Research

Quarterly InsurTech Briefing Q1 2018

Landscape of InsurTech venture capital investors

May 23, 2018
| United States, United Kingdom, Canada +5 more
  • China
  • France
  • Germany
  • Israel
  • Japan
Rafal Walkiewicz, CEO of Willis Towers Watson Securities, highlights the various types of InsurTech investors.
In this edition of our Quarterly InsurTech Briefing, we take a look at the universe of InsurTech capital providers. Our aim is to understand their strategies and motivations in order to predict the likelihood of future investment success. We consider the strengths which these investors have and which they pitch to startups when looking for attractive investment opportunities and highlight potential weaknesses that capital raising entrepreneurs should be aware of.

Expanding on the Q4 2017 edition, we further explore the notion that incumbents have an advantage over financial capital when the value chain evolves through improvements to legacy systems, yet incumbents rarely win if technology ultimately drives the creation of a new value chain. We also discuss the nature of innovation. In the Thought Leadership feature, Paddy Jago calls attention to the peer-to-peer insurance economy and concludes that it is nothing more than a mutual reinvented. As is often the case with innovation, it does not have to be a supernatural event, but rather the reinvention of an existing model for which a new reality is finally ready.

As the explosive growth of the InsurTech ecosystem drives increased interest from a variety of investors outside of the traditional insurance industry, and that in turn forces incumbents to defend themselves by investing in new technology directly, differences between the value propositions of corporate VCs and independent funds are becoming more evident. Our Q1 Industry Theme catalogues the various forms of capital participating in InsurTech investments, ranging from traditional VCs such as Lightbank and Oak HC/FT to incumbent funds like XL Innovate, Allianz X and QBE Ventures. We also highlight hybrid solutions which try to bring to market the best of both worlds.

Incumbents want to learn how to do what they do better

Innovation happens when market participants face challenges that can no longer be ignored and commit to building solutions to deal with these pressure points. What are these pressure points for insurers? Distribution costs, claims handling and underwriting excellence often rise to the top of the list. Incumbents invest to improve existing processes and to focus on modules of the value chain that present the biggest challenges to them.

Incumbents seemingly prefer minority stakes and seek startups that can attack their pressure points. They offer startups access and knowledge, proof of concept testing and, if successful, long term partnership opportunities. There are various forms of incumbent investment strategies in InsurTech, but whether we talk about corporate VC, incubators, direct investments or in house R&D, these strategies primarily focus on learning how to improve processes while an outsized return on investment is a secondary consideration.

InsurTech startups are well aware that betting the company’s future on a majority investment from one incumbent can diminish future flexibility of an exit and pressure valuation. In order to preserve their options, they try to choose partners and investors along the way while they are building value. However, it is often difficult to penetrate the complexity of a highly regulated insurance market and therefore startups need to be mindful of the potential benefits and limitations of receiving investments from, or partnering with, incumbents.

Outsiders search for breakthroughs and explosive value creation

Outside capital tends to focus on customer pressure points: cost of the product, ease of access and new or underserved markets. Independent VCs are sector agnostic and product focused. They use lessons learned in other industries and past investments to change the way the products are manufactured and sold.

One of the things that outside capital is more likely to do is to take majority positions and to focus on integration across the full stack of the industry value chain rather than focus on distinctive modules and process enhancements. Independent VCs are solely driven by investment return and have access to technologies and investment themes that may not be on the top of mind for the insurance industry. This is why they are exploring broader themes such as the impact of quantum computing on technology while incumbents tend to invest in insurance-focused applications of big data and AI.

While independent VCs bring a unique approach to innovation as well as the potential for explosive value creation for a startup, they often lack meaningful access to the insurance industry. By their nature, they do not bring to the table the same connectivity that incumbents can easily deliver. As a result, InsurTech entrepreneurs seek independent VC money to fund revolutionary ideas - the challengers to the status quo of the insurance industry value chain.

In our Transaction Spotlight feature, we dive into the recent funding round for Root, a perfect candidate for independent VC investment. Focused on a product not a process, Root started with a specific customer pain point in mind and through innovation now offers fairer, simpler and more affordable insurance to its customers. Root is an integrated insurance company that has completely flipped the traditional pricing model. While incumbents issue policies and then monitor the driving habits of its policyholders, Root collects telematics data before ever providing a quote. The company is funded by VC money and competes with incumbents for business in auto insurance today, with plans to expand to other lines of business in the future.

Combining insurance insight with value creation mentality

With ever growing capital flows and increasing company valuations, the InsurTech funding scene is becoming more robust. It is no longer divided between incumbent-driven investment vehicles and traditional VC, but now also includes a subset of insurance specialists that combine the best of both worlds (i.e., traditional VC and corporate VC). As an example, we profile Aquiline Technology Growth’s and Eos Venture Partners’ models. Aquiline has been a dominant private equity investor in insurance companies for over ten years and has recently raised a specialist InsurTech-focused fund. We talked about Aquiline’s prowess in early stage investing in Q1 2017 as demonstrated by its successful sale of Simply Business to Travelers. Eos Venture Partners takes a slightly different approach. It focuses on funding insurance startups to address the strategic interests of its limited partners, comprised primarily of insurance incumbents. It is not a corporate VC per se, but a combination of the traditional VC approach aligned with the strategic interests of incumbent LPs. The fund specializes in insurance only.

Hybrid models will continue to evolve and may be the ultimate answer for InsurTech entrepreneurs looking to balance industry expertise and the traditional VC value creation mentality. For InsurTech startups, the funding scene is more complex and finding the right investment partner has become more difficult to achieve.

Is global technology threatening regional players?

Both startups and investors see InsurTech as a global phenomenon. Technology is increasingly portable and can be quickly scaled and implemented across the globe. Insurance regulations can slow the process down, but are unlikely to stop it completely. There are many examples of the globalization of InsurTech ideas. The US-centric Travelers acquired Simply Business in the UK to leverage the startup’s technology in its core market and Trōv has expanded from Australia, to the UK and finally to the US.

The global nature of InsurTech makes insurance investing attractive to two additional groups of capital providers: technology companies and developing markets insurers. Our Venture Capital Investor Survey participants predict that 20% of InsurTech funding in the next several years will come from tech companies. Taking a look at the product deployment strategies of Google, Amazon and Facebook, we see investment in products and services with global potential. Further, tech investors are well versed in developing and running technology pilot programs in smaller countries in order to deploy successful solutions into large developed markets afterwards. Additionally, there is a wave of InsurTech investment from the tech giants of developing countries. Tencent, Alibaba and Ant Financial are rapidly growing in their domestic market in China while building technologies that will enable them to conquer developed markets in the future. Finally, there are emerging markets insurers or financial institutions and their corporate VC arms. Ping An, PICC, CICC and others are funding radical new technologies in developed countries with an end goal of using them as a springboard for international expansion when the time is right.

Raising the bets

The $724 million of InsurTech funding made available in Q1 was a slight increase over Q4 2017 and more than double the amount in Q1 2017. The quarter’s 66 transactions represent the highest number ever recorded. One of the more interesting trends to develop in the quarter was the seven transactions that rose to over $30 million in recent funding rounds. Investors are clearly willing to make increased bets on InsurTech and funding rounds are becoming larger. Interestingly, of the seven transactions raising over $30 million, there was only one developed market incumbent insurer participating in the fundraising while the remaining funding rounds were dominated by traditional VC money. Perhaps the stakes are becoming too high for insurers, especially if they are mostly investing in order to learn how to improve their existing processes.

Value creation parameters by investor type

Value creation parameters to investors are, value of independence and flexibility, investment size, disruption, cost of commercialization, expected return 

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