Insurance is having its (neo) moment.
Over the last decade the banking industry experienced huge disruption. We’re seeing the same thing happen to insurance. (Part I of a III Part series.)
After the 2008 global financial crisis, customers lost trust in traditional banks, allowing digital-first institutions like Chime, N26, NuBank, Monzo, and Revolut to emerge. The ability to make deposits and manage accounts using a mobile app was instantly appealing to millions of consumers. Collectively, these ‘NeoBanks’ are projected to have more than 145 million customers in North America + Europe by 2024.
This trend has only been accelerated by the COVID-19 pandemic. Since the beginning of the lockdown, we’ve seen a 72% increase in the use of fintech products and services.
We believe the next big wave of financial disruption will happen in insurance. Call it ‘Neo-Insurance.’
Here’s the big secret: unlike many NeoBanks, which manage their assets in much the same way as traditional banks, insurtechs use technology to fundamentally improve core functions of the business: underwriting, placing risk, and settling claims. Through applications of artificial intelligence, insurtechs are challenging traditional methods of underwriting risk.
For example, machine learning algorithms can analyze a photo of a car accident and estimate repair costs up to 10x faster than humans. Health data generated by wearable devices and recorded in the blockchain can be more reliable indicators of life expectancy than actuarial tables. Automating analysis of fraudulent claims saved the insurance industry $260 million in 2019 alone. Juniper Research estimates that AI could save insurers as much as $2.3 billion by 2024.
In this three-part series on the Neo-Insurance Moment we will outline 1) the current state of the insurtech market, 2) the metrics and characteristics VCs seek when making insurtech investments, and 3) our prediction for what the next 10 years of insurance will look like.
How investors view the insurance market.
Insurance isn’t sexy. Gen Z doesn’t chat insurance after class. Most of us don’t even think about it until we need to file a claim.
Yet, public and private investors alike see a massive market with extremely profitable incumbents. Globally, insurance premiums surpassed $6 trillion in 2019. StateFarm, the US market leader in property & casualty (P&C), accounted for more than $65 billion of premiums. MetLife, a global leader in life insurance, accounted for $95 billion. Each of them took in north of $5.6 B in profit in 2019.
The private market is following suit. From 2014 to 2019, the total annual value of venture and PE deals in insurtech increased at a CAGR of almost 60%, (according to Pitchbook) with more than $6B of venture money invested in 2019 and again in 2020. Some researchers project the insurtech market will grow to nearly $22B by 2024, at a CAGR of 36%. In 2020 alone, five major insurtechs raised $100 million or more.
Bottom line, investors see the promise in insurance.
Data that is positive for Insurtechs.
Insurance remains a painfully manual, paper-driven business. Pricing, underwriting, and settling claims is still primarily done using 20th century technology. But that’s a scenario ripe for change.
Out of the $6.2 trillion in global gross written premiums in 2019, only $1.3 billion were underwritten using artificial intelligence. This represents an enormous opportunity for digital-first insurtechs. The consulting firm McKinsey approximates $1.1 trillion of added value if current AI technology is applied to correctly price and place risk.
Insurance claims are also ripe for disruption. About one in 20 insured homeowners files a claim each year. Roughly 10% of all claims are fraudulent, resulting in losses of more than $40 billion a year in the US alone. Besides allowing insurance companies to handle claims more efficiently, technology can also increase accuracy and root out fraud.
Yet, maybe the best argument for investing in NeoInsurance has been the insurtech IPOs of 2020. Unlike the previous three years, where the majority of capital for came from M&A or corporate buyouts, insurtech startups raised $37.4B through seven major IPOs in 2020 (see Figure 3 below). It’s clear that public market investors are clamoring for more disruptive insurance companies.
Insurance market leaders are noticing too. The likes of Allianz, Munich Re, Nationwide, Liberty Mutual, and others are pouring money into finding the next best thing in insurance. Allianz recently announced that it is growing its insurtech-focused venture fund to €1B.
So, what to do with all this positive momentum? Entrepreneurs need to build, while investors need to partner with the best insurtech companies. In Part II of our III part series, we will cover what VCs look for in insurtechs, and what it takes to grow the next insurtech unicorn. Stay tuned…
— This was a joint post authored by Connor Love and Nicole Quinn, Lightspeed.
