Innovations Insights

As the world moves toward more sustainable modes of transportation, electric vehicles (EVs) stand out as a pivotal part of the solution. The key to accelerating this transition lies not only in manufacturing more EVs but also in finding ways to make them more accessible to the masses.

One promising pathway is through leasing. With the passage of the Inflation Reduction Act and associated provisions that grant some EV lessees a $7,500 tax credit1, the U.S. market is poised for significant growth in EV leasing. As of March 2023, 34% of EV sales were through leasing — an increase of 18% from the year prior.2

However, there are uncertainties and risks for lessors, largely driven by the challenge of accurately predicting the residual value of EVs.

Residual Value: The Predicted Worth of an Asset

At the heart of any leasing operation lies the concept of residual value — the predicted worth of an asset (in this case, an EV) at the end of the lease period. With traditional internal combustion engine vehicles, forecasting this value is relatively straightforward, thanks to a wealth of historical data. However, with EVs, the rapidly evolving technology, fluctuating government incentives, and changing consumer preferences make it challenging to predict residual values accurately.

According to in-house research at Group 1001, worldwide, there is a misalignment between what lessors charge lessees and actual EV depreciation due to a lack of data on EV residual values. This causes lessors to charge higher prices to cover their potential downside risk.

Tools to Help the Situation

To address the challenge of predicting residual values accurately, an organization should look for a carrier with a focus on specialty insurance products that has the bandwidth to properly analyze a company’s needs and offer financial solutions as well.

A carrier that offers residual value insurance can serve as a risk management tool to facilitate the growth of not only the EV leasing market but also enable the overall adoption of EVs as well to help mitigate the impacts of climate change.

Why? Because residual value insurance provides accounting coverage, increased loan-to-value ratio, and asset value coverage.

This will help protect against the risk of EVs (or other like assets) depreciating more than anticipated, reducing financial uncertainty for the lessor.

The end game: To encourage lessors to offer more leasing contracts for EVs, and make EV leasing more affordable to the consumer.

How? Keep in mind the fact that EV residual value directly impacts the lease payment amount — the higher the residual value on the back end, the lower the monthly payments.

By mitigating the risk of substantial EV value depreciation throughout the lease for the lessor, the right insurance partner can enable lessors to offer more competitive and accessible lease rates to consumers.

Making EVs more accessible can help displace traditional, emission-heavy vehicles. Facilitating the growth of EV leasing helps promote EV adoption and contributes to reducing carbon emissions, which directly supports the United States’ sustainability goals. Moreover, the increased prevalence of leased EVs also fuels the secondary market for used EVs, making them accessible to a broader range of consumers — further amplifying the environmental benefits.

Innovative insurance solutions like residual value insurance can be powerful catalysts for positive environmental change. For more information on residual value insurance and how to facilitate the growth of EV leasing, contact RVI Group, a Group 1001 insurer, that is committed to supporting the EV ecosystem in the U.S. and beyond, one EV lease at a time.

1 IRS “Credits for New Clean Vehicles Purchased in 2023 or After,” June 22, 2023.

2 Investor’s Business Daily “EV Tax Credits: All The 2023, 2024 Cars And Trucks That Get $7,500,” July 25, 2023.

Jason Atkins is the Director of Innovation Strategy on the G1001 Innovations Team at Group1001

In our many conversations with early-stage asset origination businesses, as well as our experience watching some of our partners and portfolio companies scale, we have noticed that the best management teams understand that they have two sets of customers (three if you include their board of directors/equity investors):

1) borrowers, purchasers, and/or users of their product

2) capital markets participants (specifically asset-backed lenders or asset purchasers), who provide the capital necessary for product origination; this capital can take multiple forms, but regardless of structure, capital markets participation is required to operate.

All founders and investors understand the need for #1, but the most sophisticated and long-term oriented spend as much time, if not more, focused on #2. It is critical to understand the relative value provided to capital markets participants, how this relative value can change over time, and if a platform can shift value between customers #1 and #2 if necessary.

In an era of low-interest rates and easy access to capital, many companies were able to get away with not hiring an experienced head of capital markets or not investing significant resources to gain a deep understanding of their capital providers’ needs. It was easier to provide relative value to capital markets participants, which can mask the need for diverse and strong relationships with capital providers, present an unsustainable unit economic profile, or lead to a disproportionate amount of value accreting to customer set #1 or to the platform itself. But in today’s environment, many are now rowing upstream without a paddle, trying to backfill the experience and relationships, and in certain cases, are coming to the dire realization that they never had product capital markets fit at all.

What’s the difference between product customer market fit and product capital market fit?

Product customer market fit, more traditionally known as product market fit, is very much comparison-driven. For example, in home equity investments, homeowners will compare the pros and cons of refinancing their mortgage, taking out a second lien or HELOC, and depending on age, can consider HECM or jumbo reverse mortgage options*. They will compare the cost, eligibility criteria, cash flow impact, and FICO score impact, among other factors, to determine if a home equity investment makes sense for them. If the originator can educate properly (and compliantly), target the right customers through the right distribution channels, and provide a quality customer experience, they may be able to drive a high enough conversion rate to generate attractive unit economics at scale. This would be an example of product-customer market fit.

On the flip side, the capital markets providing asset capital to buy these home equity investments will have a completely different set of criteria to evaluate, and in some cases, is the exact inverse of the homeowners’ analysis (see (b) below). The investor will need to (a) take a view on the absolute risk/return of the investment – what is the expected return, how is this return impacted by different macro environments, what is the probability of losing money, and is there any regulatory risk or headline risk associated with these investments, and (b) take a view on the relative risk/return of the investment – what other investments could I make with this capital and what are the differences in risk-adjusted returns between those investment opportunities. If the capital provider determines that both (a) and (b) are attractive at scale, then this would be an example of product capital markets fit.

The most challenging aspect of both product customer market fit and product capital market fit is that they can change over time. For homeowners – the cost and terms of their other financing options will change over time, and in certain instances, could become significantly more attractive (product customer market fit drift). For capital providers – the risk-adjusted returns of other investment opportunities will change over time and could also become significantly more attractive (product capital markets fit drift).

Successful asset origination teams will constantly monitor both sets of criteria, adjusting pricing and terms to make sure they maintain both “fits” over time. Even more importantly, the best founders and investors will make sure the business models they choose allow them the flexibility to do so.

*In other asset classes, the comparison may not be the cost of financing driven but could be convenience, access, risk management, or many other reasons.

Justin Ostroff, Senior Managing Director, and Michael Gerold, Director of Innovation Investments, are on the G1001 Innovations Team at Group1001.

The insurance industry is not known for product innovation, consumer simplicity, or bespoke, flexible solutions. In fact, the opposite may be true.

However, the antiquated reputation of the industry is shifting as emerging Insurtechs provide novel products and services to improve consumer experience and respond to business challenges - from embedded policy offerings, cyber risk assessment, and coverage to parametric insurance for esoteric risk classes and AI for underwriting and claims.

The Insurtechs providing these offerings require a partner and capital provider with the same entrepreneurial, problem-solving mindset. Group 1001 has been that partner and capital provider, enabling the success of numerous emerging Insurtech companies, through tailored capital solutions and a thoughtful, long-term approach.

We at Group 1001 sit at the intersection of venture capital, capital markets, and insurance. We are uniquely positioned to help Insurtechs solve some of the industry’s most complex problems. Here are a few ways we’ve done that historically.

Optimizing Capital Efficiency of a Full Stack Managing General Agency (“MGA”)

Kin Insurance, a direct-to-consumer Insurtech startup, has used technology to accurately price and underwrite homeowner’s coverage in Florida’s high-CAT exposure regions since 2016. Going against the tide wasn’t easy for Kin, who needed to optimize customer acquisition costs and simultaneously launch and infuse capital into their affiliated carrier to bring their product to market faster. We provided the capital and structuring expertise to enable Kin’s business model in its nascent stages. Today, Kin has proven its business model and underwriting expertise and has also attracted other leading capital providers and raised a $1 billion valuation series D.

Risk-Bearing Capacity in a Rapidly Growing Vertical

We’ve also partnered with an MGA Insurtech startup that provides cyber insurance policies and cyber risk identification and improvement solutions. The company significantly outpaces industry average quotes to bind timelines and has expanded the availability of critical cyber coverage to more than 30 million U.S.-based SMEs.

While legacy providers of reinsurance capacity were slow to cyber adoption, Group 1001 was able to structure an on-balance sheet capital solution for the company, increasing risk-retention capacity and alleviating capital constraints for growth. The company is well-positioned to capitalize on industry tailwinds while continuing to produce innovative products, risk assessment methodologies, and superior underwriting results.

Parametric Insurance that Consumers Are Excited to Purchase

Sensible Weather provides consumers with a parametric weather ‘guarantee’ in the travel and event industries. While parametric insurance has been around for decades, its application as a consumer product that provides a refund due to inclement weather is a novel approach and requires a deep understanding of weather forecasting and meteorology that must be translated into quantifiable risk.

Group 1001 provided the capital and structuring expertise necessary to help Sensible launch its product. We have strong conviction in the continued growth of Sensible’s product in its current application and are excited to see how its proprietary underwriting technology can be leveraged for new and innovative applications across other industries.

Insurtechs Need Creative Problem Solving

We like to think we are in the business of “creative problem solving,” rather than simply functioning as an insurance holding company or as investors. The desire we have to solve problems creatively in the

insurance space is about determining what challenges we can uniquely address and how those solutions create the appropriate risk-reward profile while unlocking long-term growth for our counterparties. We are honored and humbled to partner with some of the leading companies in the Insurtech ecosystem and look forward to partnering with you and your investment in the future.

Micky Hervitz, EVP of Group 1001 Innovations, and Michael Gerold, Director of Innovation Investments, work on the G1001 Innovations Team at Group1001.

I’ve found that there is a gap between the way that TV and internet personalities talk about annuities versus how salt-of-the-earth financial advisors talk about annuities. If you search the internet for information on annuities, you will find that many of the top results warn consumers against buying them. However, if you sit down with retirement financial advisors, as we at Group 1001 have done in our routine market research, you will find that many view annuities as the “cornerstone of retirement portfolios.”

The case built against annuities typically falls into one of two categories:

1. Don’t buy something you don’t understand

2. 401(k)s and IRAs are better vehicles than annuities

Lack of Understanding?

The truth is that annuities fall to the right of stocks, bonds, and mutual funds on the “investment complexity” spectrum. There are fees associated with the purchase of annuities, riders, and other structuring decisions that may be beyond the retail investor’s self-guided grasp. However, the fact that retail investors may need to educate themselves to more fully understand annuities does not mean that annuities would be a bad fit for their retirement portfolios.

401(k)s and IRAs are better?

The common argument that retail investors should be investing, at a minimum, in their 401(k) up to their employer match or in an IRA up to the statutorily defined limits rather than in an annuity is an incomplete argument. While it is wise to advise a younger investor preparing for retirement against investing in an annuity money that could get them matching employer funds in their 401k, it is wrong to extrapolate from a case like this that annuities are generally inappropriate as many prevailing TV and internet personalities imply. To do so leaves unanswered the questions:

1. What is the best use of an annuity?

2. Who should be looking to use them?

3. When should they be used?

Our Research

In our market research with financial advisors, we learned that the top reasons they sell annuities are to:

1. Help their clients have stable cash flow throughout all of retirement (82%).

2. Help their clients protect principal through the ups and downs of the market (68%).

These insights resonated well with insights we gleaned from research we conducted with retail investors who were in or near retirement. The top concern consumers in this stage of life expressed is the fear of outliving their money. Somewhat humorously, the second top concern after “man, I’m gonna live too long” is concern about physical health or “man, I’m not gonna live too long.”

One critical takeaway here, outside of the fact that human worry is humorously diverse, is that annuities, the instrument many financial advisors believe to be the cornerstone of retirement portfolios, also solve the greatest need that retirees express in not wanting to outlive their money. And how do retail investors arrive at the point of being comfortable buying something as complex as annuities? Our research makes clear that consumers trust their financial advisors’ portfolio recommendations.

Also interesting to note is the impact that financial advisors see in consumer behavior when consumers have the assurance that they will not outlive their money that annuities can provide. Financial Advisors report that consumers have an easier time transitioning from the accumulation phase of retirement to the drawdown phase (another difficult aspect of retirement). Consumers feel more comfortable spending the money they set aside for themselves when they know it won’t run out.

Research from The American College of Financial Services has found that retirees who get the peace of mind that comes from converting cash savings into annuities effectively double the amount of money they are willing to spend every year on themselves and their families. For retirees, the security provided by an annuity solves their biggest concern and frees them to enjoy retirement.

Jason Atkins is the Director of Innovation Strategy on the G1001 Innovations Team at Group1001