Pine forest understory. Source: Wikimedia
Last summer I went for a walk in woods near my home and noticed a mature stand of white pine with what looked like a hundred little saplings underneath. It was lovely: the majestic pines overhead and the dense carpet of green in the understory. The needles looked soft in the morning light.
I thought, “You’re not all going to make it, little friends.” There wasn’t enough room in the forest canopy for all these saplings to grow and mature. Each of these small ones has the potential to grow, expand, and mature into a majestic, fully grown pine, with great platforms of limbs extending out into the air. But most of them won’t – perhaps none of them will, unless a big storm or disease or selective logger takes down one of the current incumbents in the forest canopy.
It’s like this with businesses. There are giant firms that dominate the landscape, from tech to health care to industry to finance. They cast broad shadows and look unassailable. But there are always opportunities, chinks in the overstory that let a little light get down to the ground. Insurance is a great example. Businesses need to cover their risks, whether it’s fire and safety on their property or cyber liability or workman’s comp. Smaller firms especially can’t self-insure: an incident in one of these areas could wipe them out.
But small insurance policies aren’t profitable for giant insurers to care about. The big corporations may have attractive products, but they can’t deliver them profitably to smaller clients. The little guys don’t generate enough fees or commissions. So, some online startups are trying to fill the gap by using digital platforms, giving small-firm managers direct access to quotes and policy details from multiple big carriers and allow the customers to manager their policies – something a representative would typically do, but in these cases there isn’t an incentive to attract the broker’s attention.
Some major insurance carriers. Source: Insureon.
As a result, these “Insure-tech” startups are growing and seeking to fill this niche. Their prospects are strong, with the potential for 20-50% growth per year. Insureon, one of these seedlings, grew by over 1000% over its first five years. It had to. But there are all kinds of risks executing their strategy. Recently, they had to lay off almost 20% of their workforce.
This is the way capitalism works – one seedling at a time. Most companies fail or provide no real return over the long term. Their employees and customers do fine, but the firms just muddle along – unless they’re in the right place at the right time and can execute appropriately when a space opens up overhead. Think of it as Facebook vs. MySpace.
Not every seedling grows into a mature white pine. But if you own the whole forest, you can harvest enough wood every year to keep warm.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”