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Survey Report | Insurer Insights

Quarterly InsurTech Briefing Q2 2020

The unlikely drivers of change

Insurance Consulting and Technology|Reinsurance
COVID 19 Coronavirus|

July 28, 2020

This briefing will focus on property insurance as it relates to technology and InsurTech. Property insurance is the second-most dominant line of insurance business in property and casualty (P&C)/non-life.

The past few months have set our industry back and forward, simultaneously. We are in both pause mode and fast-forward mode. The industry is facing unprecedented historical losses and yet the value of (re)insurance has never been clearer. The strength and reliance on technology has never been greater, and yet poor market investment performances and focus on COVID-19-related priorities could see a downturn in technology investments from (re) insurance industry players over the next few years. In this foreword, we will examine the possible short-, medium- and long-term impacts of COVID-19 on our industry and more specifically on the role of InsurTech. This examination of COVID-19 looks only through the lens of its commercial and spatial impact to our industry. We are, however, acutely sensitive to and aware of the loss of life and human distress that COVID-19 has caused so many.

The best-laid plans of mice and men often go awry.”

Robert Burns

To say that we are in uncharted territory would be an understatement beyond measure. For (re)insurance, (re)insurance firms and their staffs, (re)insurance markets, investable markets in general and individual InsurTech vendors/start-ups, most “best-laid plans” for 2020 have probably been put on hold (or scrapped altogether). And yet as the world around us seems unfamiliar and strange, perversely from a technological perspective at least, we are achieving the goals that we have been opining on for decades at a lightning-quick pace. We have gone “digital.”

If a (re)insurer is still unable to digitally/ remotely procure business, quote business, distribute product and service a living policy up until the contract ends or a claim is made, then it is leaving itself vulnerable to obsolescence.

Businesses in our industry are now either fully floating on the digital rafts they have been inflating for years or digitizing increasingly and relying more and more on remote systems (increasingly cloud-based) that can support electronic quoting, policy binding and issuance, and claims paying technology, to name but a few functions. It may be trivial to state, but now more than ever there seems to be so much truth in the expression, “Necessity is the mother of all invention.” If a (re)insurer is still unable to digitally/remotely procure business, quote business, distribute product and service a living policy up until the contract ends or a claim is made, then it is leaving itself vulnerable to obsolescence.

A contemporary cartoon (that has been widely distributed) illustrates a “COVID-19” labelled wrecking ball heading toward an office where those inside are discussing the role of technology in their business. A staff member boldly states, “Digital transformation is years away. I don’t see our company having to change anytime soon.” The most important feature of the cartoon is that those discussing the topic cannot see the wrecking ball for the bricks and mortar of their offices. As humorous as the cartoon is intended to be, many a true word is spoken in jest. Most firms will have had a carefully drawn-out technology agenda for slowly moving core systems over to cloud-based platforms over a series of years. The luxury of time is no longer on our side.

This all begs the question, will COVID-19 kill the term InsurTech once and for all? Even before the dawn of COVID-19, many had begun to question the ongoing validity of InsurTech as a standalone term. It was then, and continues to be, a valid question: If, in order to survive and remain relevant, a (re)insurer’s core operations are wholly supported by technology, and our industry becomes completely synonymous with technology, then what function does the term InsurTech serve? The answer to this remains multifaceted, but it essentially orbits around one’s preferred definition of InsurTech to begin with. If one believes it to mean “the use of technology in the (re)insurance industry,” then the term InsurTech is arguably redundant. If, however, we understand the term to reflect more a cultural awakening of innovative technology being developed, supported, and funded by “nontraditional/industry” activists for the benefit of the (re) insurance industry (and its clients), then it still holds value as a term in its own right.

Perhaps the best way to start dealing with the term is to bifurcate it into InsurTech and InsurTechs. InsurTech as a term referring to the cultural shift of adopting technology throughout the entire (re)insurance vertical, that has been occurring (at pace) in our industry for the last decade. Recognizing that this has been driven by a significant number of non-traditional actors, coupled with a growing realization from incumbents that technology is a necessity, not a luxury. InsurTechs as a term referring more to the individual firms themselves that may test our traditional definitions of what we believed InsurTech to mean, but are InsurTechs nonetheless. InsurTechs as a term also allows us to accommodate the inclusion of those self-identifying InsurTechs who existed pre 2010.

As we will demonstrate this quarter, there has certainly been no lack of global activity in Q2. While it is not for us to say definitively that the term no longer holds the same value as perhaps it once did, COVID-19 has undoubtedly achieved the aspirations that no single InsurTech firm, or InsurTech strategy, could have done alone. As we wrote in a previous Quarterly Briefing, the ability to define and examine the meaning of a word against its contemporary taxonomy is a vital aspect of truly gauging what is going on in a real sense in any evolving market.

This quarter’s data highlights

Global InsurTech funding recovers after a tough Q1 2020

In Q2 2020, global InsurTech funding saw a 71% quarter-on-quarter increase to US$1.56 billion across 74 deals, as later-stage investors, and corporate venture capital investors, re-calibrate activity following a cautious Q1 2020. While this quarter’s deal count was 23% lower than Q1, the increase in funding came as a result of 4 mega-rounds (over US$100 million) from Duck Creek (US$230 million), Oscar Health (US$225 million), Pie Insurance (US$127 million), and States Title (US$123 million). Running just shy of the mega-round status were BoughtByMany (US$98 million) and Coalition (US$90 million).

Share of L&H funding grows as interest in life insurance and telemedicine accelerates

Property and casualty (P&C) deals continued to comprise the bulk of funding, representing 68% of dollars invested this quarter. Compared to Q1 2020, however, funding into L&H start-ups grew to 32%, up 17 percentage points, amidst the possible rush to get life insurance coverage and the movement toward telehealth brought on by COVID-19. Bestow, a Texas-based direct life insurance provider, which raised a US$50 million Series B, enables customers to apply for coverage online and eliminates the need for medical exams and blood tests. Alan, a Paris-based digital health insurer, also raised a US$54 million Series C and offers telemedicine through its partnership with Livi.

Investors divert attention away from Seed/Angel deals

As we have been commenting on for some time now, investments are going further up the stage ladder. With greater participation from CVCs this quarter, this has only been compounded. Early-stage deals (Seed/Angel and Series A) accounted for 42% of overall deal count (a record low) and a nine-percentage-point decline from Q1 2020. The decrease came almost entirely from a reduction in Seed/Angel deals, the stage at which a startup is most unproven, while Series A deals stayed flat. Series C deals grew to 11% up from 6% in Q1 2020.

Direct insurers look to carrier acquisitions to expand capabilities and geographies

Compared with the prior quarter, distribution-focused start-ups saw an 11-percentage-point increase in deal share, while B2B startups decreased by 10 percentage points. Unsurprisingly, direct insurers continue to be the smallest segment given the capital intensity and the regulatory process for obtaining approval.

A notable development this quarter, however, was the number of InsurTechs that obtained or plan to obtain carrier status through acquisitions, including Hippo’s acquisition of Spinnaker, Buckle’s acquisition of Gateway Insurance Co., and Pie Insurance’s US$127 million round that earmarks US$100 million to purchase licensed insurance companies. We featured Buckle in our last Quarterly, and there is much more information on Hippo’s acquisition in this quarter’s Transaction Spotlight.

Lemonade becomes the first public U.S. InsurTech unicorn

This license acquisition strategy coincides with U.S.-based D2C renter and homeowner InsurTech Lemonade filing to go public, a major exit event for the modern InsurTech era. In early July, the company’s stock opened at US$50.06 up 72% from its US$29 per share target. Lemonade’s course is still yet to be determined but often cited by many as the posterchild for brand-building InsurTechs, the fate of Lemonade could well indicate where much of the investment future is heading.

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Rest-of-the-world deal activity gets a boost as uncertainty continues to loom in top markets

While the majority of activity continues to be concentrated to the U.S., U.K., and China, Q2 2020 saw deals across 25 countries – a record number since this publication started recording. This included several new geographies such as Taiwan, Croatia and Hungary. In contrast, the previous quarter saw the least geographic diversity since Q3 2018 with only 15 countries represented. As the top markets continue to work toward recovery, investors may continue to place bets in newer regions to diversify risk.

As we are presenting, the InsurTech investment in Q2 is certainly an uptick when compared with Q1, but most of the underlying issues which affected Q1’s downturn have not gone away. Whether Q2’s surge comes from a handful of mega-deals, or a genuine play by many investing in L&H InsurTechs to capitalize on life insurance and telemedicine solutions, the impact of COVID-19 is likely to continue for many quarters to come. The ways in which this manifests itself into future investments is yet to be seen.

While it is very difficult to gauge the true impact that COVID-19 will have on the future of InsurTechs (at an individual level), we offer a view on how things could well play out for InsurTech (at a macro level), and our industry more broadly.

In the short term, we anticipate that consumer and industry investment confidence will test the status quo. In addition to the speculation of short-term returns and survival speculation of some highly leveraged InsurTechs, certain risks and their associated vectors have fundamentally changed — and could be changed forever. Will the travel insurance industry ever be as buoyant again? Will we ever drive as much again? Will we all have offices in our home? The short answer is possibly yes, possibly no. As such, we anticipate seeing a fairly unpredictable next 12 months of activity.

While it is very difficult to gauge the true impact that COVID-19 will have on the future of InsurTechs (at an individual level), we offer a view on how things could well play out for InsurTech (at a macro level), and our industry more broadly.

In the medium term, we will likely see a different kind of constraint affecting the status quo. Changing risk classes might be being better understood, and consumer optimism might be starting to rise (driving an increase in leisure activity and asset purchasing), but the true economic impact of COVID-19 most likely not be really felt until 2021 and 2022. This will in part be driven by changing market rate prices, but more importantly it will be impacted by the longer-term effects of poorly performing market investment returns. This will undoubtedly impact the view of many (re)insurers, and their shareholders, regarding how much they are prepared to invest in technology — and technology firms themselves.

The other thing to consider in the medium term is the survival prospects of many global InsurTech businesses. While InsurTechs are probably much more adept at hibernating than their incumbent relatives, if the use case of a business has been lost forever through fundamental change, or the prospect of ever “making it” now seems (more) unlikely, then many founders may cut their losses and move on. As is the case for many recession-like waves, certain assets may become more affordable, and it is quite possible that highly innovative and impacting technology will be available at lesser prices. This could well be someone’s opportunity.

In the long term, somewhat ironically, it will be technology that helps our industry survive this situation and (re)insurers will come to realize this if they do not know it already.

Funding into technology will be a fixed budget item; legacy systems will have been jettisoned, and we will most likely observe a true convergence between technology and balance sheet activity. Technology will help to evolve and shape our industry, and InsurTech businesses will most likely be valued more realistically. It will be less about finding the next unicorn and more a search for appropriate technology that supports a firm’s core digital strategy. If we think back to the Gartner Hype Cycle, this is where the “trough of disillusionment” will bottom out and then rise again as technology continues to be an embedded feature, function and commodity of our industry. We are arguably at the top of peak of expectations with this latest IPO with VC, CVC and now public interest capital all circling the pool of opportunity with very different expectations and differing financial relationships with InsurTech. When sympathetic industry capital is replaced by much more demanding public investors, there is likely to be a very rude awakening for InsurTechs who simply do not deliver financial performances associated with their valuation.

Before we move on, it is worth noting that time and time again, our industry comes under fire for being slow and unable to “do the right thing” from a technology perspective, but take a moment and look at how so many (re)insurers have reacted to this COVID-19 situation. One of the most fascinating facets of COVID-19 is not so much that we had no other choice but to go remote or digital, but that we could and can continue to do so. If COVID-19 had happened 100 years ago or even 20 years ago, many of us would have been forced to go back to offices and commuting because the economic pressures not to would have been unsurmountable. What COVID-19 has been, however, (again, this is through the commercial/functional lens; we acknowledge the impact at a human level for those affected) is an enormous experiment and validation of the technology that we have been investing in for over a decade. Many of the firms in our industry went remote because it was a feasible (albeit intimidating) option.

This graphic illustrates the four major lines
of (re)insurance business: auto (motor); property; commercial; and life, accident and health.
Four major lines of (re)insurance business

This quarterly briefing’s contents

As mentioned in our prior briefing, this briefing will focus on property insurance as it relates to technology and InsurTech. Property insurance is the second-most dominant line of insurance business in property and casualty (P&C)/non-life.

Property Insurance focus

This particular briefing we will be featuring Openly, a managing general agent that offers personal homeowners and landlord products for single-family properties; handdii, a digital platform that automates the property insurance claim process from first notice of loss (FNOL) to claim finalization; Arturo, an InsurTech that provides structured data observations and predictions for commercial and residential properties; Hometree, a provider of home cover contracts to homeowners and landlords; and Insurdata, a provider of high-resolution, accurate, risk-specific exposure data in real time.

Investor perspective

As a continuation of our newest feature for the 2020 Quarterly InsurTech Briefing series, we will be speaking to an investor directly engaged in the InsurTech investment space. This quarter, we speak with Kyle Beatty of American Family Ventures (AFV). We discuss AFV’s investment focus, and Kyle’s overall take on InsurTech in the world of property insurance.

Incumbent corner

In this quarter’s Incumbent Corner section, Adam Schwebach, Executive Vice President at Willis Re speaks with Paresh Patel and Kevin Mitchell, creators of HCI’s TypTap InsurTech initiative - a solution for flood insurance.

Thought leadership

This quarter’s Thought Leadership comes from Desmond Carroll, executive vice president and head of catastrophe R&D, Willis Re North America. Desmond considers the institutional hurdles that most InsurTechs will need to overcome in order to successfully penetrate property catastrophe insurance.

Technology spotlight

We will also be featuring in our Technology Spotlight section, Structure Insurance Scoring (SIS); a Willis Towers Watson partnership with e2value. SIS is used to capture unique characteristics that property insurers deploy to determine replacement cost.

Transaction spotlight

Our Transaction Spotlight examines the US$123 million Series C funding round into States Title, a title insurance and escrow service provider, and the acqusition of Spinnaker Insurance Company by Hippo, the smart insurance coverage provider for homeowners.

Finally, we wish to repeat our messaging from our prior Quarterly Briefing. While we do not have a history in this report of mentioning current affairs not related to InsurTech, we feel it would be remiss not to acknowledge the global pandemic we are all experiencing at a human level. While we have taken time to discuss the current and future impact of COVID-19 at a business level, we recognize this indiscriminate virus is creating unprecedented uncertainty and concern for all of us and the broader global community. We hope that this briefing finds you and your loved ones in good health. Please stay safe and conscious of doing your utmost to curb further contagion and outbreaks.

As ever, we thank you for your continued support.

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Contacts

Andrew Johnston
Global Head of InsurTech, Willis Re

Haggie Partners

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