Five Learnings from Five Years Investing in InsurTech

How times have changed!

In early 2015, we started looking to invest in startups in the insurance space. The term “InsurTech” did not yet exist — and hardly any startups to invest in…

Fast forward to 2020 and the situation couldn’t be more different. InsurTech startups globally have raised more than $15bn in funding, and several unicorns have been created. Even a first multi-billion $ exit was completed, when Prudential acquired Assurance IQ for up to $3.5 bn in September 2019.

Given the rapid emergence of InsurTech and the threat posed by the big tech platforms, one may think that incumbent insurers would have reacted forcefully. However, this has not happened, and there still seems to be some sense of complacency.

Incumbent’s complacency is a Neo Insurer’s best friend

Granted, of course, many of the InsurTechs that were founded over the last five years have not (yet) lived up to their full potential. The complacency that can be found within some incumbents is however misplaced. Quite a few InsurTechs have gained significant traction. Not only in terms of fundraising, but in terms of market share and profitability.

Few incumbent insurers have the brand power, the organizational setup and the tech resources needed to fend off well-funded and well-managed InsurTechs in the long run. Slow to change and slow to adopt new technologies, they believe that market inertia will save them.

For B2C InsurTech’s that’s great news. They will continue to grab market share without meeting meaningful resistance by incumbents.

For B2B InsurTechs, it means that to accelerate their sales cycles, they should focus on immediate cost-savings and efficiencies — rather than on innovation or customer satisfaction.

The Three “Ts” of InsurTech investing: 1. Team, 2. Team, 3. Team

A perennial question among investors is whether to place more weight on markets or the quality of founder teams.

Insurance is such an enormous industry (more than $4 trillion p.a.), and it is still so much behind when it comes to leveraging technology, that almost any sub-sector or technology represents a substantial long-term opportunity.

Time and again I am looking at InsurTech companies that at first glance seem to address a small niche of the market, which at second glance turns out a multi-billion $ niche!

The challenge in insurance is not finding a big enough market opportunity, the challenge is unlocking that opportunity.

It can only be met by the very best founder teams. In addition to the necessary hard skills needed — “managing complexity” is a big one -, focus and perseverance are some of the key qualities I am looking for (more on that below).

Smart Entry Points are key

Neo Insurers/ B2C InsurTechs may address potentially huge markets, but they need to choose their entry point cleverly. Trying to be everything to everybody from Day One will not work. And when focusing on a certain segment or line of business, some are more promising than others.

Neo Insurer Getsafe (CommerzVentures portfolio) has found the segment of first-time insurance buyers (typically in their early 20s to early 30s) an attractive segment to target. Its value proposition of an “insurance companion on the smartphone” aligns with the product expectations of this demographic — and with the distribution channels these customers can be reached with.

Indeed, entry points don’t necessarily need to be defined by product or market segment. They can also be based on proprietary distribution channels. I have seen InsurTechs gaining traction by identifying non-obvious distribution strategies and channels.

This is the big advantage of playing in the digital space. It opens up a broad range of entry points, whereas traditional insurers are often confined to their offline agent and broker networks.

A smart entry point into the market becomes even more powerful, if it is combined with an underwriting edge.

Neo Insurers are able to capture entirely new sets of data already in the customer acquisition funnel. By way of example, Health IQ uses health quizzes on Facebook to acquire customers with healthy lifestyles for life insurance. The company is able to correlate the scores from these quizzes with mortality rates, and therefore can offer cheaper life insurance to potential customers with high scores.

Marathon runners needed

While marathon runners may qualify for cheaper life insurance, the mindset needed to finish a 42km/ 26 miles run is also helpful when it comes to InsurTech startups.

The complexity of insurance and the slow-moving nature of the market means that launching and scaling an InsurTech takes more time compared to most other verticals. Founders and investors who have the stamina may be rewarded with large and enduring companies.

Once a company in the insurance space reaches a certain size and maturity, the inertia in the market actually works in its favor. After all, almost one in ten companies in the Fortune 500 are insurers!

Fundraising and focus

For most marathon runners only one thing matters — finishing! While most InsurTech startups in their early days display a similar focus, maintaining such focus becomes a challenge after large funding rounds have been raised.

The day a startup announces a large funding round, it seems like the whole world wants a piece of it, and the founders’ inboxes on email and social start overflowing with all kinds of random requests. These distractions are — in theory — the easiest to avoid. Others can be much sneakier.

As capital seems much less of a constraint, more and more tangential projects are pursued by the organization. If an InsurTech is challenging a large international corporation over its use of the colour magenta, some short-lived PR may result. But will it contribute to furthering this startup’s mission?

Making sure the company doubles down on its mission, rather than diluting it, should be the main objective of founders post-fundraise. As seen time and again, this is easier said than done.

With these learnings under the belt, I look forward to the next five years of investing in InsurTech. They promise to become just as exciting as the last five!