The first year of the COVID-19 pandemic cost insurers $55 billion, a staggering loss only eclipsed by Hurricane Katrina. And yet, in the shadow of that eclipse, the industry has undergone a historic transformation. Rapid digitization is taking place, one that is fuelling a hunger for innovation and mergers and acquisitions that are putting insurtech, a wave of tech-focused insurance companies disrupting the current industry model, front and center.
Accelerated funding and dealmaking in Q4 2020 and the start of 2021 combined with major innovation plays by some of the world’s biggest insurers suggests this may be insurtech’s moment. It’s unsurprising, prior to the pandemic, insurers had only minor incentives to innovate – the insurance industry’s model seemed to be working. As insurance-focused credit rating industry AM Best pointed out in its innovation benchmark, “developing an innovative culture among insurers has been an ongoing challenge.”
But that’s changing.
“COVID-19 upended the industry’s methodically slower pace, causing insurers to act swiftly to adapt to the rapidly changing environment,” writes the agency. And that momentum looks like it will continue.
A Hot Topic
Although social distancing and its effect on consumers’ adoption of technology in every aspect of their lives can’t be denied, it’s also a scapegoat for a digital shift that has been taking place over the past decade. Every aspect of the industry from quote issuance and claim settlement to the customer experience and back-office capabilities has felt it. For the incumbents, the pandemic has made it undeniable. And that’s reflected in the past year’s investment and dealmaking.
According to data from Boston Consulting Group, in 2020 global funding for insurtech shattered previous years, climbing to $7.5 billion, a 21 percent increase from 2019. Property and casualty (P&C) insurance saw the most dollars flowing towards it ($3.4b billion) followed by health insurance, multiline insurance, and life insurance.
Insurance giant Lloyd’s of London saw Ki Insurance, an algorithm-driven tool for Lloyd’s brokers to evaluate risk in real-time, raise a $500 million private equity round in late 2020. Around the same time, Bright Health, a U.S. insurtech company using technology to simplify health insurance, raised its own round of $500 million to help with expansion plans across the U.S.
And some of the biggest capital injections were backed by major insurers.
Investing As a Policy
A global survey by Deloitte found 79 percent of insurance executives believe “the pandemic exposed shortcomings in their company’s digital capabilities and transformation plans.” In response to that, nearly all (95 percent) of those surveyed say they’re “already accelerating or looking to speed up digital transformation to maintain resilience.”
But their approach to investing in insurtech differs.
Hippo, a U.S.-based insurtech that uses artificial intelligence and big data to instantly provide property insurance quotes, closed a massive $350 million round at the end of 2020. The funding was provided by Mitsui Sumitomo Insurance Company, a subsidiary of MS&AD Insurance Group Holdings, one of Japan’s largest insurers. By March 2021, Hippo had converted that momentum into a merger with a special purpose acquisition company (SPAC) started by LinkedIn co-founder Reid Hoffman and Zynga founder Mark Pincus to take the company public. The deal values the insurtech at $5 billion.
SPACs have held staying power despite fears they could be a passing fad. In May, U.S.-based Transverse Insurance Group’s SPAC Lakeview Acquisition filed with the SEC to raise up to $250 million in an initial public offering. And CCC Information Services, which provides data and technology to the auto and insurance industries, announced in February it would be using the SPAC route to go public with a deal that valued the business at $7 billion.
For large insurance companies without technological expertise, the race is on to acquire capabilities. That could set the tone for an impending dealmaking spree. But it could also see digital underdogs make acquisitions of their own, putting them in a better position to grab market share from the incumbents.
In fact, it’s already happening.
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Appetite For Innovation
In Q1 2021, global insurtech investment reached an all-time high of $2.55 billion, according to a report from Willis Towers Watson. So-called “neo-insurance” providers like Next Insurance, which targets small and medium business insurance, Coalition, a cyber insurance tech company, and Zego, which offers commercial motor insurance and is at the forefront of insuring delivery drivers and car hire app contractors, clinched big rounds of funding and some of them have kicked-off their own acquisition sprees.
Over the course of a few months, Next Insurance, for instance, managed to raise $250 million in a Series E funding round (helping to raise its valuation over $4 billion) and acquire both Juniper Labs and AP Integro, boosting its data analysis capabilities and supercharging its growth. And Zego recently bought Drivit a telematics company, to fine-tune its approach to pricing.
Whether or not the insurtech companies are likely to be a threat or partner to the incumbents is still hard to say. But one thing is for sure: despite their ingenuity and agility, insurtech still faces an uphill battle.
Andrew Johnston, global head of insurtech at Willis Towers Watson may have come across as a gatekeeper when he said “at this particular juncture, the technology is the least interesting part of the discussion,” rather its whether the solutions being offered make sense intellectually and commercially for “the community being targeted for adoption.”
Like any disruptive idea, it’s not enough to be disruptive, it has to make sense. The past decade has been plagued with overvaluations and gambles of big ideas that never really reached full potential. And insurance, pandemic-fuelled innovation or not, is still, at its core, a business with entrenched ideas about what consumers want. “In light of these thoughts, a number of InsurTechs, or at least InsurTech-esque initiatives, will most likely never achieve the grandeur of their aspirations,” writes Johnston. “This is likely because they have misread our industry to the extent that they have mistaken who their target audience ought to be (and, more importantly, what that audience needs and currently does); as a result, they might never be accepted by the one community that would need to emerge to support them.”
Illustration by Christy Lundy
