Insurtech Inflection Point

You’ve written that we’re at an inflection point for insurtech. What changes are you seeing in the type of investors who are funding startups now?

First and foremost, there is a relative uptick in incumbent insurance fund activity. Reinsurers, in particular, are investing at unprecedented rates as are insurance companies, or CVCs (VCs associated with re/insurers). That’s both in real terms and in relative terms. From a relative perspective, that’s been driven in part by an exodus of more general tech VCs who really piled into insurtech, particularly in 2020, where some of the advertised returns on investment were quite fantastic. But advertised is a very intentional word.

In real terms, for the first half of this year, reinsurer investments into insurtechs were 73 in count and to date are the highest that they’ve ever been in a relative part of the year. The capital is coming from the industry in a way that it previously wasn’t, and the investors who are not necessarily associated with CVCs are now predominantly insurtech specialists. These are investment funds that have targeted insurtech as a vertical of priority. They typically either have insurance expertise in the fund, or they work with people that really understand the industry.

There’s been an exodus of broader, more general tech VCs that have had interest in the financial services industry but haven’t necessarily had a huge amount of insurance expertise. I see that partly as a reflection of what we’re seeing in the market more broadly; it’s less of a volume game and more of a precision game. From approximately 2,000 insurtechs that exist globally, you can boil down their business models into, let’s say, 15 different groups. The insurance industry doesn’t need more than 100 versions of the same technology provider. To a degree, there is a certain amount of whittling down that’s happening.

And simultaneously, insurers and reinsurers have a better understanding of what they want from the insurtech landscape as they have articulated their own requirements better. Given that there is more of a constraint on capital, I think there’s less appetite for experimentation for the sake of experimentation and actually a doubling down on known entities that deliver on a known issue which pertains to an insurer’s or reinsurer’s business.

What are these investors with greater insurance expertise looking for today?

Insurtechs that are able to articulate clear commercial outcomes that speak to the underlying performance metrics that are required by any insurer/reinsurer. This, versus the issue that we had in 2020, when insurtechs were trying to sell the technology for the sake of technology. Now we’re actually seeing pitches where companies aren’t even necessarily talking a lot about their technology—it’s kind of a given that it exists. Those insurtechs that have been successful in raising capital are very good at expressing the outcome. As well, insurtechs that are able to generate revenue have attracted a lot of investor attention. Not that long ago, it was kind of growth for growth’s sake; growth at any cost, and a lot of insurtechs were running huge losses. Because there’s less and less sympathetic capital available that was sort of propping up these losses almost in perpetuity, insurtechs now have been forced to focus on revenue in order to attract investor attention.

Thinking of commercial outcomes, in the first iteration of insurtech, people were going to totally disrupt this old industry that’s mired in the past. Why has that fallen by the wayside?

Well, it was a false hypothesis, right? The extent to which the insurance industry or reinsurance industry was antiquated or ripe for disruption was completely overstated. Part of that was a reflection of the people—mainly investors and outside commentators—that were pushing insurtechs, that didn’t necessarily understand the intricacies of our industry. They were pushing this idea that the insurance industry was basically an Uber in waiting or a Netflix in waiting, but those are monoline commodities and a very black-and-white transaction, which people want to buy.

Insurance and reinsurance are highly regulated, highly complicated, very regional specific, very product-specific transactions between risk and capital, which people don’t necessarily want to buy. Technology in and of itself is not really the answer.

But the insurance industry—which in 2022 surpassed $6.5 trillion in gross written premium—for the most part does a very good job of matching risk with capital and delivering services that people want. Again, the hypothesis was overstated, and there weren’t enough industry players who were able to voice a counterweight argument to why this wasn’t the right thing to do.

Having said all that, our industry does need to keep moving forward. It does need to keep remaining relevant, and technology is definitely a part of that journey. But it’s an enabling force. Those incumbent re/insurers that have been able to be disruptive are, generally speaking, those companies that have been able to leverage technology more successfully than a traditional competitor, versus an outside entrant coming in with some kind of technological advantage. We just haven’t really seen disruption in that way.

What does a more collaborative approach mean for the industry and for brokers and agents?

It’s recognizing a company’s position in the incumbent industry and, rather than looking to dislodge them, to understand what it is that they do and how they provide solutions and services that are fundamentally accretive to what they’re trying to do, versus trying to usurp them.

Again, three or four years ago, it wasn’t uncommon for insurtechs to stand on stage and say things like regional agents are a thing of the past. That narrative is completely changed now. Now we hear: “How can we support regional agents? What do they need? How can we work with them to see more business? How can we work with them to be better custodians for their clients’ business?” I think there’s a lot more respect now for the incumbent players in our industry.

Collaboration also looks to a higher degree of empathy versus, “This is our technology product. You should buy it.” Now it’s people working from day one together, saying, “This is what we’re trying to achieve and how we need to get there. This is what we think technology can facilitate, but we need to work with the right kind of partner to get this done.”

We have seen a reduction in those insurtechs that seek disruption as a risk originator. For example, three or four years ago, about 9% of insurtechs identified as companies that were wanting to disrupt the industry. It’s now probably 2% or 3%, and there’s a huge reduction in those companies that are looking to go to war with, in some cases, billion-dollar companies.

You’ve noted a fairly significant shakeout among insurtechs from around 3,000 in number to something like 2,000. Is that a trend you see continuing?

Yes, I do see that continuing. I think, in short, a lot of companies will just run out of money and that’s just part of the natural evolution of a frothy market where there are more answers than there are questions, there are more people trying to solve problems that don’t exist than problems that do exist. To my point earlier, we simply just do not need multiple versions of the same business model. It’s just completely unsustainable.

I think that we will see at some point a correction and there will be a natural supply-and-demand curve inflection. Then my hope is that something more sustainable will come out of that, where innovative businesses are still supported. There’s still opportunities for companies to come in and try and do the right thing for our industry—and that innovation is not stifled—but it’s just not at the same volume as before where things almost became too confusing. Selecting between 20 vendors was an extremely difficult thing to do.

Fundamentally it’s a cash flow issue, and I think some insurtechs would also recognize that their time is possibly best spent elsewhere, particularly those that aren’t out-and-out insurance focused. There will be fewer companies that try and enter the space as well, because they’ve seen how difficult it is to come in and actually generate revenue, let alone profit.

What’s ahead for insurtech?

What’s going on in the industry right now, particularly insurtech, might feel a bit doom and gloom, but actually I interpret it completely the opposite. What we’re going through is an extremely healthy correction point, and it’s extremely valuable for insurtechs to have these lessons learned. Cash isn’t supposed to be so readily available, and there should be some due diligence on business models; there should be a focus on profitability.

Insurtech is now less synonymous with these huge capital raises, and it’s more about can you deliver on these commercial outcomes that are long-term, sustainable, value-adding propositions. I like to leave that with people, because if you just look at the investment numbers, you might think there’s something terrible that’s going on, but it’s quite the opposite actually. We’re going through this great exercise where we’re kind of graduating from this era of experimentation into an era of precise business outcomes, which I think is a great thing.