(Image source: Pixabay.)
2020 was a year like no other so it should come as no surprise that we aren’t just going to be able to pick up where we left off as the pandemic eases. That is even truer with regard to the high risk, high reward world of investing in InsurTechs. To use a football metaphor, 2020 was a year full of unforeseeable events and “broken plays” and now that conditions are beginning to settle, we need to look at 2021 as a “rebuilding” year; more of a reset than a resumption of what was.
Narrowing Focus; Fewer, Larger Checks
Crunchbase data shows that there were almost 60 InsurTech funding rounds in the final quarter of 2020, lower than the 65 transactions in the same period in 2019, but much higher than the paltry 36 transactions in the second quarter of 2020. Equally revealing is that almost half of the rounds in the last quarter of 2020 were for $10 million or more, reinforcing a longer-term trend towards fewer startups receiving higher amounts in a confusing and uncertain business environment.
In markets like these, investors will become even more pragmatic and disciplined, narrowing their focus to more mature InsurTechs displaying measurable traction and whose products and services are higher on the insurance industry’s adoption curve.
According to S&P, the industry faces a predicted combined ratio over 100 in 2001—the first in three years—the ongoing impact of the COVID-19 epidemic. In response, carriers will refocus on InsurTech that is relatively easy to deploy, can reduce expenses and boost productivity and efficiency. And carriers will increasingly invest in, and acquire, these innovative companies in order to guarantee prioritization of attention to their needs while also keeping these valuable innovations out of the hands of competitors. Some insurers are reducing pilot program exploration in less certain technologies to maintain their focus on those with shorter term payback potential. And as carriers struggle to innovate and keep up with the competition, we can fairly expect an acceleration of transactions involving those InsurTechs seen as most able to help resolve that.
Favored target technologies include:
- big data aggregation, analytics and processing
- no code/low code which provides access to information management directly to line-of-business heads
- artificial intelligence including robotic process automation, computer vision, machine learning and natural language processing
- AI enabled chatbots
- technologies and platforms that accelerate carrier-broker information exchanges and expand distribution channels to drive new business product sales.
- end-to-end digital claim platforms and ecosystems
- digital claim payment solutions for policyholders, providers and vendors are seeing unprecedented uptake across all P&C lines as faster, lower cost and contactless market demands continue to swell
- telematics programs are enjoying broader-based adoption in both personal and commercial lines as new and more compelling business models beyond just pricing discounts are enabling carriers to expand into new demographic segments and increase profitability by reducing customer acquisition, risk and claim costs.
Less Favored Technologies
InsurTechs that are likely to find it more difficult to attract investment in 2021 will be those that require greater implementation effort, create more organizational disruption and carry longer payback periods. These include;
- AI voice
- augmented and virtual reality
- smart assistants
Creative Exits Strategies
Some of the more mature InsurTechs may find their investors seeking exits, especially those funded by venture capital firms who have traditionally had five- to seven-year investment horizons. We should expect to see more strategic acquisitions of these companies by insurance companies, some of whom were also early investors through their corporate venture capital arms.
Recent transactions of this nature include:
- American Family’s acquisition of Bold Penguin (who had recently themselves acquired xagent and RiskGenius)
- Aon’s acquisition of small business commercial quoting platform CoverWallet
- Brown & Brown’s acquisition of CoverHound, a digital property/casualty insurance marketplace, and CyberPolicy, CoverHound’s small business subsidiary
- National General’s acquisition of Syndeste, a technology company focused on the flood insurance market using comprehensive data and analytics, before being itself acquired by Allstate
- Prudential Financial acquisition of direct-to-consumer platform Assurance IQ
- and in two “turnabout is fair play” transactions, InsurTech Hippo acquired insurance carrier Spinnaker and newly minted SPAC Porch acquired insurer Homeowners of America
Other effective exit strategies for InsurTechs will be IPOs (Initial Public Offerings) so long as the stock market remains frothy and investors value future projections more than recent results. Beneficiaries of this channel in 2019 include Lemonade and Root. Hippo is rumored to be exploring the public market as is Metromile which is planning to do so through the newly popular SPAC (Special Purpose Acquisition Company) vehicle. A type of “blank check” company, a SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. Many investors have been exhibiting extremely irrational exuberance for the SPAC phenomenon, which now includes some specializing in re/insurance and InsurTech opportunities.
In fact, investment firm Cohen & Co. launched its first SPAC with a specific insurance, reinsurance and InsurTech remit in early 2019. Its second re/insurance SPAC has entered into a planned combination with InsurTech Metromile which will effectively take that company public in the process.
As is evident, the InsurTech species will continue to thrive in 2021 in spite of and because of the pandemic, just with several differences. As in nature, adaptation is essential to survival.
Insurance Technology, Investment & Innovation under COVID-19: A Tale of Two Realities