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Survey Report

Quarterly InsurTech Briefing Q3 2019

Insurance Consulting and Technology|Reinsurance

October 23, 2019

In this briefing, we assess the different ways in which technology is attempting to improve the process of policy administration and the revolutionary central management systems that are set to boost the efficiency and health of (re)insurance entities.
Quarterly InsurTech Briefing Q3 2019

Uni·corn /yü-n-krn/ • n. (pl. - unicorns) a mythical animal typically represented as a horse with a single straight horn projecting from its forehead.

At what point does “a group of unicorns” become an oxymoron?

Being as they are mythical creatures, it’s always been a bit puzzling that unicorns are symbolic of things that are rare in the real world. We can agree, however, that “unicorn“ has also become a widely acceptable term for a start-up in the software or technology industry that is valued in excess of US$1 billion. The curious truth that we may soon be facing is the existence of multiple unicorns; if some market reports are to be believed, there could be dozens of InsurTechs making unicorn status in the next 12 months. This begs the question, when something is no longer rare or even uncommon, at what point does the term “unicorn” become misleading?

It may seem like an irrelevant, or at least unimportant question to be asking, but reviewing the appropriateness of terminology helps us to assess what is going on around us: An increasing number of InsurTechs are amassing substantial valuations, and yet we are seeing relatively little value being added to our industry at scale, across the board. What might a future herd of InsurTech unicorns really represent?: a stellar cast of InsurTech businesses, or an industry that is overvalued by transient capital and/ or also being driven by a naivety of the potential impact of certain technologies? If it is the latter two points, then we may well observe a widespread InsurTech bust before long.

In our prior quarter, we went right back to basics and addressed the term “InsurTech” head-on. For many it has become a term that is entirely synonymous with the adoption of any technology at any part of the (re)insurance value chain. This has become a confusing issue for many, and one that could pose genuine threats for the industry if not properly addressed. Technology has an enormous role to play in our industry. Its usefulness in delivering results for companies and consumers alike is enormous. InsurTech, however, denotes something more nuanced.

An increasing number of InsurTechs are amassing substantial valuations, and yet we are seeing relatively little value being added to our industry at scale, across the board.

If we were to put the 2,500 or so current “InsurTech” vendors in our universe under the more accurate definitional microscope of “the use of technology designed to squeeze out savings and efficiencies from an existing insurance model,” then many would not meet the definition’s requirements. A lot of “InsurTech” firms purport to do it, but most do not in reality. What we will need to be conscious of as an industry is becoming jaded and frustrated with technology more generally if InsurTech (as we know it) ultimately does not deliver a scalable return; appropriate technology’s fundamental role is pivotal to our success. What we must therefore understand is that InsurTech as it is today is as much about hype and entrepreneurial culture as it is about appropriate technology for the (re)insurance industry.

Technology more broadly may well be the protector of our industry as we stave off the threat of big lifestyle branded firms like Google and Amazon. Such companies have been largely built on technology, and might one day come into our industry and be truly disruptive, but a part of self-protection lies in us not confusing some technology with all technology. If our industry can be accused of anything at the moment, it’s a serious case of magpie syndrome (chasing anything that glitters) and not calling out poor InsurTech businesses when we see them.

So, what is the benefit of the term “InsurTech”? First, for InsurTechs themselves, for investment purposes at least, the term matters a lot. Firms that associate with the term typically get higher valuations when compared with their “insurance technology” cousins. Second, it has created a home for many companies — helping them to find an identity where they might otherwise be lost. Third, within incumbents themselves, the term has facilitated the carving out of internal landing pads, geared toward the quick vetting of technology in its various guises.

Those companies looking to purely profiteer from our industry’s historic lack of overreliance on technology will support the “InsurTech emperor’s new clothes” narrative for as long as they can. If we unshackle ourselves from the fear of questioning what this all really means, the number of arguably overvalued investments that might be made in error would hopefully be lessened. The famed unicorn will remain rare (and therefore relevant), and we can actually go about putting our time, resources and cash into things that are truly relevant. Let’s seek out the true unicorns worthy of such valuations and status by not becoming sheep. In this quarter, we will be focusing on two highly value adding InsurTechs, Hippo and Root, who both boast unicorn status. 

What has become quite perplexing is the speed at which several very successful, incumbent technology vendors have rebranded themselves as “InsurTech.” One cannot help but feel that this is in some way driven by a desire to be contemporaneously relevant and noteworthy in the current hype. Traditional vendors, unlike many InsurTechs, typically have an excellent understanding of our industry and would be well advised to adopt this term at their peril. The winners of the technology arms race are the slow and steady ones; those technology vendors that have been adding genuine value to our industry for decades are positioned on very strong foundations as they continue to provide answers to problems that really exist.

What we must therefore understand is that InsurTech as it is today is as much about hype and entrepreneurial culture as it is about appropriate technology for the (re)insurance industry.

One could argue that, to date, InsurTech’s greatest achievement has been to act like a defibrillator on the heart of the insurance industry. The sheer scale of the mooted InsurTech revolution has made people across the sector talk more positively about the use of technology; some see it as the potential savior of a broken system. This positive impact, spurred by outsiders, is now arising organically from the inside — precisely because the industry knows its own challenges better than anyone else. InsurTech has forced insurance technology issues into the purview of pretty much every single (re)insurance entity on the planet. This can only be good news for our industry if managed properly. Ultimately, our industry is waking up to the importance of technology; the most innovative things we are seeing built are now coming either purely organically from within or from very well-thought-out strategic partnerships between old and new.

To reiterate our consistent messaging, we are very excited at the prospect of what technology brings to our industry. We know better than anyone the value of its benefits and as such are realistically pragmatic. While it may seem that we are taking a dim view of the InsurTech universe, we are simply verbalizing what we are seeing and hearing in our consistent macro global observations and analysis, backed by data. Let us not be fooled: Unquestionably a good number of InsurTechs are genuinely adding value, and it gives us great pleasure to spotlight some of those companies, but if we look more broadly at what has gone into this space (time, resources, cash) and assess what has come out, there is a very large sinkhole somewhere. Approximately US$16.8 billion has been invested into ‘InsurTech’ in the past seven years. Who can honestly say that we have seen at least US$16.8 billion worth of value created?

On this very note, in our Q2 report foreword we visited the InsurTech billion-dollar lounge club only to find that two more seats had become occupied by Lemonade and PolicyBazaar. The very week that our last quarterly was made publicly available, another creature (not mythical or rare but extremely impressive nonetheless) took a seat in the lounge: innovative home insurer, Hippo. Raising US$100million in a Series D round led by Bond, Hippo became a unicorn. They all now sit alongside the likes of Root Insurance (while previously already a unicorn, Root now tops the unicorn scales with a US$3.65 billion valuation after a US$350 million raise this quarter), Oscar Health, Clover Health and Zhong An. We will discuss Hippo and Root’s most recent transactions in much greater detail in this quarter’s Transaction Spotlight.

Q3 InsurTech funding

This quarter we report the continued inflow of capital that InsurTech is attracting; for the fifth quarter in a row, we are seeing an excess of US$1.2 billion being invested globally. In fact we report that 2019 Q3 attracted US$1.5 billion globally. This is the third highest quarter of global InsurTech investment to date (only 2015 Q2, $1.87 billion [32 deals] and 2018 Q4, $1.59 billion [63 deals] have been higher). This latest quarter boasts 83 deals across P&C and L&H lines, which marks an overall increase of 6% total investment when compared with 2019 Q2, and a total deal count increase of 20% when compared with 2019 Q2.

When combined with the investment totals we observed in Q1 and Q2 of this year, Q3’s results actually tip 2019 to date over 2018 as an entire year: In the first three quarters of 2019, US$4.36 billion has been deployed to InsurTech companies across 239 deals. This marks a 5% increase of the total amount of investment in all of 2018. Deal activity is also on pace to surpass 2018’s high based on the average number of deals per quarter in 2019.

It is also worth noting that 2019 Q3 is the first quarter since 2018 Q2 where B2B-focused InsurTechs have constituted more investment deals (as a count) than distribution focused InsurTechs. While funding dollars are still largely going to digital distribution and full-stack start-ups, deal activity is increasingly going to B2B start-ups selling software and technology to (re)insurers or brokers. In 2019 Q3, half of all P&C deals went to B2B start-ups.

China’s InsurTech landscape is growing: This quarter, China contributed 13% of total InsurTech deal activity, driven by an increase of interest in start-ups contributing to the growth of China’s health insurance industry. Start-ups such as Xiaobangtouzi, Mintbao, and Duobaoyu are providing platforms for consumers to engage on health insurance coverage with consultants and brokers and access educational resources on digital channels such as WeChat. Nuanwa, which spun out of Zhong An Insurance with seed funding from Sequoia Capital China, is helping to provide technology to connect insurance companies to the health care system in China.

One could argue that, to date, InsurTech’s greatest achievement has been to act like a defibrillator on the heart of the insurance industry.

Strategic tech investments by (re)insurers grew to a new quarterly record: This quarter, (re)insurers participated in 43 private tech investments, the highest quarterly amount on record. The largest deals that included (re)insurers were a US$550 million Series C to Babylon Health (Munich Re Ventures) and a US$176 million Series C to SMB credit firm Fundbox (Allianz X). Only 37% of tech investments by (re)insurers went to U.S.-based start-ups in Q3, with the U.K. taking 12%, Germany taking 9%, and France, Singapore, and Switzerland all taking 7% of deal share in the quarter.

If nothing else, this quarter marks the continued gamble many investment parties are prepared to make into InsurTech businesses, whether it be for speculative exits or for the propagation of “innovative technology” for the industry’s benefit.

Policy administration and central management systems in focus

As discussed in the forewords of our previous two quarterlies, this year we are performing a long-term review of technology’s relevance and applicability to the four major cornerstones of the (re)insurance functional chain. In Q1 we looked at how certain technologies have demonstrably improved the process of pricing and underwriting. In Q2 we examined the different technologies and InsurTech businesses influencing the streamlining and improvement of the Quote, Bind, Issue process. In Q3, we are assessing the different ways in which technology is attempting to improve the process of policy administration and the revolutionary central management systems that are set to improve the efficiency and health of (re) insurance entities.

It is worth noting that while policy administration and central management systems might not be the most exciting topic, it is arguably the most important part of function chain. This functionality is the core mainframe around which all other technologies can support a (re) insurance entity. It is here that policies sold come to life for (re)insurers. Obviously, a major part of this function is to appropriately house policies for easy access, time duration and general system management. But with appropriate technology, these policies can bring so much understanding to the (re)insurers who have issued them. From these policies, and the data stored inside them, (re) insurers can really understand the pricing sensitivities of the market, the strength of their products, the health of their own portfolio and how to engage better with their clients. This part of the process is truly the backbone of any (re)insurance entity, so while blockchain-enabled drones might be more fun in the short term, using technology to optimize policy administration and central management systems is ultimately a much better use of time and resources.

InsurTechs in focus

The InsurTech businesses featured in this quarter are U.S-based BriteCore, a cloud-based fully-managed policy administration system, and U.S-based Risk Genius and Canada-based ProNavigator, which both provide services around managing policies, acquiring/populating data, and supporting intelligent navigation through insurance company systems.

Incumbent corner

In this edition’s Fireside Chat, James Kent, Willis Re’s global CEO, and Franck Pinette, Willis Re’s managing director of the International Life and Health practice, speak with Philip Walker. Philip is the CEO of iptiQ Americas, part of Swiss Re. iptiQ is a digital end-to-end platform, providing a bespoke life and health service supported by a product suite as well as a property and casualty insurance platform for a modern market.

Technology spotlight

We will also feature Willis Towers Watson’s own software, Unify – an end-to-end business process automation tool that allows users to integrate and automate disparate systems.

Thought leadership

This quarter’s Thought Leadership comes from Jason Rodriguez. Jason is data science lead in the Insurance Consulting and  Technology practice (ICT Americas) of Willis Towers Watson. He talks to us about the importance of policy administration for all (re)insurers.

Transaction spotlight

As previously mentioned, our transaction spotlight examines the recent raises, and unicorn trampolining statuses of Hippo and Root Insurance. Finally, we conclude the report with a review of InsurTech market trends and transactions in the InsurTech Data Center.

As ever, we welcome your feedback, and we wish to thank you again for your continued support.

The insurance function chain includes pricing and underwriting; quote bind and issue; policy administration and central systems; and claims and settlement.
The insurance function chain

Source: Willis Towers Watson Q3 2019 InsurTech Briefing

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