InsurTech: From Leapfrogging to Sneaking in
There was a moment — in 2020 and 2021 — when the long-awaited disruption of the insurance industry seemed well underway. Category leaders such as Lemonade, Oscar and Hippo posted impressive growth rates and started to go public during this time. The premise behind these successful debuts still rings true today: that buying insurance is often a terrible experience, and that technology can play a meaningful role in changing that experience for good. This trillion dollar industry remains dominated by old fashioned behemoths, founded decades ago.
But, whilst tech stocks in general have declined substantially on Wall Street in the past 18 months, for InsurTech stocks the decline has been a bloodbath. A focus on profitability has meant impressive growth rates now matter less. Investors have instead renewed scrutiny of high CACs sustained to accomplish them, and of loss ratios that — despite the promise of better data — haven’t yet outperformed incumbents, who rely on decades of customer history. As capacity providers have diminished risk appetites, the market has hardened, leaving InsurTechs less space for manoeuvre in terms of product freedom and growth.
To navigate these stormy waters, many InsurTechs have beefed up their teams with industry veterans in previously lighter weight functions such as Underwriting or Claims. More traditional teams, a less risk-prone approach and branching into non digital forms of advertising and even old fashioned brokering are making some InsurTechs look more and more like the incumbents they set out to disrupt. Valuations have simply followed suit.
So, is the tech disruption story in insurance over? We don’t believe so. Not only do we think that some of the category leaders mentioned above will come back into favour, we also believe that the many ways in which technology can disrupt this sector have only just started to play out. First generation unicorns displayed the most obvious — but also the most challenging — way to take insurance on: bettering its UX. There is however a second generation of leaders, mostly still private companies, that are using technology to disrupt insurance in much subtler ways.
Tech to underwrite new risks
Novel and specialty insurance segments offer an even playing field for risk taking, with technology playing a meaningful role in providing a new data model for pricing. In the US, our portfolio company At-Bay has become a leader in the fastest growing specialty segment, cyber risk insurance. At-Bay question, analyse and monitor the cyber risk of every company in their portfolio not just once but continuously, a fundamental ability in a space with always evolving threats. In Europe, companies like Descartes Underwriting and our portfolio company FloodFlash have ushered in climate risk insurance. These companies use a wide set of data sources (incl. satellite imagery, IoT sensors, stationary sensors, radar and sonar data) and analytical tools to build live climate risk models for corporate, SME and public sector clients. InsurTechs have a formidable edge in these types of insurance vs incumbents.
What’s even more exciting is that — once brokers are familiar with these propositions — specialty products can act as a backdoor into established segments. Cyber can be sold together with other commercial lines by the same broker. Climate risk can be bundled with other P&C lines. There are also opportunities for alternative distribution or further monetisation with these new categories, by allowing customers to access and use risk monitoring tools.
Tech to better power incumbents
But tech disruption doesn’t just mean building a new insurance company from the ground up. Many InsurTechs are using technology to modernise the industry from within. Shift is using AI to help insurers better identify fraudulent entities and claims. Tractable is using computer vision to help assess, repair and protect cars and homes. Our portfolio company Canopy is allowing open access to insurance data. Others are using technology to facilitate, automate and speed up all kinds of processes inside the insurance world, from sourcing excess insurance capacity, to cleaning customer data, to publishing pricing models.
In an environment with less growth, companies old and new are also looking for new, high margin revenue streams and ways to monetise their existing customer base. Embedding insurance at the point of sale is a great option for retailers. If done well, this can both enhance customer experience and increase basket size. Tech-enabled players like our portfolio company Open offer an easy way to design, launch and manage great digital insurance experiences.
Be it using specialty segments as a backdoor, working with incumbents to modernise or finding new ways to distribute existing insurance products, the path forward for tech to disrupt insurance seems not to be leapfrogging, but sneaking in. The change in strategy doesn’t make the category any less exciting for us, or the market: whilst deal volume declined by 38% from 2021, 2022 was still the second largest ever year for InsurTech fundraising, with $8.5bn going into the segment. We’ll say it again, we think insurance disruption is just getting started.
