Startup takes a large bite out of the $16B private health insurance industry
In just 15 months since its launch, Health.com.au has experienced phenomenal growth. Their disruptive approach to product, process and service has seen the company sign up over 40,000 members and deliver revenues of AUD$46M in their first year of operation.
Over a seven-year period working in real estate, Andy Sheats was growingly intrigued by the number of startups that were overlaying online business models onto traditional industries.
“Having worked in numerous startup businesses in the past, it’s been really been amazing to see opportunities to overlay contemporary online practices onto what are really old school industries. There is so much room for innovation,” says Sheats, Founder and CEO of Health.com.au.
After crossing paths with someone working in health insurance – an industry he describes as “old school” – Sheats recognised the potential for innovation. He explains that traditionally health insurance customers have been either ambivalent or negative; that they would engage in “grudge purchases” because what was being offered was essentially a “low engagement product”.
“For the segment of the market who prefer online services, we’ve simplified the product line, made sure it’s easy to research and make purchase decisions on and we’ve focused on delivering excellent customer service. It is subtle but when you look into the customer segment, Health.com.au is really differentiated,” says Sheats.
But why health insurance? In Australia, health insurance is a $16B industry – the largest insurance sector. The number of people who are switching to online services is multiplying rapidly.
“The expectation for an online service model is going to become a prominent one and we want to be part of it,” says Sheats.
One of the biggest initial challenges for startups is “will anyone buy our product?” But there was already a large market for private health insurance.
“We knew we could scale out pretty quickly. There are so many people who have private health insurance, so that took away a lot of the revenue risks that startups face. I saw a compelling consumer opportunity to disrupt an industry,” says Sheats.
In their seed round in June 2011, Health.com.au raised $3.6M allowing them to build their product and launch in April 2012. They’ve raised money successively since then to fund growth and is currently sitting on $34M in equity.
“The health insurance business is like a bank. You have to deal with credential regulation, build a balance sheet, and a robust risk management system, plus there are costs with sales, marketing and advertising,” says Sheats.
They spent $4M on “things that aren’t sexy” including the regulatory, legal, financial, and actuarial aspects of business before its launch. Following its launch, Health.com.au spent $20M on just sales and marketing alone.
“It was a pretty expensive undertaking, but that’s the nature of insurance. We believe we’re fully funded to make it through to an IPO now – we’re aiming for an IPO in 2015,” says Sheats.
“It may not be as exciting as Twitter, but the business is definitely working. We have the lowest turn rates out of all our competitors in the health insurance industry.”
Sheats says, on average, over 50 percent of customers stay with their health insurer for nine years.
“Once you sign people up, if you give them good service, you should be able to keep them for that long. While upfront there’s a bit of sales and marketing expense, if you do a good job with the customer you’ve got them for a long time,” he says.
According to Sheats, 85 percent of Health.com.au’s revenue gets paid out in claims.
“If something happens to you, we’ll pay out a lot more than you’ll pay in but that’s the nature of insurance – you’re insuring against things you don’t want happening to you. Unfortunately, it does happen. As I said, on average, as 85 cents out of a dollar is paid out for medical expenses,” he says.
Health.com.au sells primarily through iSelect who also do the branding and demand creation and receive a commission. But they’re growing their sales and marketing “quite aggressively” at the moment.
“We do targeted online marketing. We’re aiming at specific groups of people who we think are likely to get health insurance – like people who are actively engaged in sports,” says Sheats.
“As a small company we don’t want to waste money marketing in all the wrong places. we want to aim it at the people who are in the market for health insurance.”
A rather unusual approach for a business that is not an ‘all-online’ startup, Health.com.au uses Agile across all functions of the business. It’s a “key defining organisational construct” for the company, using it “top-down” unlike other businesses that use it for lead manufacturing processes.
The biggest challenge for the startup has been finding the right investors.
“Because our business is a bit unusual, finding people who were interested was hard at first. We wasted a lot of time talking to the wrong people,” says Sheats.
He learned that the best approach is to find investors who’ve had extensive experience or interest in the industry you’re trying to disrupt. They’re more likely to invest their time to “really understand your vision”.
In the upcoming year, Health.com.au plans to remain ahead of its competitors in product innovation and customer service.
“At the end of the day product innovation is what gets people in the door and the other thing we’re really focused on is continue to improve the customer process, and that’s what keeps them in door once they’re here,” says Sheats.
The rapid growth of Health.com.au and its disruptive approach is forcing many major players in the private health insurance sector to overhaul their product suites and create simpler solutions.
The company’s growth also saw it recently named Best New Startup at the Telstra Victorian Business Awards.
Take a tour of their website for more information: www.health.com.au