Status of the Canadian InsurTech Landscape (Part 4) — Startup Stats, Investments and Future Opportunities
We recently launched our 2020 Status of the Canadian InsurTech Landscape report that dives deep into the InsurTech ecosystem here in Canada. We thought it would be great to highlight some parts of the report through a Medium blog series.
For this last part of the series, we will look at InsurTech startup and investment statistics, and future opportunities.
InsurTechs by Charts
Luge Capital is currently tracking 151 active InsurTech startups in the Canadian market. We have analyzed our database in different ways to gather insights on InsurTech activity by region, business function, year founded and line of business.
Number of InsurTech Startups by Function⁴⁰
Unsurprisingly, “Distribution” is the largest category of insurtech startups in Canada to date. This aligns with global insurtech trends to offer a more customer-centric and digital experience to shop for insurance products. We expect that the COVID19 pandemic will further accelerate the shift to digital experiences, especially as social-distancing measures are in effect.
Naturally, given the number of challengers in the “Distribution” category, a sizable number of startups emerged in the “Digital Augmentation” category to help brokers and insurers compete in the market. As access to existing and new types of data continues to grow, InsurTech startups in the “Data & Analytics” category have emerged as the third largest category of startups in Canada to help modernize and improve the risk assessment capabilities of insurers.
We expect more startups to emerge in the remaining categories as there seems to be untapped opportunities in those segments. Specifically, we believe that more InsurTech startups will emerge in the “Process Automation” category as insurers and brokers look to improve their bottom lines accelerated by COVID-19; as well as the “Claims” category induced by the growing interest of insurers to help their customers navigate the claims process and drive superior customer experience.
InsurTech Startups by Year Founded⁴¹
We note that there was a significant number of InsurTech startups founded between 2016 and 2017. Our data suggests that 80% of the startups founded during these two years fell into the categories of “Distribution”, “Digital Augmentation” or “Data & Analytics”, indicating that these were some of the first areas of InsurTech innovation in Canada. However, as those categories begin to mature, more startups are being created in the other categories. In fact, 50% of the startups founded in 2019 and 2020 fell into the categories of “Claims”, “Underwriting”, “Process Automation”, “Payments” and “New Segments & Products”.
The spike in the number of InsurTech startups founded in Canada between 2016 and 2017 generally mirrors the heightened startup activity in the overall financial technology sector in Canada⁴². However, this activity slowed down in subsequent years as startups were confronted with several challenges including the slow pace innovation of insurance carriers (hence delayed partnerships and long sales cycles), difficulty in navigating through a complex industry and regulations that are unsuitable for the internet-era.
We believe that this trend will reverse in the coming years due to a few factors including increased access to capital through fintech investment firms such as Luge Capital⁴³, growing openness of insurers to work with smaller startups, evolved regulations and emerging InsurTech startup successes.
Number of InsurTech Startups by Line of Business⁴⁴
Property and Casualty insurance tends to be easier to distribute, price and bind, which is why the data is skewed towards P&C. Life and health insurance products tend to be more complicated and hard to distribute in a fully digital environment.
InsurTech Startups Active in Canada by Headquarter Location⁴⁵
From a geographical distribution standpoint the majority of Canada’s InsurTech startups are headquartered in the province of Ontario, followed by Quebec and then British Columbia. Given that most of the large insurance carriers in Canada are based in Ontario, emerging startups tend to set up their operations in the same province to be proximate to those carriers. Ontario is also one of the largest markets for insurance in Canada, and is the largest producer of insurance talent who have experience with the large carriers.
Investments
Between 2011 and 2020⁴⁶ a total of $1.158 billion of disclosed funding has been raised by 67 InsurTech startups that are either headquartered or operational in the Canadian market⁴⁷. We estimate that the actual amount of funding is closer to $1.205 billion⁴⁸.
This funding data includes financing of international InsurTech startups that operate in Canada.
It is worth noting that a large portion of the capital was received by a small number of companies. Further, some of these companies are not “pure” InsurTechs. Rather, their technologies have broader applicability and insurance is one of the segments they serve.
A few of the largest funding rounds are highlighted below. As noted, most of these companies’ core business is not in insurance. Insurance is one of the markets they serve. All of the below startups, except Hover, are headquartered in Canada.
The flow of venture funding to the Property & Casualty line of business was much higher than to the Life & Health line of business. This is congruent with the distribution of the total number of InsurTech startups, as noted earlier.
Flow of funding to InsurTech startups by line of business
Flow of funding to InsurTech startups by function
We performed an analysis of the number of startups in each insurance industry function (as segmented earlier) as a percentage of the total database. We then compared it to the percentage of funding flowing to each of these categories of InsurTech startups, as shown in the table below.
For the Distribution and Payments categories, the proportion of funding aligned with the proportion of total startups in those respective categories, but we found divergent data in other cases like Digital Augmentation, Data & Analytics and New Segments & Products. In the case of New Segments & Product, the majority of the funding value is attributable to Dialogue’s total financing of more than $88 million. Similarly, in the Underwriting category, the majority of the funding value is attributable to Element AI. We expect that the following categories will continue to attract investment capital:
- Digital Augmentation — Luge believes that there is still a role to be played by intermediaries in the insurance industry, particularly for complex products, such as life, health and disability insurance. We anticipate more venture capital financing of technologies that augment the digital distribution capabilities of incumbents.
- Underwriting — Insurers and intermediaries are slowly beginning to partner with InsurTech startups to explore the modernization of underwriting processes. As more insurers move parts of their operations to the cloud, we believe that there will be an increase in venture financing of startups aiming to help insurers with more streamlined underwriting processes.
- Claims — As insurers continue to enhance their digital distribution capabilities, they are turning their focus to claims management to improve customer experience, reduce losses and reduce fraud. We believe that more startups will enter this space and venture financing will follow.
Investors
We have tracked an increased participation of venture capital firms in InsurTech deals. Access to capital is crucial for InsurTech startups to be able to invest in R&D activities and remain afloat during the early years when sales traction may be growing slowly. As such, Canadian and international venture capital firms play an important role in supporting the InsurTech startup ecosystem in Canada. Below are some investment firms that have made InsurTech investments in Canada.
InsurTech M&A
Only recently has the Canadian InsurTech ecosystem seen heightened M&A activity. The industry is still at a nascent stage and there have only been a handful of InsurTech startup acquisitions in Canada and most of them were acquired early in their journeys.
We believe that in the short and medium term, insurers and incumbent intermediaries will look to continue their digital transformation processes and partner with InsurTech startups. Mergers and acquisitions may see a gradual uptick during this time.
Future Opportunities
At Luge, we continue to invest in the future of insurance. Below are some areas of interest for us and future opportunities that we have identified in this space.
Portable benefits
There are 11 million Canadians without supplementary health benefits⁴⁹ and 80 million Americans without employer-sponsored benefits⁵⁰. In Canada, 2.9 million people are self-employed⁵¹ and in the U.S., 10.6 million workers’ primary income comes from contract work⁵². These numbers are expected to increase with the economic impact of COVID-19 across. With this trend, we believe it is important for health/wellness and financial benefits to be customizable by workers, and able to support contributions from multiple employers. We believe these benefits should apply to workers that are full-time, part-time, contract, gig, and everything in between.
Insurance underwriting
Underwriting is a core component of insurance operations. We believe that the use of alternative data, connected databases and artificial intelligence could significantly reduce customer onboarding questions and the need for collection of fluid samples in certain cases (for life insurance). The industry can rely on high quality macro and micro data to assess risk, and proactively suggest the appropriate type and amount of insurance coverage. Data is the oxygen that can fuel more automation and efficiency in the adjudication process.
Commercial insurance
Business or commercial insurance is a massive market, but the process of obtaining a commercial insurance policy is still largely complex and manual. We believe that the insurance industry can utilize modern technologies to better serve the micro and small commercial insurance segment and do so in a cost-efficient way. The industry can also benefit from workflow improvements for the placement of larger commercial policies.
Embedded Insurance
The proliferation of digital platforms are opening up new channels for distribution of insurance products. Examples of this include short-term rental websites, digital mortgage brokers, used car online marketplaces and on-demand handyman booking platforms.
This “digital distribution 2.0” opportunity will be further fueled by the transition of many insurers’ technology stacks to the cloud. We believe that there is an opportunity here for InsurTech startups to enable the embedding of simple insurance products through these digital platforms.
Claims experience
Unlike banks, insurers do not have the luxury of frequent customer interactions. The quality of customer service, including claims experience, is of paramount importance. As distribution of insurance products becomes more and more digital, friction of switching between insurance carriers will likely decrease. Insurers can differentiate themselves by providing superior customer support during the claims process. Opportunities include: (i) speeding up claims processing using automation AI and computer vision, (ii) proving more transparent collaboration between multiple parties such as the customer, insurer, adjustor and service providers, (iii) providing disaster support to the customer during their time of need. For example, a property insurer could use satellite imagery data to proactively warn insured customers in an affected area. In addition, the insurer could offer disaster assistance and various recovery services in a way that is fast and effective for customers during a time when they are under a lot of stress.
Rise of “Full-Stack” InsurTechs to insure new risks
The growing trend of “full-stack” InsurTech startups is no surprise to those who have been following the industry closely. Full-stack InsurTechs are platforms that manage the end-to-end process of insurance from creation, underwriting to distribution of policies. Most often, these startups share or completely pass through the risk to an insurer or reinsurer. We believe that more full-stack InsurTech startups will emerge in specific categories of insurance where traditional insurers have been slow to innovate their products. For example, cyber insurance is a small, but growing line of business that many incumbent insurers are yet to fully understand the risks of or understand how to truly evaluate. This provides an opportunity for startups that have technical expertise in cybersecurity to create new underwriting models and design cyber insurance products that the startups can directly distribute. Reinsurers are increasingly interested in partnering with these new age distributors, further creating opportunities for full-stack InsurTechs.
This concludes our four-part series on the Canadian InsurTech Landscape. You can download the entire report here.
[40] Including 11 inactive firms
[41] Including 11 inactive firms
[42] Status Of The Canadian Fintech Landscape by Luge Capital
[43] Other investors covered in the Investments section
[44] Excluding inactive firms
[45] Excluding inactive firms
[46] As of July 31, 2020
[47] In Canadian Dollars
[48] Some companies have not disclosed their financing rounds publicly
[49] 90% of supplementary health benefits are distributed through group plans. Canadian Life and Health Insurance Facts 2020
[50] Catch Introduces Health Insurance Marketplace, alongside Retirement, and Tax Withholding
[51] Statistics Canada
[52] Share of Americans working as independent contractors dips, government data show
