Reverse Engineers

Leaky, a car insurance comparison website, ran into a problem:

The problem? In order to compare the insurance prices you’d pay with different providers, Leaky was scraping the data directly from the insurance companies’ websites. It sounds like Traff wasn’t entirely surprised by the letters (“We understood their objections and complied with them,” he says now), but he thought Leaky would have more time to fly under-the-radar while it figured out the best way to get its data. However, the high-profile launch made that impossible, and the site went offline after four days.

The solution?

Now Leaky is back, and it’s offering price comparisons based on a new data source — the regulatory filings that car insurance companies have to file with the government. Using those filings, the company has created a model that predicts, based on your personal details, how much each insurance provider will charge.

I presume he means the rate filings insurers give to regulators (I smell an actuary in there somewhere!). This is a fascinating project but I’m pretty pessimistic.

The web startup model, as I see it, is to build something geeks love, piggyback on the free advertising in the startup press and wait to get bought out by someone who has the platform to actually bring your product to the masses.

Leaky is offering no product, though. They’re offering replica pricing. Oh, but it’s so close to the real thing!

That means Leaky is no longer getting its prices directly from the providers, but Traff says the new model is making predictions that fall within 3 percent of the actual prices.

First lesson in stats: means mask the tails of the distribution. There’s plenty of wiggle room in 3% average deviation (if that’s what he means) to make this product completely useless.

Car insurance is not unlike car manufacturing. I remember reading an interview with Carlos Ghosn where he was lamenting that the only way to make money is to have huge scale in auto manufacturing and the only way to get that scale is to kill your margins.

Online platforms, like manufacturing plants, are a colossal capital outlay. As soon as it’s up insurers need to pour money into advertising to get people to the site. Sure you’re cutting out the broker, but you need to pay Google and network TV to get the word out and promise (cross our hearts) that your deals are actually cheaper.

And the real cheap deals only come occasionally as a carrier grasps for market share. Leaky can’t predict that from the rate filing.

So the only way to improve on the existing model is to compare real quotes from real insurers. Online players killed the broker a long time ago, they aren’t going to let him back in now.

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