The title of this article brings to mind two famous quotes from American culture. Mark Twain is reputed to have said, “The reports of my death are greatly exaggerated.” The saying could also apply to the frequent statements by insurtech detractors who have recently pronounced its death, following an incredible eight-year run, give or take a year. To appropriate another famous line, Dorothy, in "The Wizard of Oz," said, “Toto, I’ve a feeling we’re not in Kansas anymore.” The phrase has come to mean that we have stepped outside normality; we have entered a place or circumstance that is unfamiliar and uncomfortable—as we most certainly have over the past three years.
Conflicting Evidence
To be sure, there are several good reasons one might suspect the death of insurtech, including the recent collapse in share prices and unsustainable underwriting ratios of public insutechs such as Root, Lemonade and Hippo. Private insurtech valuations have slid along with those in the tech sector overall. Many insurtechs have laid off staff to conserve cash. Some have merged with others in response to adverse market conditions as inflation concerns and spiking interest rates have altered the investment and economic landscape. All combined, it is understandable that insurtech has at least been declared unhealthy.
In fact, 2022 was the first year to see an overall year-on-year drop in insurtech investment since 2016. Globally, annual funding halved between 2021 ($15.8 billion) and 2022 ($7.98 billion). Quarterly insurtech funding for Q4 2022 fell to the lowest level since Q1 of 2020, decreasing 57% quarter over quarter from $2.35 billion in Q3 to $1.01 billion in Q4, according to a recent Gallagher Re report.
However, there are a number of private insurtech businesses reaching real scale, including Zego, ManyPets, Next Insurance, Ethos Life, Alan, At-Bay and Coalition, to name just a few. Their loss ratios are good, their unit economics are sensible and they are growing. An impartial review of the marketplace reveals that there are numerous insurtechs that are succeeding, even if operating under very different business conditions than before. And just days ago, Equisoft, which provides digital solutions to the financial services industry, including life insurers, announced a sizeable $125 million in funding to fuel international expansion and R&D.
Funding vs. Results
It’s ironic that a common perception of insurtech success was most recently and mainly based on the amount of funding raised and accompanying valuations, characterized by our fascination with “unicorns” (private companies with valuations of $1 billion or more) and even a few “decacorns” ($10 billion).
Revenue and EBITDA were rarely addressed, if they even existed. But customer acquisition costs for these insurtechs were too high, retention not high enough. Investment experts are quick to point out now that easy (cheap) money and inflated and unrealistic valuations were a big part of the “bubble” that burst starting in 2021. The erroneous theory at the time was that the more capital these startups could attract, the faster they could scale to profitability. In today’s world, revenue, growth, traction, margin and EBITDA are now the most meaningful measures of success in a return to business fundamentals, particularly for new-entrant insurers.
See also: Is Insurtech a Superpower?
“Insurtech” Confusion
Further confusing this discussion is the interchangeable use of the term “insurtech” to describe two very different categories of companies:
- start-ups and early-stage companies that incorporate technology and develop solutions for use within the insurance ecosystem, and
- “pure play” insurance companies that have developed partial or “full stack” businesses from scratch employing digital and other new technologies, selling and servicing insurance
Although the relatively small latter group has had less market success than the former, too many industry pundits have lumped them all under the same banner of insurtechs, of which there are thousands.
It’s important to describe what’s in the scope in the definition of insurtech. Although many simply consider new insurance entrants, such as digital-first native companies, as “insurtechs,” the vast majority fall into the category of solution providers or enablers. In other words, companies that partner and therefore are dependent on existing carriers are the broader picture. They may be less flashy compared with a new digital insurer boasting that it will change the insurance world, but they are smarter, faster and nimble. In retrospect, the over-played disruptor moniker did a disservice to the vast insurtech movement.
The “full stack” insurtechs have failed to capture the level of meaningful market share their founders and investors envisioned because they have run headlong into the reality that selling insurance profitably is hard and that no amount of exciting technology alone can overcome that. Factor in the extreme inflation, and it is evident that most are ill-equipped to ride the storm.
Some of the other “insurtechs”—let’s call them technology solution providers—have succeeded or are on the road to success because they have developed valuable solutions and learned how to sell them to legacy insurers, which is an extremely nuanced act itself.
Insurtech Success Stories
Many insurtech technology providers are thriving. Among the most successful categories: cyber risk/insurance, distribution, embedded insurance, connected devices including telematics, virtual claims inspection, automated damage estimating, digital customer communications, aerial and geospatial underwriting and claims solutions, e-payments for billing and claims and predictive analytics including fraud detection and claims workflow management.
And there is another wave of insurtechs that are nearing success with innovative solutions leveraging blockchain and virtual and augmented reality.
Partnerships, Platforms and Marketplaces
The market downturn has caused insurtechs to become even more creative in their search for traction and growth. Partnerships, platforms and insurance technology marketplaces are three beneficiaries of this strategic shift.
A few selected examples of insurtechs that have partnered with other insurtechs, information providers or insurers:
- Tractable has teamed up with Verisk to offer AI-powered estimates for property damage. Leveraging AI, the identification, classification, and measurement of property damage will be possible. And both Tractable and Verisk customers will now have access to end-to-end, automated property claims.
- Zendrive and Sfara have partnered with CCC Intelligent Solutions to deepen and broaden their telematics capabilities, including connected car data to drive better insights and claims experiences for auto insurers and drivers.
Several insurtechs are creating purpose-built platforms (vendor hubs) that enhance the value they deliver to their insurance clients by quickly adding relevant technology capabilities while avoiding the cost and time of developing these capabilities internally. One of the better examples of this strategy is Betterview, a property intelligence and risk management insurtech platform that P&C insurers use to identify and mitigate property risks of many kinds, including wildfire, hurricane, hail and catastrophe.
Over the past year or so dozens of insurtechs have joined one or more so-called marketplaces, basically core systems provider platforms used by insurance carriers to access a wide variety of point solutions and services:
- Guidewire, Duck Creek, Majesco and EIS have all seen tflock to their electronic platforms or “marketplaces,” through which insurance clients of their cloud-based core systems can access these point solutions on an as-needed basis without leaving their core system environment through relatively simple API connections
- Guidewire Marketplace alone now has 140 “partners,” and Duck Creek Content Exchange has almost as many; some providers reside on both platforms.
Follow the Money
Boston Consulting Group research shows that it took seven years, from 2012 to 2018, for $15 billion in equity funding to be invested in insurtech. In 2019 alone, $15 billion was plowed into insurtech, only to increase again in 2020 and 2021.
Even though the success of an insurtech is no longer measured in funds raised alone, VCs are still considered as savvy a breed of investors as may exist—especially so in today’s economic environment—so we still value their opinion when they vote with their checkbooks.
There were more than 20 funding events in the insurtech sector during each of January and February 2023, according to a review by Digital Insurance, including Ushur ($50M), Wefox ($455M), OpenEyes ($18M), Floodbase ($12M), Flock($38M), EvolutionIQ ($33.1M), Goose ($4M), Joyn ($17M) and BOXX ($14.4M), as well as the earlier-referenced Equisoft ($125M).
Consolidation and M&A
Consolidation is one effective business strategy for insurtechs that have developed valuable technology but are running out of cash and unable to attract more capital. While this typically results in dilution for founders and investors, it ensures that management and employees remain employed and able to see their vision realized while still participating in the overall success of the combined business. One of the better-known examples of this is the acquisition of Metromile by Lemonade.
See also: Outsourcing 2.0 to the Rescue
Looking Ahead
One of the most important and valuable contributions of the insurtech movement has been the stimulation of greater innovation and the acceleration of much-needed transformation in the insurance industry. Indeed, several large carriers have recognized and embraced this value by creating separate corporate venture capital investment funds to encourage the growth of these companies and the further development of these insurance technology solutions.
In addition to these significant investments in insurtechs, insurers have incorporated their underlying technologies into their own strategic planning around automation, digitization and modernization. Often labeled as slow to change and encumbered by legacy technology, insurers have come to recognize these realities and have embraced the opportunities to address them as embodied in insurtechs. Going it alone is no longer viable for any forward-thinking business.
We should not confuse the relatively slow adoption and implementation cycles often displayed by insurers with any lack of interest or enthusiasm for change. Insurance corporate culture will simply take time to correct as change management initiatives take hold. But make no mistake: Insurtechs and the insurance industry at large are co-dependent and will become increasingly so.
2023 will likely also present opportunities for legacy insurance carriers to acquire some of the technology-enabled solutions and talent they are interested in, and at a reasonable cost.
Dave Wechsler, a principal with OMERS Ventures and lead insurtech investor, recently shared with us his prediction that “those who can optimize their businesses and drive revenue around slower adoption rates will do fine.” In January 2023, OMERS led a $17.7M investment in Joyn, which integrates insurance, data and technology expertise to underwrite and bind E&S policies.
It is generally recognized by insurers and investors that insurtechs, and the broader tech-enabled startup community, is a highly valued contributor to innovation, employment and the economy overall. Friday’s federal government intervention in the Silicon Valley Bank to make the SVB depositors whole, including startups, VCs and investors, is strong and encouraging evidence of that recognition. Despite this unnerving development, numerous insurtechs have assured investors, employees and customers that the demise of SVB will have no direct impact.
To be clear, some insurtechs will struggle, and there will even be some fatalities, but the majority of insurtechs are making the necessary adjustments and operating successfully while basically sheltering in place and preparing for the next exciting phase in the evolution of this critical “movement,” which is very much alive yet quite different.
