The Time is Now for Transformational InsurTech Businesses

We’ve been debating at Crystal Venture Partners whether to publicize the generational market opportunity we see for InsurTech businesses over the next decade. There are compelling reasons for us to capitalize on it quietly, but there are far too many valuable opportunities to pursue and not enough technical founders focused on the space… yet.

While there has been considerable media coverage on the InsurTech missteps, it’s important to highlight that numerous founders have established, grown and successfully exited InsurTech businesses in the last decade. However these accomplishments have been overshadowed by high profile blow-ups and significant overcapitalization of inefficient business models.

It’s helpful to look to FinTech as an analogous sector with similar dynamics. In FinTech, early-stage VC funds had some success in backing enabling technologies (“tools and widgets”) and disruptive challengers (“neobanks”). But the last decade has shown that the best — and most consistent — outcomes came from investing in high gross-margin software businesses.

These are what we call “transformational” businesses. Rapidly scalable businesses that serve critical business functions, provide meaningful improvement to customers (e.g. productivity, efficiency, service) and build differentiated technology assets (e.g. unique data). Enabling technologies and disruptive businesses lay the necessary groundwork for these transformational businesses to thrive.

We see a similar trajectory playing out in InsurTech, and have reached conviction that now is the time.

Here’s the FinTech evolution (grossly oversimplified)

The InsurTech Evolution

Enablement (Tools & Widgets)

Thesis: Insurers need to adopt technology: build software for Insurers

Learning: 2016–2020 timing for selling new software to Insurers couldn’t have been worse. Insurers were still digesting hundreds of millions spent on core systems over the prior decade. The residual negative sentiment of failed core systems business cases, minimal basic infrastructure (e.g. APIs) and an overall lack of talent made the industry unable/unwilling to adopt new technologies.

Non-insurance technical founders couldn’t access the subject matter expertise to identify critical business processes for high value software applications. Without a deep understanding of key insurance functions, superficial tools were built providing minimal incremental value to insurers and small revenue opportunities for start-ups.

Success: Legacy businesses became aware of new tech tools and began laying the foundational infrastructure (e.g. APIs) to adopt and ingest new technologies. Most importantly they began the multi-year process to propose and allocate budget for future projects and transformation initiatives.

Disruption (“NeoInsurers”)

Thesis: Insurers aren’t adopting software and are subject to disruption: build new Insurers

Learning: Insurance has a few proven adages, phrase it however you like, but fast growing insurers are not profitable and require a high business risk appetite on top of fundamental execution risk.

What has been “successful” in high growth insurance businesses is running a large cash burn, paying high CAC and/or underwriting at least some undesirable/unprofitable risks to drive top line growth. Then at scale raise rates, churn unprofitable customers and stabilize the book at a significantly lower size. In the end your high initial CAC/LTV ratio becomes unjustifiable when you don’t retain a high % of customers for your target payback period and the economics at scale fail to reward the undertaking.

Insurance company economics are not software company economics. Insurers are traditionally valued on a book value basis, not a revenue basis like traditional VC SaaS businesses. Insurance premium revenue does not have the same quality of revenue characteristics as a VC backed SaaS business with 80%–95% gross margins.

Success: Customers have been exposed to modern digital self-service tech offered by challenger insurers. This has influenced increased customer service expectations sector-wide. Legacy insurers are now compelled to accelerate investments in software and technology to meet increasing customer service expectations.

Where we are now: Transformation

Thesis: Insurers are now adopting new technology in critical business functions: build software around core functions for Insurers and new ecosystem participants

Learning: We are now at this stage. The first InsurTechs have successfully influenced insurers to invest in the necessary infrastructure improvements (e.g. APIs & Modern Data Storage) to adopt new technologies. Insurance companies have digested the multi-year; tens of millions spent on core systems and finally have budget to allocate to new technology transformation initiatives.

The insurance market has reached consensus that technology needs to be adopted in a meaningful way across their enterprises to remain competitive. Insurers face an aging workforce, a growing talent shortage in the hundreds of thousands all on top of a decade plus struggle to attract software engineering talent. To fill this gap, historically Insurers have allocated significant budget to 3rd party software and technologies (Core Systems, CRM, 3rd Party Data, …). Growing claims costs, new emerging risks (e.g. Climate), increased customer service demands, a rising yield curve, pressures from social inflation and the prevalence of new data are just a few of many forces pushing insurers to innovate and adopt new technologies.

All of this is leading to a generational market opportunity. Insurance, a $7T global industry, spending billions per year on technology, is ripe for new transformational businesses.

All of these fertile start-up market conditions exist before even mentioning the most obvious and significant opportunity in AI.

You’d be hard pressed to find an industry more perfectly suited for AI technologies. Insurance is an industry that evaluates, quantifies and prices risks. For decades insurers have been using gigantic risk models with seemingly infinite ever-changing variables and leveraging centuries of learned experience from top actuaries & underwriters. The use cases and potential applications for new businesses leveraging AI to serve the Insurance value chain are immense.

We’re now seeing second and third time founders come back to the space more excited than ever by the opportunities to build transformational businesses. We are hopeful that the sector’s great multiple-time founders will be joined by exceptional technical founders whom previously would have overlooked the sector to focus on other industries will now see the potential to build in Insurance.

That being said, if you’re a technical founder who is interested to build in the InsurTech space please reach out to us. As an early stage sector focused fund, we live to help entrepreneurs enter the market, refine their vision and build scalable businesses. Within the Insurance sector there are dozens of large addressable sub-markets, significant opportunities to leverage data in a differentiated AI solution and strong customer demand to fuel a growing technology business. We have a running list of ideas we would love to see built. We’re happy to share our market perspective with great founders.

Happy to take follow-ups in DMs or Linkedin messages