Carl Ziadé, co-founder of Gaya on the auto financing and insurtech opportunity

But the financing is still being sold at the point of sale, and people are just excited about the car, so they go check it out on websites and comparison tools like Autotrader. But they’re not necessarily doing that, or not enough people are, for the car financing aspect of things. They don't go into the dealership with a check in hand after they have surfed the web yet. It's not there yet. 

How does the car insurance process work today? What’s the role played by the insurance agents in the process?

If you're a new customer and buying your first car, and if you need to finance the car, no one will finance it unless it's insured because it's a risky collateral. You have to get insurance. Now, some dealerships have an independent agent around town, they give them a nice gift card, if they slide their name. They’ll call the agent, ‘I want the car for this model, this brand, and I'm buying it now. Can you get the policy for me quickly?’ And the agent will say ‘yeah, sure,’ and the policy is bought.

If this is not your first car, you will probably ask your existing agent to add a new vehicle to your existing policy. They would call their agent and ask ‘Can you run this quote for me? I'm buying this car. I want to check how much I'll be paying for insurance.’ Because different cars have different price tags. Audis are maybe more expensive, insurance wise, while Toyota and Honda are cheaper, they have cheaper parts and are cheaper to fix. So, some people call their agents to get a quote and approach it from that regard.  

The customer wasn't thoughtful enough about insurance at this point, they just wanted the car. They’ve already been waiting at the dealership, who's going to optimize for the insurance state at this point? 

Insurance is easy to re-shop over time, compared to loans, so it's not a big commitment. Historically, insurance was a yearly commitment, but now it's a monthly commitment, or not even, sometimes it's prorated as well, per day. So, that's one element. The second element is that some dealerships are trying to take a more of a cut of the insurance, and now they can integrate with dealerPolicy, which rebranded as Poli. What dealerPolicy is doing is saying ‘You're buying the car, we're going to let you, as you're buying the car, get an insurance quote, and also show it to you as a bundle with your loan payment.’

Now independent of car purchases, insurance shopping is very common every year as rates increase for all sorts of reasons from minor moving violations to other factors. Once customers see a bill rising by 10-15%, they shop around. Very commoditized product. Low loyalty. To increase retention, you have to layer other lines of business: renters, home, life, commercial etc.

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Lots of loans are still based on just the credit score from one of the credit bureaus. Across multiple industries we’re seeing fintech companies using alternate data like monthly incomes, bank account statements, and all of that, to bring down the rate of interest or underwrite more people with less risk. From that perspective, what's your observation been in the auto industry?

There's a ton of companies using alternative data, like Upgrade and Upstart, who pride themselves to be using 1,500+ data points. Lendbuzz is also heavily using AI to target subprime customers, and they seem to be doing very well. So a similar thing is happening for auto fintech.

On the auto insurance side, credit scores are also being used, funnily enough. It was surprising for me, as an immigrant coming here, that credit is perceived as a judgment of character to a certain extent in the US. Even in insurance, in most states, maybe California, Hawaii, Michigan, and Massachusetts, they don’t require it. But as far as credit score, if we’re the same person with the same driving record, the same age, everything the same, but I have bad credit, and you have a great credit, I might be paying 70% more on car insurance than you. On top of the credit score, there’s the driving record and a lot of data providers that aggregate from all of that from the departments of motor vehicles across states and from the courts—everything from speeding tickets impacts your rate (Verisk, LexisNexis). Lately, the most sophisticated thing is telematics, which is heavily used in the UK now, and is also being increasingly used in the US.

But surprisingly, telematics, and all these additional advanced vehicle technologies—like the camera in the back and the bells and whistles you can add to the car to decrease probability of accidents, and track the customer's way of driving—they aren’t heavily decreasing the premium that consumers would be paying. It's merely shaving maybe 3% to 4% off the premium that the customer pays, and that's because these technologies increase the repair cost per accident. 

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Your primary channel right now is insurance agents. Can elaborate more on why you chose insurance agents rather than other financial agents like wealth advisors? And also for insurance agents, what's the value proposition of taking Gaya to their customers?

When we looked at the refinancing, we saw this huge opportunity and a huge problem. We saw a lot of great companies building for it. We saw traditional ones, like RateGenius or iLending or Caribou doing a fascinating job with call center operations. The moment you express interest, they call you, and it's very easy to process with technology adopted heavily and DocuSign everywhere. Maybe there’s one paper that you sign that you mail back and forth to finalize the process. 

We felt that to increase the conversion rate, we needed a financial coach in that role. We wanted to bet that insurance agents were ready to take that role. As we went door-to-door, talking to insurance agents, we felt their readiness to adopt this product more and more. We didn't feel at any point that they didn't want it, or they didn't want to use it, etc. That motivated us to build it and partner with the right providers to build the scraping tool, and put it out to market. That's how we proceeded with insurance agents. We might evolve into targeting tax agents in the future, or maybe some other intermediaries. But, for now, we’re focusing on them, especially given they can benefit from higher stickiness if we were to bundle the two together.

Besides the referral fee that they can make, which is equivalent to one year of commission premium on the car they underwrite, this can lead to increased stickiness due to increased lines of business with the customer, and the more they see the agent’s value. Imagine someone calling to tell you they can save hundreds of dollars on your car. That’s not selling you on something, that’s actually saving you money. It's a different sales pitch. Your affinity for that person is likely to increase, and your probability of staying with them would also increase. So, there’s that.

Finally, we’re trying to build the bundling technology so that the customer will pay one Netflix-style subscription for their car, and that will channel the loan and the insurance payment. Then, it's no longer top of mind. Insurance shopping is there because people are trying to find different ways to optimize or sometimes lapse on their coverage. But maybe if we present them with a continuous refinancing system, such that, if they were unable to meet the insurance payment this month, we will try to refinance them, like giving them two months of leeway and then start charging again, or different kinds of scenarios that we’re trying to cover.

One of the value propositions for customers is if they take this insurance, it also gives them a lower interest rate on my car loans. How do you achieve that? Is it just by comparing different providers and giving the best offer to the customer? Or is there something else at play here?

Like most of the financing players, we have relationships with credit unions and banks across the credit spectrum. If the customer is going to issue the loan at the dealership, as I said, most of them have a high-interest rate or higher loan payments.  We will be able to achieve, if not the cheapest rate, a very, very cheap rate, that will be around a maximum of 10-20 basis points from the absolute-minima. That's how we can achieve lower rates. But if we were to bundle their insurance as well, one of the things we are betting on is that many customers in the subprime category lapse on the insurance coverage whenever they can't make it, they go into the gray route, where they’re illegally driving their motor vehicle in the country.

The government doesn't like that, but banks don’t like that because their car is not insured and not covered. If we were to guarantee to the banks that the car is covered, perhaps there’s also an opportunity to decrease the interest rate on the car for this purchase population. Now, banks do have other mechanisms today to hedge against that, and they may be using them, so there is a lot of possible experiments we have to run on that side. It's not a certainty though, still a hypothesis.

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And are insurance companies also experimenting with something similar to what you're doing? Or is it too niche for them, and they're just focused on business as usual?

Historically, most insurance companies operated banks as well. State Farm used to own their bank, AllState and Nationwide as well. They all kind of dissolved them; they sold all their books and all their loans. It seems that operating those banks was difficult because there are different regulators, federal versus the state. Insurance is state regulated, finance is federally regulated. Many of them struggled with loan integrity within their channels, or their agents selling credit cards left and right to customers who don’t want them. There were many scandals that occurred in the 2011-2018 era when it comes to that. So they dissolved.

But the fact that they opened them in the 2000-2010s era tells us that there is an interest in actually expanding. Maybe it's lower tech, or perhaps it's customer retention—could be various reasons. But there is definitely an interest in having banking operations. Now, the execution was terrible. Can we improve it? Can we expand the Gaya vision beyond the insurance agent and to the insurance carrier, and also start offering embedded banking services? To specifically answer your question: Yes. When they had banks, most of them used to call their customers and tell them, ‘I see you are financing with Bank of America. If you finance with me, I will give you a better rate.’ Then, the agent got a commission, and the customer transferred their loan to State Farm instead.

One thing to note is that most recently, Progressive filed for a trademark application for Ello Money, and might be launching banking or neo banking/ financing operations. We might be right on the money on this one.

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How does Gaya monetize? How do you plan to make money now, and as you scale up and move towards the future?

As we speak, it's a commission for refinancing. Every time we channel a new financing from one bank to another, the bank pays a commission and we pay part of that commission to the insurance agent. As we prove the point that this has value in it, we can also layer in a SaaS fee, just like dealerships today pay a SaaS fee to RouteOne and to DealerTrack so that they can offer customers credit loan applications. We will also layer that. As we expand the vision besides loan refinancing into other types of financial products, the one thing we are toying with is the credit card backed by your car, such that given that your car is there. They know the value of the car as agents, maybe they can spin out a secured card and then enter into the banking service systems through that angle. Or, credit building tools for most nonstandard subprime customers, a lot of other things.

Now we're running pilots with two major insurance brokers with hundreds of locations across California, Texas, Illinois, Arizona and Florida. In these pilots, we’re going to be learning the best way to do this. Because it's not a partnership in which they just sell it. It's a partnership in which we need to learn at what point did the customer renew, did the customer lapse on their payment? When is the best time to call the customer and tell them, ‘I see your car, I see you're overpaying, refinance now and save your money, or refinance immediately and keep your insurance policy, or else you'll lapse, and then your insurance premiums are going to increase if you lapse.’ There's a lot to explain that is embedded in the nature of that.

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Do you also see any risk in bundling insurance and financing and going through one channel? As you're experimenting, are there any risks in terms of customers defaulting on their insurance payment and that impacting their financing ability?

Obviously, there will be some seniority in terms of which one needs to be satisfied first. But that could be a moment where we call the customer and pitch a new refinancing deal that would push the loan term a bit, give the customer a month of a breather, let them continue on their insurance. Or, have a kind of a case by case, but scalable discussion. This is the nature of what we would be considering here. 

When it comes to the legality of it, historically, bancassurance wasn't very much liked in the US before the 1990s. Bancassurance, meaning the bank selling you the insurance. Because the banks would use the insurance and price it or could price it in a way such that the customer had to buy it so that they could get the financing for their house report.

So bancassurance wasn't the same, and then they let it in. And a lot of banks started buying insurance agencies and they didn't know how to run them well. Then insurance carriers also launched banks, because now there’s a kind of a bilateral relationship between the two. 

From that, we see that we definitely have to be very cautious about everything from a regulatory perspective. But we don't see any major red flags, just that it should be done in a very tidy way, in a very serious way, state by state.

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You are indexing on the fact that insurance agents as a channel will continue to grow? There are fintechs and insurtech companies on the other end that are betting on the framework of going directly to the customer. How do you see these two trends playing out? Do you see one of these winning or do you see them continue to exist in parallel for a time?

Just for terminology purposes, an MGA is a managing general agency, and they are the frontline carrier that would be in charge of rating and finding the policies and creating the product, and they would actually offload that risk to the insurer. Six to eight years ago when insurtech MGAs started, obviously everyone started from some comparison websites, and then they started verticalizing, to own more of the life cycle. The bet and the offensive marketing campaign was: Let's cut out the middle man, the middle man is worthless. It's just like travel agents. We are the new Expedia for insurance. But now, all of them undeniably, have switched their gears, corrected their ship, and now are steering in the direction of ‘we are on a mission to empower agents.’

Because they realize that, yes, you can go to the customer directly online and do all sorts of things, but they didn't get the best customers by doing that. For Roots, for example, they got a lot of customers, but not profitable ones. Their stock is underperforming as the market realises they are more of an insurance company with a not so great book of business (high loss ratio). Now they do have a beautiful marketing engine, and that is undeniable, and unquestionable. But the nature of their book of business is very skewed toward the nonstandard, and investors realize that now. Same thing, for Lemonade, and the same thing for other ones as well. This direction to going into direct and cutting out the middle man hasn't been playing well for them. 

So now everyone  is shifting, and actually there is now an abundance of very nice insurtech firms that are catering to agents. Agentero is doing an amazing job at being the CRM for insurtech MGAs, and other ones as well are doing all sorts of stuff for sales enablement, for insurance agents to sell all sorts of policies.

So my bet is on independent agents.I wouldn't say that going direct to consumer isn’t great—Zebra and all these comparison tools are also doing very well. I wouldn't say there is no room for others, but I would say that this narrative coming out of  Silicon Valley, that insurance agents are like travel agents, was wrong. 

Insurance is a more complex product. I remember the first time I bought my own car insurance and frankly, I don't understand what I was buying. It's not as simple as selecting a destination and applying to fly. It's very complex and it needs people who are comfortable giving advice. When a claim happens, you don't just want a direct to consumer, like Lemonade's Maya, which is a great, great onboarding system. But if my house is burning, God forbid, I don't want to talk to Maya, I want to talk to a person. So I would bet on independent agents.

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Given your bet on insurance and financing, you are also indexed on the growth of car ownership in the US, while Uber and Lyft seem to be indexed on less people owning cars. How do you think about this?

Covid-19 came, with all the unfortunate things that happened, and the new discovery that people can now work remotely and all these new habits formed. I was expecting more people to move to he suburbs, to leave the city—and I wasn't the only one betting on that. But then when you look at the New York rent rates this year and the San Francisco rental rates, it's kind of crazy; it seems like even though some offices no longer require people to return to office, people still want to be at the center, which further drives less car ownership and more car ride sharing requirements. 

Even with all of that, car ownership is on the rise in the United States, when you look at the number of cars per capita or number of cars in general. We didn't feel it would be a major thing at this stage, especially that with time, the Uber and Lyft costs are going to continue increasing. Because with time, the good thing is that the gig workers shall be and will be compensated more fairly. At which stage maybe people will start prioritising having a car .

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How would you define your model’s defensibility? If someone else also starts a similar company, and talks to insurance agents about bundling in their offering, what would prevent insurance agents from ripping Gaya out from their workflow and putting in something else?

It's not easy to have all the banking relationships. Everything is doable if you take time. I feel like the moat that we have today is that building the relationship with an insurance agency isn’t an email away. It takes months to grow, and it’s multiple months away. The pilots we're running today are the fruits of seed investment we made five or six months ago. That gives us a first-mover advantage that's significant. Secondly, we’re going deep into their processes. It's not, ‘Take this link and send it to your client to refinance.’ It's not as simple as that. It’s going deeply within their workflow trying to see when to time the offer, to make it timely and relevant. That kind of joint partnership with each agency, to build something like this, and for us, figuring out what needs to be built that could be scalably implemented across them, gives us a technological defensibility going forward. 

Circling back to the overall insurtech market, we’ve seen companies like Metromile, Roots, even Lemonade, losing significant market cap. Is this just a part of the larger market correction? Or do you see any issues in the overall business model of these companies?

I definitely saw how they plummeted, in terms of stock. What I can bet on, is that they have very smart people in their rooms. They’ve hired lead scientists from all the competitors that you can think of. We can speak about who, they hired the best of the best from Geico, Progressive, from everywhere. Same thing for Lemonade. I would say that when you're IPOing and you're going into that public route, you have an incentive to grow and to show exponential growth, and you might not be thinking about what kind of book of business you have. Then, things will catch up and then you realize you have kind of traded off sustainability to growth.

Now, does it mean that they can never be sustainable? I think they can. I think they surely can, especially because they have leading actuaries working for them, people who have priced and built products for the other companies that are more traditional. I think they have a competitive advantage at having great marketing engines, knowing how to target and how to be very efficient with their marketing dollars, which other incumbents do not have. Now the question is, can we see over the next two years, them building a very sustainable vertical business? My feeling is that they can. 

But in terms of the other reason why all of this plummeted, most of these insurtech MGAs, when they started, they went to shop for capacity from reinsurers. Back then, from 2015-2020, interest rates were very low. All these reinsurers were perceiving them as interesting experiments and were open about testing things out. The attitude was "let's try to expand and find some yield here and there". But now, as rates are up again, the market conditions are changing such that reinsurers, and in general, the markets are judging insurtechs based on underwriting and profitability versus just acquisition strategy and go-to-market strategy.

If they continue existing or consolidated in whatever shape or form, I feel they will surely improve their vertical services, claims, or whatever kind of book of business they go after. They will be closely profitable to the incumbents or a bit more, because of how light their organizations might be in comparison to the incumbents. I wouldn't dismiss them and say that it's the end of the story. I think they are just getting started. 

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What’s the hardest thing about building something like Gaya, that you have seen so far?

Working with the insurance agencies is not an easy thing. First, it's beautiful, in the sense that they are amazing ambassadors. They will go to their competitors to preach about how awesome your product is, even if it is giving them a leg on them. Beautiful.

But what’s challenging is, getting to this feeling of urgency of ‘hey, we want to use this product.’ When you look at other companies/startups that build embedded services, most of them had this urgency to work.

We feel that our drive and our impatience to get things done is not at the same caliber when it comes to working with an insurance agent. Because most of the time, they already have a big book of business, they're making good money and they have other priorities in life. For us, it might be that we are seeking and more eager to finish stuff and experiment quicker, which might be a hard sell, or a hard thing to move forward through that sales force. Because what we’re doing is betting on the insurance agency as the sales force and trying to embed all sorts of stuff to it, starting with refinancing. But that goes back to defensibility, because being able to build all these relationships is significantly defensible, when it comes to other people wanting to join.

Anything else about Gaya that we haven’t touched on that you would want to share with readers?

I wanted to share a few things we've been thinking about. Some of the things that we were surprised to see. I hope there will be some founders that come and work on it, as well. When we started innovating in the space, we were surprised to see that in 2022, there’s still no big insurance wallet that everyone has, that’s continuously looking for the best insurance for consumers and easily selling and buying new coverage for consumers. When we started looking at the space, you see the wallets in fintech, you see Credit Karma, but we didn’t see that kind of mirroring in the insurance space. We didn’t see these big companies yet.

We wondered whether it's a difference in structure or actually just because the hype in insurance start ups lagged behind the fintech startups. 

The second thing we noticed is around the time to innovate. If you have a market you want to go after to insure, say you have a special niche and hypothesis, you want to test, if you want to build a credit card or some fintech company, you can spin out something in six days now, with all these banking as a service companies. That used to take two or three years before. In insurance today, if you want to spin out the competitor to Lemonade focused on, I don't know, tech workers between 30 and 50 years old, if you want to spin out that exact niche, it'll take you one and a half to three years to go live. Be it from finding capacity from reinsurers, filing your rates to each state and formalizing your processes. 

We felt like, wait a second, why is fintech so quick? Why are we able to innovate so quickly and test new things in fintech that we still can’t do it still in insurtech? 

That was something we learned as we were building Gaya. The final thing we saw is how much of an opportunity there is to help the unbanked and the subprime category in the United States. I would bet insurance agents should be the ones to give them the tools. We hope that our bet is true, we’ll see in the next year or two. But I feel in general, there are a ton of other fintech ideas that could be explored and should be explored to help this population and include it further in the financial ecosystem at scale, while not exploiting them. Those  are the three things that I would actually finish with when it comes to my learning as I get further immersed in the insurtech space and in the fintech space. Because we're kind of at the intersection of both, which is nice. We get to be kind of experts and updated in two fields.

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