InsurTech – My Top Predictions for 2022

As promised, my InsurTech predictions for 2022 are finally here (albeit a week late!)

I give my predictions & thoughts across a broad range of topics including VC fundraising, Cyber ILS, M&A, Crypto and more.

As always I welcome your thoughts (incl. disagreements!)

Enjoy..

Prediction 1 – InsurTech M&A and market consolidation to accelerate in 2022

Last year saw a record-breaking year for venture capital funding in the InsurTech space. At time of writing we are still awaiting full-year figures, but at the 9-month point in 2021, $10B (Billion!) had been raised and deployed by venture capital into InsurTech globally according to research by Willis Re InsurTech (Now Gallagher Re) – the report provides some excellent insights from Andrew Johnston and his team and I’d highly recommend reading it. An incredible pace of fundraising given that 2020 had ended the full-year at $7.1B raised.

When that money is raised, where does it typically go? Well, if you're turning your start-up into a scale-up and you're trying to grow, it's going into things like product development, Research & Development (R&D) and building out talent capabilities. Ambitious players are getting new people in and attempting to set up shop in places outside of their home jurisdiction for expansion. Some of these companies that have excess capital are likely already looking around for M&A/acquisition opportunities. We’ve seen it within the broader (re)insurance sector, whether that's private equity roll-ups in the broking space, InsurTechs joining forces and some carriers making acquisitions.

A good recent example is Cyber MGA, Corvus, which just announced the acquisition of Lloyd’s-based Cyber MGA, Tarian Underwriting from Beat Capital. Clearly a smart strategic move by Corvus, as it provides them with platform via Tarian to grow internationally beyond its US home market. Tarian has access to the global Lloyd’s license network, a talented team and A-rated underwriting capacity from several Lloyd’s syndicates. All beneficial to an InsurTech with global ambitions.

?I’m expecting many more deals to be announced through 2022 similar to this.

?Prediction 2 – InsurTech VC dollar quantum defies logic, although Europe and Asia will continue to close the gap on the US

As mentioned above, breaking the $10B milestone for VC funding in InsurTech for 2021 is a big deal. It’s likely we’ll end up north of $12B for the full-year once results are released later in Q1.

Some might (perhaps rightfully) argue that InsurTech funding is firmly into bubble territory. I’ve regularly seen funding rounds into InsurTech MGAs valuing businesses at more than 20x trailing twelve-month revenues, making these valuations more akin to SaaS (software-as-a-service) valuations of recent years. SaaS businesses have been great successes for VC investors more broadly, as their recurring revenue model and >85% high gross profit margins make them excellent scalable machines for growth. The question is do InsurTech MGAs have the same characteristics? – probably not.

However, I do believe we’ll continue to see VC funding in InsurTech defy logic and increase further, but the rate of growth of funding will slow. Most credible predictions for 2022 point to a slowing global economy, with central bank stimulus to support economies during the pandemic tapering off, a key factor which has pushed equity valuations to record highs. Whilst InsurTech still in my opinion has a long way to go from a growth perspective, it isn’t immune from the broader macro-economic trends that are prevailing.

The USA has continued to dominate VC funding in InsurTech but we’re now seeing real momentum in Europe (which broke >$1B of VC funding in InsurTech last year), Asia and Latin America. I’m expecting the ‘gap closing’ trend to continue into 2022.

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Prediction 3 – ‘Brand-name’ VC houses to become more prominent and active investors in InsurTech

Despite record-breaking VC activity in InsurTech, I have been somewhat surprised that the mega-VCs have not made more of a splash in the sector. The likes of Seqouia, Tiger Global, a16z (formerly Andreesen Horowitz), General Catalyst and SoftBank have made some interesting forays into InsurTech (e.g. Lemonade, Zego and Digit), but nothing like the wholesale moves I had been expecting.

Instead the sector has relied on exciting, highly-qualified specialist VCs to make prominent moves and provide capital to growing businesses (Anthemis, Hudson Structured, MTech, FinTLV and Eos amongst others). I think this points to a couple of things: a) Whilst investing venture capital in InsurTech has proved highly lucrative for some VCs, there appears to be bigger, better and more exciting opportunities outside of the insurance sector for VC opportunities and b) Perhaps game-changing industry disruptors that eat up market share (e.g. Uber) just haven’t materialised in the much older, fragmented and highly-regulated insurance sector. Brand-name VCs love backing industry-disrupting businesses. I’d argue we haven’t seen too many of those yet.

?As the InsurTech sector continues to mature, and we see interesting M&A activity and consolidation to build true disruptors to the (re)insurance status-quo (see Prediction 1), I’m expecting more brand name VCs to come forward and make a bigger splash.

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Prediction 4 – Crypto-insurance product growth to gather pace

?At time of writing, the market value of the cryptocurrency space stands at around $2.2 trillion. This is down about 35% from recent early December 2021 highs. It’s no secret that if you decide to play the crypto game, high degrees of volatility are normal so you better get used to it.

Which begs the question, if this industry has a value of $2.2 trillion, (up from about $300 billion in early 2020 as the pandemic began to hit), then why hasn’t there been more activity in the (re)insurance space to help protect value and insure against certain risks in this fast-growing space? (I’ve seen research that suggests that the insurance underwriting capacity to protect against crypto-property losses available is less than 0.1% of the crypto market cap. It’s nascent for sure).

Part of the challenge has been education. Insurance protects against risk it can understand, model and quantify/price. Anything outside of that tends to be a no-go. There have been some interesting forays into crypto, for example Coincover, a first-of-its-kind liability policy, with flexible limits from as little as ￡1,000, was created in the Lloyd’s Lab by Lloyd’s syndicate Atrium in conjunction with Coincover to protect against losses arising from the theft of cryptocurrency held in online, hot wallets.

I think 2022 is going to show us more regarding how the (re)insurance industry can help protect value in the cryptocurrency space, and just as importantly help unlock its growth and education, as awareness and the regulation in crypto matures. After all, our industry is a key lever for economic growth and unleashing innovation in burgeoning sectors like digital assets.

?If you want to learn more about the meeting together of the cryptocurrency and (re)insurance industry, then I’d recommend reading InsTech London’s report which you can find in the link below:

https://www.instech.london/insight/demystifying-crypto-insurance-opportunities-challenges

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Prediction 5 – ILS market could move deeper into Cyber via InsurTech

For at least the last 5 years, a number of people in the industry have been asking why the Insurance-Linked Securities (ILS) market (that’s alternative capital backing insurance contracts as opposed to traditional (re)insurance capital) hasn’t been making more significant moves to help underwrite cyber risk, given the growth of the space in recent years.

?A fair question, but one has to better understand the market dynamics at play to realise why it’s still nascent today:

?1.????Primary carriers looking to offload risk have had a pretty limited reinsurance market dominated by 4 major players (combined 60% market share) to go to that write cyber reinsurance i.e. there hasn’t been a lot of options to lay risk off to.

2.????It gets worse as one heads up the value chain and looks at the retrocession market (that’s reinsurance for reinsurers!). ‘Retro’ has been preoccupied with ‘trapped capital’ issues given the large natural catastrophes of 2017-2021 and the ongoing US casualty/social inflation challenges. It’s led to a pullback in certain retro capacity offerings and that works its way downstream to reinsurers, primary insurers and insureds.

3.????The level of insured loss, premium and exposure data is still pretty thin when compared to traditional property-catastrophe business making cyber risk modelling and pricing more challenging.

4.????However, reinsurers and ILS are still prepared to write cyber risk (despite ongoing ransomware frequency and severity loss acceleration) if the price is adequate relative to the risk and you’re high enough up in the insurance tower.

Cyber risk exposures are only going to grow with the continuing digitisation of the world. That means demand will continue to increase from the corporates/governments and individuals for proper risk management and insurance protection products against cyber perils.

I think 2022 could be the year where we see some more significant moves by the ILS market to use InsurTech and more extensive data providers to support modelling and pricing efforts in the cyber risk space, and structure novel products that can support primary and reinsurance carriers in the market.

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?Prediction 6 – More InsurTechs to begin the move toward ‘full-stack’ in 2022

?InsurTechs that have chosen to go down the route of underwriting risk (as opposed to selling data and technology to incumbent insurances) have often picked the managing general agency (MGA) model.

For those not familiar with this structure, MGAs setup a vehicle to source and underwrite business. But rather than requiring the need to raise a large balance sheet with sufficient capital that satisfies rating agencies and regulators to provide you with a license to trade, underwrite, collect premiums and pay claims ((like a traditional insurance company does), you effectively ‘rent’ the balance sheet, financial rating and regulatory licenses of an existing insurance company. They in turn ‘delegate’ authority to you to underwrite (and potentially pay claims) on their behalf. In return, the MGA receives commissions as compensation whilst (hopefully) generating an underwriting profit for their insurance company backers.

Clearly, the advantage of this model is speed, agility and a capital-light model. MGAs can focus on sourcing business, building broker and client relationships and use their particular talents to underwrite niche business (with the support of a technology stack to generate expense efficiencies and improve risk selection and pricing). Your insurance backers get access to high-quality underwriting earnings that might be more difficult (and costly) to underwrite in-house themselves. If the MGA does its job well, it can scale quickly and earn a phenomenal amount of money (MGAs are valued more like insurance brokerages on multiples x EBITDA earnings) whilst satisfying your capital provider’s return hurdles. The disadvantage is that as a MGA you’re very much beholden to the underwriting appetite of your insurance backers (incl. risk pricing parameters, what you can and can’t write etc). If your backers decide they no longer like that type of business, (either by restricting or even pulling completely the underwriting capital/capacity), it could leave the MGA in a difficult position.

What we’ve seen recently is a few high-quality MGAs (e.g. CFC Underwriting in the Cyber space) go down the path of raising some of their own capital to underwrite with (and taking a share of each risk with this capital) and balance the rest via the insurance company partners’ capital. Eating one’s own cooking as the saying goes. This can demonstrate a greater alignment of interests between the MGA and the insurance company/carrier (we win and lose together). This is Step 1 in the move toward going ‘full stack’ and underwriting completely with your own capital.

I’m expecting more news like that of CFC to emerge, particularly in the InsurTech space, and those players that have been around 5+ years with a proven business model and track record now believing in having their destiny placed more in their own hands.

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Prediction 7 – Public listings for InsurTech to slow significantly as more InsurTechs choose to stay private for longer

The last two years has seen an explosion in the broader technology sector using the public markets as a way to create an exit for existing private capital, whilst raising fresh capital for expansion opportunities.

Unfortunately, the track record of technology-based players going public has been mixed at best, especially in the InsurTech sector.

Lemonade floated in July 2020 via a traditional IPO at a stock price of $29, reaching an all-time-high of $164 per share in July 2021, before falling dramatically to around $39 at time of writing. A fall of over 70% from it’s all-time-high. Lemonade has held a Price-to-Book (P/B) ratio of >7 historically at its higher share prices. To put that into perspective, traditional insurance carriers have been changing hands over the past 5 years for between 1-3 x P/B ratio. The public markets were valuing Lemonade like a tech company, Lemonade has been growing quickly, investing in technology and marketing to attract new customers at an even greater rate, which is putting pressure on financials and therefore the stock price in the near-term. It’s recently announced acquisition of Metromile to accelerate its efforts to move into the usage-based auto insurance sector will be fascinating to watch. Metromile itself went public via SPAC merger in November 2020 for $1.3B. Lemonade is picking up the business for just $500M, over 60% reduction in equity value demonstrating a disastrous run as a public company for Metromile.

What does this say about the public markets as a route for InsurTechs? - it’s certainly not all plain-sailing and you really need an established profitable business model to sustain a high stock price in the public markets. That’s why I expect more InsurTechs will shun the uncompromising glare of the public markets in 2022 and choose to stay private for longer as they scale.

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Prediction 8 – More ‘big name’ P&C insurance talent to move from traditional industry into InsurTech

An interesting observation over the past year has been the huge movement of talent in the (re)insurance sector. On the broking side, it’s no secret that the failed merger of Willis-AON has created opportunities for challenger brokers to lure away top, disenfranchised staff.

We’re now seeing top talent from the ‘traditional’ (re)insurance sector move into InsurTech in greater volume. A clear signal that the marketplace is maturing when it’s able to attract long-tenured experienced executives away from incumbents to fast-growth start-ups and scale ups.

Back in August 2021, I wrote a LinkedIn article titled The ‘Talent Problem’ in Insurance – can it be solved?, where I discussed in greater depth how InsurTech is likely going to be a key route for bringing in fresh talent to the marketplace. You can read it here https://www.dhirubhai.net/pulse/talent-problem-insurance-can-solved-premal-gohil/

I’m expecting the talent trend to continue and accelerate into 2022. My prediction above on fundraising (Prediction 2) is related, as part of the fresh funds raised by start-ups and scale-ups are being used to build out talented teams. These InsurTechs are for the first time able to compete on salary and bonus packages vs incumbents, whilst offering the attraction of significant stock option plans that have the potential to be worth a lot of money to the holder in the future if the company grows as expected.?

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Prediction 9 – Corporate VC activity in InsurTech to increase meaningfully in 2022

Will we see more Corporate Venture Capital (CVC) activity in 2022? I think so. My current employer, Liberty Mutual, has had some great success with our in-house VC fund, Liberty Mutual Strategic Ventures. Since 2016, the fund has backed some exciting InsurTechs and start-ups including Jupiter Intelligence, REIN, Edge Case Research and Snapsheet. It’s delivered excellent strategic and financial returns for Liberty Mutual, whilst keeping us plugged in at the forefront of innovation in the insurance sector.

Across the industry, players like Munich Re announced the close of its $500M venture fund (Munich Re Fund II) in October 2021 focusing on investing in InsurTech and Cybersecurity, Future of Transportation and Industrial Equipment spaces amongst others.

Interestingly, incumbents have had less success with innovation labs, accelerators and incubation studios. I’d call out the Lloyd’s Lab (Lloyd’s of London’s in-house accelerator) as an exception, but overall I don’t think the industry has derived the value it would’ve expected from these initiatives going in.

As a result, I think we’ll see a more meaningful increase in CVC activity in the InsurTech space in 2022 - this lever has generally proven value for its sponsoring parents and the portfolio companies they back, and it’s possible we may see some more large incumbents, who do not already have CVC programmes in place, decide to launch them.?

So there you have it. My Top predictions for InsurTech in 2022. I’ll revisit in December to ascertain how close (or not!) I was.?

Disclaimer: The views expressed in this article are my own and do not reflect the views of my employer or other affiliations.