Will #insurtech investments continue?

This article is part of The Future of Insurance -LinkedIn's Newsletter Series, you can subscribe here. Important note: nothing in this article should be interpreted as an investment advice, or as an offer to buy or sell securities.

Insurers, brokers and reinsurers have been influenced (and at times challenged) by profound?changes in customer expectations and technology overall. As a result, many insurers initiated years-long transformation projects (some successful, some not...), many insurtechs were born, and investments started pouring into the industry to boost this transformation. I sometimes focus on industry problems I observe or innovative solutions being built, and fail to give enough attention to our role in the world, as an industry and as insurance professionals (in a recent conversation, a good friend reminded me of?this!).?To underpin the importance of the industry and its efforts, here are some numbers from US alone (III report):

• $5.8 trillion: assets under management in 2017
• $602.7 billion: insurance industry contribution to the U.S. gross domestic product in 2017
• $752.5 billion: P/C policyholder surplus on hand at the end of 2017 for ensuring individuals and businesses claims are paid

Despite the fact that our industry?started out as a pioneer in the market and continues to innovate, it can feel stale to those of us who’ve been in it a while. But?what many initiatives by insurers, brokers, and others over the years?(and?what #insurtechs?have?achieved so far) has shown, is?that the industry is finally and truly changing.?The latest insurtech report by CBInsights and WTW once again confirmed that the transformation and innovation will continue, see their findings below.

Some colleagues believe?that the rising trend will continue and some -especially looking at the stock prices of IPO-insurtechs- have different opinions. Even though I personally think that #insurtech investments are still in the "hot phase" and will continue to rise, I asked the experts: Emy Donavan - Venture Partner at FinVC, Eugenio Gonzalez - Principal at Plug and Play Ventures, and Adam Blumencranz - VP at NFP Ventures.

#1 Overall funding into insurtech space still booming

Despite the pandemic and its economic consequences, total investment in insurance technology for 2020 appeared to be more robust than previous years, and H1 2021 passed the entire 2020 figures, reaching record levels: $7.4 billion! Interestingly enough, around 15 investments were "mega-rounds" ($100M+) and they summed up to $3.3billion, which is more than half of the total investments. This indicates the maturity of early-on insurtechs got to a point where they're able to secure these mega-rounds, and I'm curious to see if we have more early and mid stage insurtechs to mature to those levels so we can see even more mega-rounds in the space.?

Emy commented: “To me, innovation in the insurance space is probably about 10 years behind that in the payments space. We aren’t living in a world where we have to go to the bank to get cash and initiate a wire transfer anymore, but some insurance is still transacted that way. To put it mildly, with Insurance we’re talking about a space where there is still a lot of room for upgrades. Having lived and led commercial insurance lines for almost 20 years, I understand many of the challenges in the space. Having now been on the investment side for a short while, I understand how these challenges are likely to be solved through a different lens. There will be winners and losers in the next wave of InsureTech investments, but it’s imperative that we keep seeking out innovators, whether those be in distribution, underwriting, claims management or tech stack more broadly. There are a lot of inefficiencies that frankly confound investors and insurance professionals alike. Where that sort of dynamic exists, there’s a ton of opportunity.”

Eugenio commented: "InsurTech is definitely booming. We've done over 90 insurtech deals over the last four and a half years and this year alone we've done 13 investments. It's not surprising that a large number of VC dollars are going into this space. First, the size of the industry is massive. The Financial Services sector comprises 20-25% of the world economy - insurance is a $5.8T GWP industry. Second, there's a lot to do still. When you look at the NPS of the insurance companies, it's one of the lowest there is. Car insurance, which has an NPS of 41%, is the best line of business. Health insurance, not so good. The industry average is closer to 20%! That's basically telling you that there's plenty of room for improvement."

Adam commented: "I think we’re still in the early innings of the insurtech movement. Despite gaudy investment rounds, and success stories, the reality on the ground floor for most incumbents is that they’ve barely scratched the surface in terms of the potential for change. We’ve seen progress in personal auto and home, and small commercial but by and large, there remains massive opportunity across every line, size, and vertical for improvement."

#2 Property/Casualty leads, but it's hard to ignore Life/Health

When we look at the insurtechs funded throughout the years, in terms of lines of business, 66% of them are in the P/C space, led by auto insurance, and 18% in Health and 16% in the Life insurance space. Q2'2021 was slightly different where the number of P/C transactions represented 74%.

Eugenio commented: "Historically we've seen a larger number of deals on the P&C side rather than on the L&H side. However, COVID-19 has been a massive boost for Life and Health insurtech startups. In fact, compared to previous years, we've done more L&H deals than P&C. Besides COVID-19, I believe that there are huge tailwinds for L&H to pick up the pace, e.g. an aging population, a decrease in fertility, a rather worrisome savings rate and pension situation, an upcoming wealth transfer from Boomers to Millenials, skyrocketing student debt, etc."

#3 Investments in Distribution wins against others combined

55% of transactions were insurtechs with a focus on insurance distribution - such as sales, digital brokers, MGAs, lead generation, including some of those mega-rounds I pointed earlier. When I see a distribution insurtech, I think of improving insurance sales with different approaches but more importantly creating a differentiated customer experience, which is exactly what insurance industry needs. An open question for me is if we will see a shift from distribution-focused investments with these high amounts, to more technology innovation-focused investments such as blockchain, crypto, software-as-a-service, etc. Maybe the answer is simply no, and unfortunately I don't have the numbers to answer that.

Adam commented: "I’m not surprised distribution related co’s (eg: sales, digital brokers, MGAs, etc.) continue to make up a majority of the insurtech transactions. Long sale cycles make B2B challenging, forcing founders to become beholden to incumbents. If the goal is to accelerate pace of change, improve customer experience and leverage data in unique ways for underwriting or risk management purposes, owning the entire stack provides more control over the fate of the business."

Eugenio commented: "I think the figure is a bit misleading. Associating MGAs solely with distribution means labeling a large number of startups working on innovation at different levels solely with sales. Some MGAs have a B2C component to them but that's not really telling the whole story. We have several MGAs in our portfolio whose biggest breakthrough comes from their underwriting engines or the data they're leveraging from their claims process rather than from the distribution / UX side.?"

#4 Good to see more insurtech IPOs but what happened to stock prices?!

We had some notable deals recently which include Hippo Insurance's IPO, Oscar Health's $7.9 billion IPO, Clover Health's IPO in January, Lemonade's $7 billion IPO, Metromile and Spac Deals, and Insu Acquisition Corp. Just for a second, forget that you know the insurance space, and imagine you're an individual investor and checking out the insurance industry to invest, because you kept hearing about these recent IPOs and the buzzword #insurtech...?On one hand,?I wonder how?the next?set of insurtech IPOs will play out: how long should?we?wait for them to find their higher price levels, and?when will they "stabilize"? On the other hand, change won't happen overnight especially in a traditional industry, so maybe the stock prices are not the best metric to look at (at least for now).??

Eugenio commented: "Full disclosure, we're (very proud) investors in Hippo.?Unlike 2020, 2021 has been a difficult year for growth companies in the stock market. Particularly, for companies that went public through SPACs, which are getting hit hard with redemptions and falling stock prices. But price doesn't reflect the underlying story. The reality is that the majority of these companies are growing faster than their peers and these?public InsurTechs are free from the?legacy infrastructure/culture their competitors have. Just look at how Assaf thinks about home insurance?and peace of mind for your home - it's a completely?different story from traditional insurers - and more importantly, how they execute on it. I strongly believe it's only a matter of time before the prices start trending upwards again, in line with?the growth some of these companies are exhibiting."

The insurtech outlook (globally!) delves deep into the future of insurance and shows that rest of 2021 will continue to be a year for insurers and brokers to further transform and innovate. Many different insurance sectors have been redesigned by the pandemic, allowing insurance companies to take full advantage of the opportunities and markets they find themselves in. Technologies like AI/ML, IoT, blockchain, wearables are experiencing growth in the insurance industry, and distribution insurtechs such as brokers, lead generation and MGAs are opening up a wide range of opportunities for insurers to grow with better customer experiences, or in areas they didn't used to have the ability to reach. It looks like this trend will continue in 2022 as well! ??

On a separate note, InsureTech Connect (ITC) is almost a month away! Based on my experience, it is THE conference to network fellow insurance professionals and connect with investors. ITC was kind enough to offer?$200 off?of tickets for readers of this Newsletter - Future of Insurance!

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Sources: CB Insights, McKinsey & Company, TechCrunch, Yahoo