) plug of a vehicle. OBD is a vehicle’s built-in self diagnostic system.
By connecting the KOBA Rider to the OBD and to the KOBA smartphone app, in-vehicle data such as vehicle GPS coordinates can be logged and streamed through the cellular network to the cloud. The data is then processed and presented live through the KOBA smartphone app to the vehicle owner. This way, relatively accurate KMs travelled can be measured and used to calculate the monthly driving premium of the insurance.
This approach also opens up opportunity for KOBA to get access to other in-vehicle data permitted by the user to offer personalized, value-added services such as vehicle locator, digital mechanic self-check, dynamic maintenance plan based on vehicle condition etc. See below a list of features in the product roadmap for KOBA.
These services are key to the overall business strategy and potential secondary revenue streams that will supplement the low-er margin motor insurance business.
A Team of Seasoned Digital Operators and Motor Insurers
Andrew and Erica are seasoned digital marketers having run digital teams and agencies respectively for huge brands such as Reckitt Benckiser, American Automobile Association (AAA), Toyota, Nissan and Volkswagen Group. Andrew’s most recent experience with AAA was where he got the inspiration for KOBA Insurance. Alongside the founders, the team consists of seasoned operators in the motor insurance industry – Nick Bell, the Head of Insurance Product & Underwriting has worked for various car insurance brands in Australia in the past 15 years, Don Rossell who is the Senior Adviser for KOBA Insurance helped launch Toyota Aloi Insurance and help grew the business to $200m GWP in 6 years. The team is also supported by a group of impressive advisors in the pay-as-you-drive industry such as Max Brunner (Metromile), Robert Lumley (By Miles) and Nathan Anderson.
KOBA Insurance is Pre-revenue, but Expected to Launch October 2021
KOBA Insurance is pre-revenue, which means it has not proven its product-market fit as there are no paying customers yet to justify the business model. However, it has developed a working prototype that is going through beta user testing and is expected to launch in October 2021 if no major issues are uncovered in the beta test. See below the planned phased approach for KOBA Insurance.
The crowdfunded capital will be used to fund the “Product Fit” phase to establish product-market fit and prove the insurance thesis that low usage drivers get into less accidents. At this stage, there are still considerable risks in whether the business plan will work. After all, we have seen other telematic-based, pay-per-usage insurance products like “Insure the Box” (QBE) and Ubicar (RACWA) failed in the past, and are now defunct.
High Retention Rate in Traditional Vehicle Insurers in Australia
The other potential challenge for KOBA Insurance is the fact that the retention rate of customers in traditional vehicle insurers in Australia is really high (~75%). This is mentioned in KOBA’s offer document, based on the experience of the team. This sentiment is also echoed by Carolyn Batterton from UbiCar in a press release in 2019. According to her, “They (consumers) just don’t change insurers so a lot of insurance companies don’t have to try that hard.”1 Whether it has changed over the last few years, especially with Covid-19 impacting household income is not clear.
What is encouraging though is the fact that the KOBA business model has a very clear value proposition and is backed by a team of seasoned digital marketers and insurance operators. Hence, the bet is whether the product is able to function as advertised and whether the team can convince the target market to switch over.
Summary
Overall, KOBA Insurance is well placed to execute its “Product Fit” phase, supported by a strong team, with an innovative solution and relatively good timing i.e. tail-end of Covid-19 (fingers-crossed). Its pre-revenue diluted valuation of $11m is fair and supported by extensive research and baselining (see below document). If you are comfortable in the associated risks mentioned above and in the offer document (attached below) when investing in pre-revenue startups, then this might be a good opportunity to invest in a “smarter insurance”.
The Australia Motor Insurance Market is expected to value at ~$15.5b based on expected direct written premium. The market is expected to grow ~4% in the next 3 years to ~$17.5b in 2024. The market is currently dominated by a few leading insurance providers such as Suncorp, IAG, Allianz and QBE Insurance. Despite the negative growth of direct written premium in 2020 due to Covid-19, car insurers have reported higher margins due to lower claims as people are travelling less. As a result of Covid-19 and restriction of movements, car insurers have also roll out pay-as-you-drive plan to help drivers save on car insurance as a result of less travelling.1 The demand for pay-as-you-drive motor insurance is expected to increase as some form of the flexible work arrangement will stay even after Covid-19.
Growth Is the problem growing?
3
The Australia Motor Insurance Market is expected to contract 4.4% in 2020 as a result of Covid-19, with marginal growth in 2021. Higher growth in the range of 3%-5% is expected from 2022 assuming that people movement is no longer restricted due to Covid-19.1
Urgency Does it need to be fixed ASAP?
2
There are currently plenty of existing motor insurance products, and consumers are in no rush for a new solution.
Costly Does it require capital to solve?
3
Main startup cost includes tech development, marketing and commercial development i.e. establishing partnerships. These are not capital intensive.
Mandatory Can the problem be enforced?
3
Third party insurance is compulsory for all vehicles in Australia. However, most vehicle owners purchase additional insurance to cover financial loss as a result of damage to other physical goods in the event of an accident.2
Frequency of Occurrence Is the problem encountered often?
Is the solution innovative and 10x better than existing competition?
4
The pay-as-you-drive insurance model itself is not something new to the market, however the implementation of the pay-as-you-drive insurance model by KOBA is by far the most innovative one compared to existing insurance providers.
Existing competitors currently implement pay-as-you-drive (PAYD) motor insurance by asking drivers to provide planned KMs travelled at the start of policy and if more KMs is required, drivers will need to notify the insurer. If the KM travelled is not reconciled at claim time, drivers will have to pay a certain penalty before being able to make a claim.
KOBA implement a tech-enabled solution, where a device is attached to the onboard diagnostic (OBD) plug of the vehicle to gather vehicle data and calculate KM travelled. Additional in-vehicle data collected could also be used to develop other personalized service for the vehicle owner, thereby increasing the revenue potential of such solution. It may not be something new in other countries, but definitely a far better solution to PAYD insurance solution in Australia.
Is the solution scalable? Increase in revenue does not require proportional increase in cost.
3
The tech products such as the app and KOBA drive hardware and software can easily be scaled as users increase. The connected car care products can also easily be scaled. Key variable costs are customer acquisition cost and KOBA rider device cost.
Is there a product-market fit? Are customers willing to pay for the product? Is there a clear value-proposition for the customers? Does the solution improve the unit economics of solving the problem?
3
It is unclear what the market share for pay-as-you-drive segment is in the overall motor insurance market. However, due to the clear value proposition of the product, it should not be difficult to sell to the target customers.
Is there a clear target customers for the solution both immediate and in the future?
4
Yes. Please refer to the offer document page 18.
Is the business model clear and profitable?
4
Yes. Assuming the risk pricing algorithm works, the business model should be profitable.
3. Traction to Date
Question
Score
Comment
Does the company have a functional MVP? Are early customers willing to pay for the MVP? Are there any industry recognition or benchmark that shows the MVP is superior?
3
Yes. The company is currently beta testing its product with early adopters and testers. It is expected to do a public launch in Oct-21. It plans to onboard 1,200 customers for an annual recurring revenue of $1m (gross) by Feb-22. The crowdfunding capital raised will be used to fund the “Product Fit” phase where KOBA will aim to get its first customers and confirm the insurance thesis that low usage drivers get in less accidents with real time data.
Is the company quick at iterating on their MVP? Does the company have a good feedback channel?
3
Is the company securing sales for their products at a good rate? Is the products getting exposure and demand from potential customers? Is the company securing strategic partnerships to gain exposure or expand market share?
3
The company is currently pre-revenue but has a clear plan to market its product and acquire customers. It has also established key content and advertising partnerships with established comparison sites in Australia such as “Compare the Market“, Carsales, Finder and Mozo.
Does the company have a solid plan / deliverable to progress to the next stage i.e. commercialise the product, expand to other markets etc.? Is the planned use of fund inline with accomplishing the capital raise deliverable? Does the company know what their biggest challenges are for the next stage and has a plan to address them?
4
Yes. The company have a clear plan to progress to the next stage. The company aims to raise further capital after completion of the “Product Fit” phase to further scale the business.
4. Business Defensibility
Question
Score
Comment
Is it easy for competitors to re-create similar / more superior solution? Is the technology developed by the company protected?
2
Yes. There is no significant technology moat for the business as most of the technology are common and not unique.
Is it easy for existing customers to switch to a competitor?
3
According to KOBA’s offer document, the average retention rate for a traditional car insurer is ~75%. Carolyn Batterton from UbiCar also echoed the sentiment, commenting that many customers were not willing to switch insurers.1 This means that it is hard to get existing customers to switch to a new provider without clear product differentiation and unique value proposition. However, once a customer switched, the same argument can hold for competitors where it will be relative difficult for them to pull customers from KOBA.
Is there a favorable network effect as the customer base scale?
3
Is there an element of “hook” in the solution?
4
There is potentially a hook effect due to the increased interaction KOBA has with its customers either through secondary personalised value-added services or monthly motor insurance reporting + insights. The variable reward effect might come into play depending on how KOBA develop its product.
Does the founding team has a unique experience with the problem? Is the reward structure of the company focused on motivating outcomes?
4
Prior to starting KOBA Insurance, Andrew was the Digital Marketing Director of American Automobile Association (AAA) driving their digital IT, media and customer acquisition program. AAA offers membership for emergency roadside service and 4 insurance products (auto, home, life, specialty). This is also when he was exposed to the motor insurance industry and came up with the founding idea/inspiration behind PAYD insurance for KOBA.
Most of the founding members are subscribed to the Employee Share Offer Program (ESOP) program and as a result, have the interest aligned with KOBA.
Does the team have deep experience in the industry / business segment? Does the team have the ideal number of founders with varying skillsets? Does the team have a good balance of commercial and tech skillsets depending on the stage the company is at?
3
The team has several motor insurance veterans serving in the team. The founding team themselves are experts in digital marketing and sales. And they have also brought on a technical lead specialised in web development and analytics to support the tech product development. Overall, the team seems to be quite experienced in various fields and complete.
Does the team work well together? Has the team previously worked together?
3
The team has been working together for the past 3 years and seems to be working really well culminating to the product launch in Oct-21.
Does the team has an impressive list of advisers who are leaders in the industry?
3
Does the team have prior startup experience and successful exits?
3
Peter Thiel 7 Questions for Product Innovation
Question
Score
Comment
Engineering: Are they creating breakthrough tech instead of incremental improvements?
3
See the “Characteristics of Ideal Solution” section
Timing: Is now the right time to start the business?
4
See the “Characteristics of Good Problem” section
Monopoly: Are they starting with a big share of a small market?
3
See “Traction to Date” section
People: Do they have the right team?
4
See “Characteristics of Founding Team” section
Distribution: Do they have a way to not just create but deliver the product?
3
See “Traction to Date” section
Durability: Will their market be defensible 10 years into the future?
3
See the “Business Model Defensibility” section
Secret: Have they identified a unique opportunity that others don’t see?
4
The pay-as-you-drive insurance model is not something new in the Australian market. However, the way KOBA approached the problem has open up a whole suite of opportunities that other motor insurers don’t see – the opportunity to leverage in-vehicle data to create personalized products for drivers. The use cases for these data is currently untapped. This is where the big opportunity lies, in my opinion.
Berkus Method
Metric
Score
Score Description
Valuable Business Model – Base value
4
The business model aligns with the company goals, is self-reinforcing and robust.
Available Prototype – Reducing technology risks
2
An MVP is in the test run, the problem the product should solve is defined and there are first results of trial runs.
Abilities of Founding Team – Reducing implementation risks
4
The team consists of one or more founders that are all highly qualified, have gathered previous corporate experience or already are startup founders.
Strategic Relationships – Reducing market risks
3
The first “letter of intent” documents are signed.
In the offer document, it mentioned that if the combined operating ratio is below 61%, the difference will be apportioned between KOBA and Eric based on a 50/50 profit sharing arrangement. Apologies for the lack of industry knowledge, but when does the “profit” get recognized? Just thinking out loud, I am assuming that the 61% goes into a pool of funds for x period to fund claims but was not sure when the funds can be pulled out.
Does the 61% loss ratio apportioned to fund claims get invested in any sort of investment instruments or are they just parked in a trust account? Would the investment returns be a 50/50 profit sharing arrangement between KOBA and Eric as well?
Does KOBA consider the current partnership arrangement with an existing underwriter a long term strategic direction or does KOBA have plans to build a vertically integrated motor insurance business?
Did the team managed to extract any lessons from failed pay-per-usage motor insurance provider in Australia such as Ubicar? And what is KOBA doing differently to avoid the pitfalls identified?
