The last few years have seen massive investments being pumped into InsurTechs. But will this level of investment continue? And what can InsurTechs do to convince people to continue investing in them? We speak to the experts to find out.
The fourth quarter of last year saw an all-time high of $2bn of investments into InsurTechs, and 2019 as a whole produced 33.9% of total global InsurTech investment recorded to date, according to Willis Towers Watson’s latest InsurTech quarterly report.
“Over the last three years, the investment community has identified the insurance vertical as a fragmented marketplace, seeking out opportunities to add value through strategic innovations via start-ups or leveraging incubator platforms to turn ideas into business plans,” said FIS head of insurance – capital markets JP James. FIS is a provider of financial services technology and outsourcing services.
What happens to all that money?
McKinsey partner Jeff Galvin said that there have generally been at least four overlapping themes to the investments:
- Digital distribution and aggregator models, particularly in P&C: Many players are investing in various direct or aggregator models to provide insurance more quickly and cheaply to consumers and SMEs.
- Ecosystems: A major investment theme, particularly in Asia, involves trying to create ecosystems. Ping An is a traditional player which has invested heavily in the automotive, home and healthcare ecosystems. Many of the tech giants are also integrating customised insurance offerings into their experiences.
- Improved operations, across the business model: Traditional players are investing heavily in technology to cut costs or improve their offerings across the value chain. Pure play start-ups have also emerged to help players with these areas.
- In America in particular, significant investment has gone into new full stack health insurance players.
“We believe the investments in these areas have the potential to create tremendous value for consumers through, for instance, better customer experience, new or tailored products, lower underwriting/claims costs or improved healthcare,” he said.
Unsustainable in the long run
While the amount of money that has been invested might look like a favourable indicator for up and coming InsurTechs, they might have to temper their expectations.
Willis Re global head of InsurTech Dr Andrew Johnston told Asia Insurance Review that such a level of investment is unsustainable in the long term as there are simply not enough market opportunities for this many InsurTechs to survive.
Furthermore, the value of InsurTech businesses on the market is likely to lessen as the hype dies down. And while a slowdown might be inevitable, he said that it is almost impossible to predict exactly how or when it will happen.
“To call it a bubble suggests that it has the ability to burst,” he said. “I don’t know if that will be how we observe the decline or whether or not it will be a slow erosion or whether or not it will just stagnate.”
“In the long term it is unlikely that this level of investment into InsurTech will persist. But I couldn’t possibly say that in the next 12 months things are going to be drastically different.”
Signs of the end
At the same time, there are indicators to suggest a slowdown in InsurTech investments might be on the horizon.
“What we’re noticing is that there are fewer people investing in late series A and series B,” said Dr Johnston. “You typically have the traditional investors operating in seed and series A, making a number of small investments across a big portfolio. And then the industry investors are investing later and later into series B, C, and D, when they know that a proposition is likely to be successful.”
He explained that there is a widening gap between late series A and series B, which is a critical investment stage for InsurTechs, but also arguably the most risky, and the fact that there is less appetite for people to invest there is indicative of a potential slowdown.
Mr Galvin has also observed the same trend. “In the long-run, investment in InsurTech will continue. That said, both financial and strategic players are conscious of where we are in the investment cycle,” he said.
“Early stage companies are finding it harder to get funded. Mid- and later-stage companies with a demonstrated offering and initial customer base are still being funded, but these companies are being pushed to focus on developing sustainable models and achieving profitability.”
“People in general are starting to agree that perhaps the time has come for people to be more serious about the actual value of InsurTechs. But there’s no one indicator, that would signify that the whole industry is changing its view,” said Dr Johnston.
“As a general trend, the global investment market is likely to slow down when compared to last year in 2019,” he added.
How to keep the cash coming?
Investments into InsurTech have come primarily from two sources – the traditional investors who manage their own funds or private equity funds, and the investment vehicles within the industry itself.
Given the strong support the industry as a whole has for InsurTechs, traditional investors will likely continue to be interested, and InsurTechs will just need to be very loud about the value of their technology to make sure the money keeps coming their way.
With regard to the industry investors, Dr Johnston said, “The InsurTechs really have to do what they say they can do to maintain enthusiasm. A bad technological relationship can become quite an emotional one and a damaging one. So InsurTechs have to be very serious about the proposition that they can offer insurers and reinsurers.”
Insurance is a niche market, and InsurTech is essentially a niche market within insurance – a ‘vertical within the vertical’ as Mr James puts it – and InsurTechs need to capitalise on what they are able to deliver within this niche to ensure future success.
“Driving profitability within a very competitive environment leads to the question of longer-term sustainability. Competing against the existing industry leaders, who bring the leverage of larger ecosystems, will make it very difficult for this new generation of providers to survive,” he said.
Reaching the underserved
One area where Dr Johnston feels that InsurTechs should focus on to enhance their value is the underinsured market, especially in developing nations. He pointed out that there are still about 2bn people worldwide who do not have access to even the most basic insurance services, and that approximately 85% of them have access to a smartphone.
“InsurTechs do things cheaply. They can do things effectively from a distribution perspective, and they are looking to circumnavigate legacy,” he said. “And yet they’re focusing on traditionally very competitive markets, which is strange because you’d think that the underinsurance market would be a perfect place for them to try and sell products or generate value.”
“It’s surprising to me that InsurTechs haven’t looked at that model. Actually they could do really, really well by going into markets that aren’t that competitive, where there could be a huge demand for insurance, and where insurance is not being sold for a lot of different reasons.”
“If I am an InsurTech, this is exactly where I would be focusing my attention.” A