Insurtech funding reaches record high in Q3
Investor confidence in insurtech is at an all-time high, according to broker Willis Towers Watson’s (WTW) Quarterly Insurtech Briefing.
A record $2.5bn was raised during insurtech funding rounds in Q3 2020, representing a 61% leap on the previous quarter. The capital was raised over 104 deals, 41% more than Q2.
Six major funding rounds accounted for more than two thirds (69%) of the total amount raised. Bright Health and Ki both drew $500m, while Hippo, Next Insurance, Waterdrop and PolicyBazaar all secured between $130-250m.
Investors were also seeking the next big thing. More than half of insurtechs with a Q3 Series A were raising funds for the first time and on average pocketed $10.9m. Those in Series B and C rounds, however, were the worst affected, seeing their deal share shrink by 9%.
WTW noted the pattern was a version of the barbell strategy: investors are more willing to take low-cost, high-risk punts on startups in the seed stage, or inversely, high-cost, low-risk stakes in growing established companies, than they are insurtechs in the middle of their journey. At the venture stage, investors have proven they are currently unwilling to fund firms that are testing markets, building use cases and seeking capital for growth.
“That means the lifeblood of budding InsurTechs who rely on Series B and Series C rounds to scale up has, relatively speaking, disappeared,” says Andrew Johnson, Global Head of InsurTech at Willis Re, WTW’s broking reinsurance arm.
India overtakes China
Globally, India pulled ahead of China for the first time in three years. Six insurtech companies in India secured funding during the quarter, ahead of five in China. You need only look at Razorpay, which earlier this month became India's fifth fintech unicorn, to see that appetite in the country is on an upward trajectory. But the US remains the biggest and most important market for investors, sweeping up 42% of funding rounds, followed by the UK with 9%.
Richard Clarkson, Head of London Market Consulting at WTW, noted: “Algorithmic-follow disruptors – those underwriting entities that use technology and analytics to take a share of business offered under the terms and rates of a lead underwriter – are set to claim to a bigger slice of the insurance market, especially as the evolving Lloyd’s business model shifts to make it easier for them to do so.
“Many of the component parts required to create systems to implement this model have actually been around for a while. This will make trading faster and more responsive, and open new attractive avenues for alternative capital.”
Insurtechs are winning the race with legacy system companies
Nestled in its own place within the world of financial services, insurance is arguably more unpopular than retail banking.
That’s hardly surprising given that, from a customer service perspective, insurance is something of an off-kilter transaction. You pay a sizable premium in exchange for a service you hope you will never have to use. This image problem is exacerbated by ubiquitous tales of insurers not paying out when it is time to make a claim.
The insurance sector has long been due to an overhaul, and this is where the disruptive force of insurtech comes in - one of fintech’s most upwardly mobile subcategories. Accordingly, last year, insurtech in the UK alone attracted £262m in investment, a growth of 60% on 2019, according to Tech Nation. Insurtech’s momentous growth has been captured in a new report by The AI Journal exploring this burgeoning sector.
What exactly is insurtech?
Put simply, insurtech refers to technological innovations that seek to make insurance cheaper to buy and more efficient to use. In a similar vein to fintech, the large, established institutions have been dipping their toes into insurtech, but it’s the disruptors who are genuinely looking to shake up the status quo, diving into and exploiting those areas that traditionalists have little imperative to explore.
Examples are price comparison sites (one of the earliest forms of insurtech that was eventually snapped up by the insurers it initially sought to disrupt), claims software, customisable policies, or even smart-tech-enabled dynamic policies whose premiums can fluctuate depending on changing circumstances.
The latter, for instance, could use someone’s fitness tracker or smartwatch to monitor fitness levels, thus reducing the premium of a life insurance policy; or track a GPS system that records the location of a car and assesses risk levels accordingly.
Most consumers tend to shop around for their insurance needs and perhaps end up buying their contents insurance with one provider, their car insurance with someone else, and their pet insurance with yet another underwriter. Managing all these different policies, with their varying renewal dates and payment terms can be complex. This has led to the increase in apps that pull everything together.
More prosaically, insurtechs are developing AI that uses machine learning to act as an insurance broker, eliminating the need for a human intermediary and therefore offering more cost-effective and impartial advice.
Insurtechs and risk
But there are some obstacles in the way of insurtech’s continued evolution.
Insurance companies are averse to risk. Understandably so, as at the crux of the industry is the role of the actuary, whose job it is to analyse and measure the probability and risk of future events. So it’s little wonder that there’s a reluctance among the traditional players to welcome the disruption that insurtech brings.
Insurance is heavily regulated, a minefield of legality and labyrinthine jurisdiction, which means the idea of shaking it up can be anathema. And why would they, when their old-school business models are working perfectly fine?
There’s an understandable nervousness and unwillingness to work with startups, who themselves need to work with the bigger firms in order to underwrite risk.
While it seems like a catch-22 situation, there is growing, if cautious, interest from insurance companies, who can see the benefits of insurance with a friendlier face, innovative solutions, and a competitive edge through differentiation. As that tentativeness dissipates, the growth of insurtech will gather even more momentum.
Tom Allen's analysis is based on the findings of a new report on the fintech and insurtech industries produced by The AI Journal.