While the search for innovation in insurance has been relentless in the dozen years I've been involved with the industry, the insurtech movement has waxed and waned. For years now, funding for insurtech startups has simply waned. It fell from some $16 billion in 2021 to roughly $4 billion last year as some big ideas didn't pan out and as the industry came face to face with more immediate problems, such as the soaring costs for auto insurers.
But the explosive gains in the stock prices of Lemonade, Hippo and Root got me to take another look at the trends in insurtech startups, and there are signs of spring after the long winter. Although I learned that those three marquee names still have a good ways to go before they can be crowned successes, there seem to be lots of interesting ideas bubbling to the surface, principally in AI but also in other areas.
Those ideas likely won't lead to 2021 sorts of investment numbers -- AI startups generally don't require huge amounts of capital to launch -- but the impact could still be huge.
I credit the term "insurtech spring" to Teddy Himler, founder and managing partner at Optimist Ventures, whom I met through the (highly recommended) weekly Insurtech Rap hosted by our friend Dave Wechsler, principal at OMERS Ventures. I followed up with Himler, whose take on the last several years of insurtech is that "mobile didn't really have much of effect on the insurance industry. Okay, sure, you could click your way into a renter's policy or whatever, but the mobile and cloud waves didn't affect the economics or the value chains, or the efficiencies of insurance broadly."
By contrast, he said, "AI, machine learning, IoT, big data synthesis, all of that makes a huge difference."
Himler said the gains in efficiency will be so radical that you can imagine "an autonomous brokerage, scanning leads, ranking leads, automatically filling out PDFs, distributing those PDFs to the wholesalers and the carriers that are in their network, and then quoting and binding."
Short of that sort of breakthrough, there are also all sorts of opportunities to improve processes via AI and to create "co-pilots" and AI agents that support the work, in particular, of agents, underwriters and claims representatives. The question is whether those innovations will occur inside existing insurance companies or whether they will come from outsiders that will be acquired or will sell services to incumbents.
Himler said the innovation will happen outside-in because "the talent doesn't want to go to work with the large insurance companies." He added that he doesn't see insurtech startups as disruptive.
"I hate using the word 'disruptive,'" he said. "I think [insurtechs are] so complementary to what insurance companies are doing."
Adam Chadroff, a principal at Equal Ventures, said the need for innovation related to climate catastrophes will also drive a rebound in insurtech investing, as will M&A prospects, highlighted by the recent announcement that Munich Re is buying Next Insurance for $2.6 billion. But he agreed that incumbents will turn to startups for AI innovations as they get frustrated with the slow pace of internal progress.
He wrote earlier this month:
"Large carriers today are experimenting with home-grown solutions, but the writing is on the wall that they will have more success with customizable, scalable third-party platforms compared to internal developments. Already, >50% of decision makers surveyed at large carriers cite accuracy/reliability and implementation costs as top barriers to pursuing more/faster GenAI investments. Moreover, there is already a large lag between testing solutions and actually implementing them in production, which speaks to the challenges in AI deployment and the need for specialized software and service providers."
He added:
"The real question then is whether this is the domain for venture-backed vertical AI startups or for leading transformation/implementation consultancies: will it be the best engineers who win, or blue chip firms that know how to navigate large carriers? To date, revenues are pouring into the latter; Accenture has been eating most other firms’ lunch, with a whopping $3 billion in gen AI related bookings last year. Our view, though, is that best-in-class technical solutions do not have to be mutually exclusive from enterprise reliability. We believe the winning formula here is the player that can provide leading vertical AI innovation alongside the stability of a consulting firm, and we believe that company is overwhelmingly likely to be a new entrant."
David Gritz, co-founder of InsurTech NY, offered an intriguing analogy for insurtechs in a webinar hosted by Denise Garth at Majesco:
"If you think about how R&D is done in the biomedical industry or the pharmaceutical industry, it’s not usually the Mercks and the Pfizers and the Johnson & Johnsons that are developing innovative products and working at the cutting edge. They are the ones that have the distribution. They have the market share, and they have the controls and the ability to handle regulation.
"Instead, it’s the biotech startups, or the pharmaceutical startups that work in labs, get through clinical trials, and then when they’re proven, then the incumbents acquire them. I think that’s very much what we’re going to see over the next 10 years in insurtech. Insurtech is a great sandbox to play and to test out new concepts, whether it’s technology that can be adopted to improve workflow, or it’s new products that don’t really exist today."
As I said, the stock prices of the biggest insurtech names were what first caught my eye -- Lemonade's and Hippo's shares have roughly doubled since last summer, while Root's price has more than tripled -- but I'd say they're just a small part of the growing optimism. As Matteo Carbone explains in one of his usual, remarkably thorough analyses, the big three are getting their heads above water but are still struggling enough that they aren't likely to be the main models for future innovation.
I realize that venture capitalists tend to see opportunities for venture capital. As the old saying goes, if your only tool is a hammer, the whole world looks like a nail.
But I think the VCs I've quoted have a point. Even if a lot of incumbents manage the confusing transition to an AI-driven world successfully, many won't, and they'll be open to innovations from outsiders.
We'll still have the normal problems with fit. An AI startup's technology still has to mesh with the IT systems of the incumbent. The processes of the startup and larger companies have to be compatible. Individuals within the different corporate cultures have to get along. And so on and so on.
But at least there's a spark for the first time in quite a while.
In the meantime, if you must know, it was 79 degrees in northern California today and will be in the low 80s tomorrow, so I'm certainly feeling spring.
Cheers,
Paul
P.S. If you want to see what sorts of insurtechs have been getting funded, here and here are compilations of the latest sizeable rounds.