(Image credit: Adobe Stock.)
Interest in InsurTech has grown dramatically over the last six years with total investment surpassing $1 billion quarterly in 2017, according to Willis Towers Watson/CB Insights. Insurance is a trillion dollar industry that’s largely been bereft of new entrants, making it an obvious target for investors of all types.
Bootstrapping and angel funding have traditionally been the ways that startups launch, but InsurTech is seeing a variety of benefactors open their wallets to companies focused on changing the insurance landscape. New funding models are helping startups increase market share and influence in the insurance industry. In some instances, market entrants like Lemonade are hoping to completely reinvent the wheel, while other startups are aiming to be more collaborative, layering their offerings in with existing insurer ecosystems. Regardless of approach, InsurTech companies continue to acquire funding from a new participants hoping to gain or increase their foothold on the insurance market, including:
The Giants
When Google famously entered, then retreated, from insurance in 2016, many insiders believed the complexities of the market insulated traditional insurers from the tech giants. After all, if Google was unable to find success, all other tech companies were doomed to the same fate.
By the end of 2017, the dynamic had changed. CVS’ acquisition of Aetna for a massive $69 billion sent shockwaves throughout the space. Since then, other companies are following CVS’ lead. For example, Fifth Third Bank completed acquisitions to expand market presence in insurance, viewing the investments as a way to create new value-added capabilities. Three of the “Fortune 25,” Berkshire Hathaway, Amazon and JP Morgan Chase, recently announced their intentions to take on healthcare in the U.S.
Health insurance providers should consider themselves on notice. These latest deals and intentions highlight how deep-pocketed companies with little or no insurance experience are still circling the industry, even if nascent attempts from outsiders failed to materialize.
The Reinsurers
In the past five years, one of the more interesting developments has been the expansion of reinsurers’ roles in the startup funding space. According to CB Insights, InsurTech investment from this group has increased 100-fold since 2013.
The increase in reinsurer funding should be no surprise due to the typical tension between InsurTech companies and insurers. Generally speaking, InsurTech players look to solve a problem for an insurer, like improving the customer experience of purchasing a policy, but there are challenges on both ends. Insurers already have an infrastructure in place that aligns with their business goals and regulations, while InsurTech companies can’t fix what they don’t own.
This dynamic has created an opportunity for reinsurers to bridge the gap by funding startups that connect front-end technology with established insurance-specific stacks. If this approach gains more popularity, it could have far-reaching consequences on incumbent insurance companies by creating tremendously well-funded competitors with deep insurance knowledge. Tech start-ups operating as full-stack Managed General Agents (MGA) with reinsurer backing have started to proliferate. In the U.S., Sirius is backing Pie Insurance, while the Ascot Group in the U.K. spun out Ethos Specialty Insurance.
The Crowd
If companies like Kickstarter and GoFundMe cracked the door to crowdfunding, cryptocurrency swung it wide open. Initial Coin Offerings (ICOs), where companies create their own digital currencies, have become a mainstream method for startups and established companies to secure funding.
ICOs have two distinct advantages over a typical funding round. First, most ICOs trade their coin in exchange for Bitcoin and Ether (considered the gold and silver of digital currency). This expands the pool of participants beyond VCs to include individuals that are non-traditional investors. Though regulations seem likely for the ICO marketplace, the current lack of oversight lends itself to relatively seamless processes for token creators to push an ICO to the public for investing. Companies like InsurePal and InsureX have been able to launch and rapidly raise capital, increasing speed-to-market for their products.
This rise of ICOs will complement traditional funding models but is unlikely to replace them. KPMG emphasizes how angel and early series investments are continuing, and companies like Metromile and Oscar Health went through traditional funding mechanisms to raise hundreds of millions of dollars.
For InsurTech companies, the variety of new funding participants and methods in the insurance market has opened a wide world of possibilities. Ideas and concepts that might previously receive minimal funding offers are now seeing dozens of options. The environment lends itself to an even larger wave of InsurTech capital in the coming years and will continue the upward trend in overall market funding, which has increased for six straight years.
Lemonade Announces Reinsurance Support from Lloyds, Berkshire Hathaway’s National Indemnity