Startups Startin’ Somethin’

A few years ago, insurtech wasn’t even a topic of conversation in the boardroom. Today, it’s the buzziest of buzzwords, fueled by capital investment.

Total 2016 funding in insurance technology startups was estimated at $1.69 billion, spread across 173 deals, according to CB Insights, which tracks insurtech activity. Insurtech  funding for the first quarter of 2017 was estimated at $406 million across 29 deals, according to Venture Scanner, an analyst- and technology-powered startup research firm. It’s a very fluid market that’s hard to define exactly, so the numbers vary by source. For example, CB Insights pegs the number of insurtech startups at 325. Venture Scanner is tracking more than 1,000.

These figures are definitely significant, and they demonstrate investor confidence in the companies’ products and services, which promise improvements to wide-ranging processes and systems across the insurance value chain. Each startup offers a new technology solution that purports to do what insurers and brokerages do, only better. Some say this could spell disintermediation for brokers.

Nine in 10 insurers fear losing part of their business to the insurtech newcomers, according to management consultancy PwC. Three quarters of them believe at least some part of their business will be disrupted.

But that’s a pretty typical response to change that’s beyond the industry’s immediate horizon. For those willing to look to the periphery, insurtech can be a means to thrive. By using it effectively, you can underwrite more closely to risk, process claims more efficiently and cost-effectively, and reach more customers in more interesting ways. But more than that, the potential is there to improve your clients’ ability to do business as well as the lives of their staffs. If you want to evolve your business—and many will say there’s no longer much of a choice if you want to sustain it—insurtech offers endless opportunity. 

WHO’S INVESTING?

The lion’s share of startup money is coming from traditional venture capital firms, many in Silicon Valley. CB Insights tallies 141 traditional and corporate VC firms that invested in an insurtech startup in 2016, compared to 55 in 2011. Among VC firms in the sector are Andreesen Horowitz, Canaan Partners, Horizon Ventures, Lightbank and too many others to list. Insurers and reinsurers have also begun to throw their dollars into the ring, establishing venture capital funds to sniff out interesting startups and make a deal. Five years ago, it was hard to find mention of investments in private technology companies by an insurer or reinsurer. Last year, more than 100 deals were completed.

Thousands of investors, technology developers, startup leaders, and insurance and reinsurance executives have packed conferences in Las Vegas, London, Luxembourg, Singapore and Israel. Similar to conventions like the Consumer Electronics Show, insurtech gatherings have the latest insurance technology innovations on display.

“In the past, innovative insurance business models were generated inside the walls of insurance companies,” says Jamie Yoder, leader of the insurance advisory practice at PwC. “Now, much of the innovation is happening outside company walls, changing insurers’ focus from how to build these new capabilities to how to incorporate them.”

Second to the traditional VC players in placing their bets are global reinsurers, with 79 deals (investments) to their credit in 2016. Munich Re is the primary property-casualty reinsurer investor

in the sector, followed by Swiss Re. The company recently launched a unique startup-reinsurer partnering program, Digital Partners, providing both capital and reinsurance capacity to early-stage companies. In the second half of 2016, partnerships were inked with seven insurance technology startups.

The deals are a win-win for the reinsurer. “The partnership concept aligns Munich Re’s investment with its risk-bearing capital so the startup can sell property-casualty insurance provided by Munich Re,” says Matthew Wong, senior research analyst at CB Insights. “Hannover Re has introduced a similar partnering program on the life side.”

Much of the capital that has been invested in the sector is so-called “seed capital”—the initial funds provided by an entrepreneur’s friends and family for product research and development in advance of launching business operations. “Two thirds of the insurtech startups that raised money last year were early-stage companies with seed capital,” says Wong. “Now that they’ve attracted the first round of early-stage venture capital, we expect to see additional funding rounds occurring this year.”

Geographically, six in 10 insurtech deals last year involved domestic startups, with the remainder of activity spread unevenly across the world. No other country saw nearly the volume of activity or the deal values that have been tabulated in the U.S., with India a distant second at 11%.

THE ESTABLISHMENT IS ENGAGED

 Among the investors betting their capital in the mushrooming sector are many of the world’s largest and most recognizable primary insurance companies. A growing number of insurers have formed venture capital funds as a separate business to essentially do what traditional VC firms do—seek out innovative startups offering a decent return on the investment.

Unlike the traditional firms, insurers have two other reasons to make such investments—as a hedge against a new business model that may be in development and as an intelligence-gathering mission to scope out the next generation of insurance products and distribution mechanisms.

Three years ago, you could count on one hand the number of insurer-backed venture capital funds. Today, CB Insights tallies more than two dozen funds financed by a who’s who of insurance, including AIG, John Hancock, Liberty Mutual, Sun Life, USAA, Northwestern Mutual, Mass Mutual, Transamerica, Chubb, Axa Strategic Ventures, American Family Ventures and XL Innovate. Reinsurers with venture capital funds include Swiss Re, Hannover Re, and Munich Re, among others. “The corporate venture capital market in the insurtech space is now one of the most active segments,” says Wong. (For a deeper dive on carrier investment, see the sidebar “Carriers Are Investing in Insurtech.”)

Other industry experts agree. “The VC players and industry-backed VC funds are spreading their money across every segment and corner of the industry,” says Robert Hartwig, an associate professor of finance at the University of South Carolina’s Darla Moore School of Business. “The investments are driven primarily by what could end up being a very lucrative deal with a high return on capital.”

Every investor in a startup is hoping for the next unicorn, a company that reaches a $1 billion market value in the shortest time possible. Most would settle with a growing company with a defensible niche. In the insurance industry, niches are aplenty. “There’s this sudden realization that every link in the insurance value chain is susceptible to disruption,” says Steven Kauderer, a partner in Bain & Company’s financial services practice. “VC firms want to invest ahead of the curve.”

The categories covered by insurtech startups are numerous. And each new platform tries to speak to a perceived pain point or gap in the industry. Take the sharing economy, for example. The rise of on-demand business has created a new type of client who is looking to insure certain assets for regular, short-term periods. This is a need that insurtech wants to fill.

“Most of the attention in the space is going to startups that have developed new ways to distribute insurance under the theme of alternative distribution,” says Wong. “Less attention is going to underwriting, claims and other parts of the insurance value chain…. The startups with the most interesting ways to engage and interface with customers have received the most capital,” Wong says.

WHAT DOES IT MEAN FOR BROKERS?

While some are quick to say all of this spells the end of brokerage, many inside the industry don’t see it, especially those who are already engaging with these technologies.

“There are huge dollars flowing in to try and disrupt the space, but I don’t know if disrupt is the right word,” says Brian Hetherington, CEO and co-chairman of ABD Insurance and Financial Services. “I’d say enhance the space. It’s going to make it easier for people to access and use insurance to better their lives.”

Located in Silicon Valley, ABD both serves and embraces the tech world. One of the company’s five core tenets is Use Technology for Good. And Hetherington talks about that very thing in describing how he would like to see insurance technology become a part of the brokerage world.

“How do you prolong a happy and healthy life? Technology is going to play a huge part in that,” he says. He also notes that technology has the ability to make insurance approachable for people, which is key to using it effectively.

 In talking about the employee benefits side of the business, Hetherington comments that Zenefits did a great job of simplifying the front end for the client.  “But what they didn’t do was take care of things on the back end. So I think where insurtech is going is really trying to figure out how to use technology to take better care of our clients and risks.”

 On the front end, that essentially means simplicity—making enrollment, claims management, HR services, etc. more user-friendly.

“The broker plays an important role in program design on the front end, delivering services before a loss: prevention, disaster recovery plans, contract review,” says Hetherington.

“After a loss, there’s claims management, insurance recovery. And the broker has to be constantly vigilant, paying attention to changing laws and circumstances that impact the client risk profile and/or service requirements,” he adds.

On the back end, things are a little more experimental. “If you could make it simple to have a front end  so that [clients] don’t have to worry about what’s behind it, then you can swap out the [back-end] technologies as they happen,” he says. “So we’re trying to build a modular portal like that. You figure out how to swap out the pieces that are going to help you do workers comp claims or loss control or open enrollment or claims handling, deductible management, healthcare management for chronic illnesses, prescription management. All of these things are more back end. There are companies trying to do those pieces, but I don’t know who the clear leader is in any of them yet.”

He notes that from a distribution standpoint, there is also a bit of wait and see, as carriers make investments in technology, yet there’s no consistency among the investments being made. “I don’t think there’s been anybody who’s changing the dynamics of how people purchase insurance in the middle and upper market yet,” he says. “…so sitting back and waiting to see what becomes a prevailing trend does make sense.” 

The lack of consistency also means brokers have to remain the trusted advisor guiding their clients’ risk to the right insurer. And even when there is more consistency among technology use, Hetherington believes, brokers will still play an integral advisory role. “I think there is an expectation of having some self-services there, but at the end of the day you need someone to verify and validate that this is the right thing for the company,” Hetherington says. “There’s still an emotional component, and you have to have it vetted through and somebody to talk to as a counselor or advisor, and that’s where brokers add value in the chain. A good broker will dig deep, connect dots and ultimately deliver the right combination of insurance protection and services.”

He also believes there are three areas that are seeing great change yet would still be difficult to completely automate. “A lot of stuff is changing in risk prevention and risk management and coverage selection. I think we need to break things down to those three areas. We talk about the philosophy of risk here…. There’s no wrong answer in insurance. What should my deductible be? They’re all right as long as you know what the ramifications could be…. The coverage selection is an important part of the consultation. I think it’s a harder piece [to disrupt] because it gets to the philosophy of somebody.”

For the larger risks, he notes, the human element of understanding the philosophy and the complexities of decision making are crucial, which is why he sees the greatest technology gains coming in small business. There is more consistency in the risk, which makes it seem more adaptable to a consistent technology.

Technology’s potential to take on more and more complex risk is certainly up for debate. As Manish Agarwal, general partner in Axa Strategic Ventures, says, “Technology always has a way of surprising us.”

In risk management and prevention, brokers on the employee benefits side have already begun to put technology into action, for example, with devices that help manage wellness programs by tracking employee behaviors. “The more information, the better choices we will make,” Hetherington says. “I think that brokers’ roles over time are getting more into the consultative piece to try and figure out how to go extend happy healthy lives, and the psychology component will be a bigger part of all of that.”

The same philosophy can be applied to the p-c side. Hetherington gives the example of weather insurance and using technology to understand weather trends that can help farmers determine when to plant crops, how best to grow things, etc. “Those kinds of informed choices that [enable you to be] more effective with the dollars you have and the time you have will also continue to accelerate,” he says.

“And the end of the day,” he adds, “for a lot of our clients, it’s still relationships, and they still want us to tell them what we think is valuable and how to go approach it. They trust us to say this solution will work for now, and if it doesn’t work, they expect us to try and find whatever the next best thing is to try and make it work. So I think people need to be nimble and adaptive and ready for the changes that are coming, but I don’t see it being a huge disruption.”

Others agree. “Brokers can empower themselves with the same technologies to provide new coverage options to clients,” Hartwig explains. “You will then have a value proposition worth paying for.”

Yoder shares this perspective. “Brokers and agents can’t sit idly by; they have to tap into what’s available, technologically, to do the same things,” he says.

“There are a lot of great ideas percolating in this space involving cost-reduction, market differentiation, customer retention, and revenue growth concepts—all of them with clear applicability to brokers and agencies,” says Yoder. “These new capabilities can be incorporated into what you’re doing today. But you can’t take advantage of them if you’re not aware of them. They’re only a threat if they are ignored.”