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Reality Of Insurtech Investing- Credible Or "Foie -Gras'd"

By Parul Kaul-Green, Head of AXA NEXT Labs, AXA

Parul Kaul-Green, Head of AXA NEXT Labs, AXA

Inspired by transformation in banks and wealth managers, InsurTechs, technology-led companies entering the insurance sector are instigating innovation throughout the Insurance industry.

Investment in the Sector

According to Venture Scanner, there were over 1544 companies classified as InsurTech that had taken in $29 billion funding from 1500 different global Investors in the period of 2012 to end of June 2019. In Q2- 2019 alone, InsurTech took $1.4 billion funding, more than double when compared to Q2-2018. The funding is at pace to reach a record high in 2019.

All this investment activity is creating an interesting dynamic within the Industry long known to spend little on its technology stack (IT budget as percentage of revenue in insurance is 3.6 vs 7.2 in banking, according to Deloitte Insights). There is a competitive threat to the incumbents from some of the companies, but there are also valuable opportunities for partnering.

Opportunities and Threats for Insurance Incumbent

Many incumbents are looking at InsurTech to opportunistically upgrade/modify part of their technology stack or gain access to new data sets and applications. Insurance intermediation and advisory is one such area of application. InsurTechs like Anorak Life bridge the advisory gap by enhancing customer data with bank transaction data to tailor life covers of the insured. InsurTech partnerships within claims such as Shift Technology augment claims fraud handler capacity to detect a wide spectrum of fraudulent insurance behaviours, from opportunistic to organised crime using big data and machine learning. Similarly, Tractable has developed AI algorithms that can learn and perform visual tasks in damage assessment for motor and home claims faster, and at a fraction of the cost of human loss assessors.

But what about the threat to incumbents, are InsurTechs eating the incumbent’s lunch? If we assess the threat from the size of Insurance Gross Written Premium (GWP) captured by InsurTech, results are underwhelming. Oscar, Clover, Bright and Lemonade, the most celebrated of the current crop InsurTech “disruptors” reported combined GWP of $1.55 billion while they continued to post losses. This suggests that despite upward trajectory of valuations, the user traction remains muted.

Investor Enthusiasm and Lessons for Incumbents

What is driving this investor enthusiasm for the sector? The answer comes by way of the size of untapped opportunity offered by persistent global protection gap, and a uniquely investor fuelled phenomenon of Foie Gras’ing of start-ups. Foie Gras’ing is the received wisdom in Silicon Valley that raising more capital in increasingly larger rounds is an essential part of the formula for success for technology disruptors. SoftBank Group’s Vision Fund in particular has come to embody this phenomenon. The fund has showered money on many global InsurTechs such as Lemonade (US), ZhongAn (China), and Policy Bazaar (India). CB Insights analysis suggests that such “foie gras’d” start-ups underperform their less funded peers and post IPO share price performance is underwhelming. However, this does not detract from the fact that “capital” as Insurance barrier to entry is being eroded.

An incumbent would be well advised to continuously scan the horizon for emerging competition and expand opportunities for cooperation with InsurTech to incorporate new technologies and business models.

Weekly Brief

Top 10 Insurtech Consulting/Service Companies in Europe - 2019
Top 10 Insurtech Solution Companies in Europe - 2019
Top 5 Insurtech Solution Companies in UK – 2019

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