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Business Operations Business Models

How Does Root Insurance Make Money (Business and Revenue Model)

The Root Insurance business model

How Does Root Insurance Make Money?
Here’s what you should know:
  • What is Root Insurance, and how does Root Insurance work?
  • How does Root Insurance make money?
  • Net Premiums Earned
  • Net Investment Income
  • Fees and Other Income
  • Root Insurance’s profit and revenue
  • What is the Root Insurance business and revenue model?
  • Root Insurance’s funding and market cap

How does Root Insurance make money if it’s so cheap? Here is a full, in-depth, breakdown of their three (3) revenue streams and the different products and services they offer, as well as the Root Insurance business model, their year-over-year revenue, and how Root Insurance works.

What is Root Insurance, and how does Root Insurance work?

Root Insurance is an insurance company that currently offers car, renters, homeowners insurance.

Founded in 2015 by Alex Timm and Dan Manges, Root Insurance began trading on the Nasdaq on October 28, 2020, under the ticker symbol “ROOT”. Now, Root Insurance is available in 31 states across the US with more than 330k active policyholders to date.

How Root Insurance works is: To get insured by Root, the company first requires drivers to download their mobile app and to drive around for several weeks while the Root app studies the driving behavior of the driver. If they pass, Root offers them a quote which is partially determined by the driving score the app calculated during those several weeks of test driving.

If they fail, Root will not insure the driver. This is because, as Root says, they “only insure good drivers, which helps [Root] keep their rates low.”

Some of Root Insurance’s competitors include Lemonade Insurance, Hippo Insurance, and other non-traditional insurance companies.

Root Insurance App in Apple App Store | Root Insurance Business Model | How Does Root Insurance Make Money?
Source: Apple App Store | Root Insurance

How does Root Insurance make money?

According to page 62 of Root’s 2020 Form 10-K, Root Insurance has more than 330k active policyholders to date and had roughly $616.8 million in direct written premiums in 2020.

So how does Root Insurance make money off of all those active policyholders and direct written premiums?

Below is a breakdown of how much money Root Insurance makes and its revenue model. Including all revenue streams and how much they charge for their services.

Here are the 3 ways of how Root Insurance makes money (in 2021):

Root Insurance has a revenue model that makes money in three (3) ways – net premiums earned, net investment income, fees and other income.

#1. Net Premiums Earned

Root Insurance makes the majority of its money off of net premiums. In fact, $322.5 million or 93% of Root’s total revenue came from Net Premiums Earned in 2020.

So, how does Root Insurance make money from this? As an insurance company, Root underwrites the insurance policies and receives direct written premiums for each policy written. Of which, Root earns a portion of. Which is referred to as the net earned premiums.

In 2020, Root received $616.8 million in direct written premiums. Of that, $322.5 million became net earned premiums, which is roughly 52.3%.

Root Insurance Quote | Root Insurance Business Model | How Does Root Insurance Make Money?
Source: Root Insurance

Note: 93% of Root’s total revenue came from Net Premiums Earned in 2020.

#2. Net Investment Income

In addition to Root’s net premiums revenue, Root Insurance also makes a portion of its money through its investments, which resulted in an additional $5.4 million for Root in 2020.

According to page 65 of Root’s 2020 Form 10-K, net investment income is recognized as “interest earned from [Root’s] fixed maturity and short-term investments and cash and cash equivalents less investment expenses.”

#3. Fees and Other Income

Root Insurance makes the remaining portion of its money from what Root refers to, on its 10-K Form, as “fees and other income”. Collectively, these “fees and other revenue” earned a combined $18.6 million of revenue for Root in 2020.

The fee revenue refers to the flat fee Root Insurance charges its policyholders who are paying premiums on an installment basis. Which covers the additional administrative costs linked with processing more frequent billing.

And other income consists of the commissions earned for homeowners policies placed with third party insurance companies and the sales from enterprise technology products.

Root Insurance Cost | Root Insurance Business Model | How Does Root Insurance Make Money?
Source: Root Insurance

Note: “Fees and other revenue” earned a combined $18.6 million of revenue for Root in 2020.

Root Insurance’s profit and revenue

In 2020, Root Insurance reported $346.8 million in revenue.

Note: Because Root, Inc. is a publicly traded company, under the Securities Exchange Act of 1934, they must file continuous financial filings with the U.S. Securities and Exchange Commission (SEC). You can find all of Root’s publicly released financial reports, including annual reports, through Root’s investor section on their website.

What is the Root Insurance business and revenue model?

Root Insurance makes money through a few revenue models that they combine within their company, they are:

  • Commission based business model
  • Interest revenue model
  • Fee-for-service (FFS) business model

Root Insurance’s funding and market cap

According to Root Insurance’s Crunchbase profile, Root Insurance has raised $527.5 million over 5 rounds and has a market cap of $1.49 billion as of September 2021.