Investments in insurtech companies dropped initially, as investors absorbed the impact of COVID-19, but they have since picked up significantly, with an emphasis on well-established firms, and that trend is expected to continue.
Many of the insurtech firms now being formed are expected to be acquired by conventional insurers and reinsurers, while others will likely remain independent as partners, experts say.
Some may also follow the lead of Lemonade Inc. and Duck Creek Technologies Inc., which recently launched successful initial public offerings, but they will likely remain in the minority, they say.
And others may not survive (see related story).
Willis Towers Watson PLC reported $1.56 billion in insurtech funding volume industrywide in the second quarter of 2020, compared with $912 million in the first quarter, according to a July report.
Insurtech investments cross many different lines of property/casualty insurance, but cyber insurance and cyber security continue to be popular. Expansion in other areas, including professional liability insurance is likely, experts say (see related story).
“Insurtech, generally speaking, is going to see a lot of increased attention and investment,” said Howard Mills, an independent corporate director who recently retired as managing director and global insurance regulatory leader at Deloitte LLP. “The pandemic, I think, has accelerated a trend we were seeing even pre-COVID, that insurers really need to invest more in infrastructure.”
Insurtech attracted increased attention because the insurance sector overall has to some degree been “hobbled” by legacy systems, he said.
“If you think about what’s happening in the pandemic world right now, any investment which is not digitized” is experiencing a “huge wakeup call” to become so, said Vishal Vasishth, co-founder and managing director of San Francisco-based Obvious Ventures, a venture capital firm.
Lemonade Inc.’s successful IPO in July has led to a revived interest in the sector, said Amelia Gandara, senior investment professional in Columbus, Ohio, with Nationwide Mutual Insurance Co.’s venture capital team.
Most new investments are focused on established insurtech companies, observers say.
Phil Edmundson, founder and CEO of Boston-based Corvus Insurance Holdings Inc., an insurtech managing general underwriter, said he still sees a lot of interest in Corvus from investors but smaller and younger companies “may have a more difficult time emerging during this lockdown time.”
“Investment in the insurtech sector in general is moving more towards established and successful companies, so success is begetting success,” said Joshua Motta, co-founder and CEO of cyber insurance and technology firm Coalition Inc. in San Francisco.
Such firms “have been out there for a while and have been able to be successful,” said Edin Imsirovic, associate director in Oldwick, New Jersey-based A.M. Best Co. Inc.’s property/casualty ratings area.
The established companies “have been able to separate themselves from the pack in terms of growth,” he said, making it hard for newcomers to compete unless they find a niche to fill.
Mr. Imsirovic said insurers are “increasingly investing in the later stages of funding,” and into more established firms because they are seeking to make investments that can “deliver some sort of strategic value” to their business models.
Established companies are commanding a larger share of the available capital as brokers and insurers seek “a more digital experience” and look to protect their core business amid COVID-19, said Jason Barg, a partner with Lovell Minnick Partners in Philadelphia, a private equity firm that focuses on financial services.
“If you’re seeking an early-stage funding and have less of a track record, it’s probably more difficult to impart your vision,” said Kassie Bryan, Armonk, New York-based head of solutions P&C Americas at Swiss Re Ltd.
The decrease in early-stage funding in the first half of the year will make it difficult for new entrants, she said.
“On the other hand, the success of Lemonade shows there’s pent-up demand for insurtech firms, and it might give more confidence for people in investing, as they look for the next Lemonade,” or other successful investments, Ms. Bryan said.
Ms. Gandara said Nationwide has continued to make investments with its $100 million insurtech investment fund.
There is a move, however, toward a partnership approach, observers say.
Vikram Sidhu, a partner with Clyde & Co LLP in New York, said many large insurance groups are “actively looking at potential ideas” and are willing to partner with startups. Quality ideas “are still drawing interest,” he said.
Swiss Re has recognized “we can’t do everything ourselves, and so we seek partnerships with companies, and in particular develop strategic partnerships,” said Ms. Bryan. The reinsurer is focused in particular on alternative distribution channels “to bring insurance products to people in new ways.”
Mergers & Acquisitions
So far, there has been limited mergers and acquisitions activity in the insurtech sector because, among other things, insurtech companies are “still defining their value propositions and may not offer a clear strategic fit,” said Mr. Imsirovic of Best.
An exception, he said, is Aon PLC’s acquisition of CoverWallet, a New York-based digital insurance platform for small and medium-sized businesses, which was announced in November 2019.
The general notion in the insurance market is “that partnerships are where the opportunities lie,” said Jeffrey Williams, Arlington, Virginia-based senior analyst with Forrester Research Inc.
Paul P. Chen, a partner with Mayer Brown LLP in Palo Alto, California, said that smaller, niche firms may find greater value in collaborating with incumbent insurers, depending on whether their technology can be quickly implemented.
As relationships between insurers and insurtech firms evolve, the pace of M&A activity may increase, Mr. Imsirovic said.
While Lemonade and Duck Creek’s IPOs were successful, the scope for future public offerings may be limited.
New York-based Lemonade, which specializes in renters insurance, had a $1.6 billion valuation after it went public, and Boston-based Duck Creek, a software provider for insurers, had a $3.46 billion valuation.
In August, it was announced that a Chinese online insurance technology platform, Waterdrop Inc., had raised $230 million in a new funding round led by Swiss Reinsurance Co. Ltd. and Chinese internet giant Tencent Holdings Ltd., and that an IPO is planned.
However, experts do not expect most insurtech companies to launch IPOs.
To conduct an IPO, “you have to have a very large book of business and a large market to go after, so I don’t know that all MGAs would qualify for that,” said Rotem Iram, CEO and founder of At-Bay Inc., a Mountain View, California-based MGA that offers cyber insurance.
“The IPO market has been pretty robust, even in the last three months, including in insurance, but in terms of pure-play insurtech IPOs, I don’t see a lot of those happening any time soon” because they are not mature enough, said Bryan T. Casey, Atlanta-based co-leader of Locke Lord LLP’s regulatory and transactional insurance practice group.
“I’m certain there are players who will go down the IPO route, but on the whole,” startups “are really looking to build up their business to the point where they will then get acquired,” Mr. Sidhu said.
The trend is for private companies to remain private longer and become larger firms, said Michael S. Piwowar, executive director of the Milken Institute Center for Financial Markets and a former Securities and Exchange Commission commissioner.
The benefits of being private are much higher because of the private capital, with a lot of private capital coming into fintech, which includes insurtech, from various sources including sovereign wealth funds or pension funds, with many pension firms doing their own direct investing. Furthermore, the cost of going public has gone up because of regulations and accounting requirements, Mr. Piwowar said.
Insurtechs are more likely to remain independent, Ms. Bryan of Swiss Re said. “Operationally, it can be difficult for an insurtech to maintain its momentum under the umbrella of an insurer,” she said.
The culture of insurtech firms is also different than that of established insurers, she said. “You probably have to work hard to make sure that (culture) continues when bringing it under” a traditional insurer’s umbrella, she said.
She added, however, that while partnerships will predominate among insurers, brokers have a distribution focus and there may be more synergies in adding innovative distribution models.
