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Survey Report | Insurer Insights

Quarterly InsurTech Briefing Q3 2020

Brave new world

Insurance Consulting and Technology|Reinsurance
COVID 19 Coronavirus|Insurer Solutions

October 28, 2020

This briefing will focus on commercial insurance as it relates to technology and InsurTech. Commercial insurance is the third-most bought and sold line of P&C insurance globally.

This quarter we are announcing an unprecedented level of global funding into InsurTech businesses – both in terms of total U.S. dollar amount and transaction volume. With the huge amount of capital being deployed, and the rate at which it is being deployed, one can quite easily see this quarter as clear validation of investors (industry and non-industry) being prepared to put their money where their mouths are as it relates to the pursuit of digital operations – both for pure investment returns and also for securing digital capabilities. What is particularly interesting, is that a handful of well-established InsurTechs have raised an enormous amount of capital (for example, Bright Health raised a seismic US$500 million this quarter), and brand new entrants with very limited track records have also been successful in raising capital – 73% of those InsurTechs who raised seed capital this quarter, were raising any form of capital for the very first time. Over half of those InsurTechs who raised Series A capital were similarly raising capital for the very first time.

With so many fantastic InsurTechs in our midst, investors can be pickier and hold the knowledge that the winners will be relatively few.

What is clear is that there is no shortage of capital to support nascent businesses in the less expensive, earlier rounds, and certainly no shortage of capital to support well-established InsurTechs who are demonstrating their ability to deliver and who are in need of later stage capital to support scale-up/growth mode. What we are also seeing, however, are the clearest examples of a (relative) drying up of Series B and C funding. In its crudest terms, InsurTechs struggled to secure funding in the US$20 to US$50 million range, relative to the number of InsurTechs looking to raise this amount of money. This is a very natural evolution of any burgeoning space that requires investment – the novelty and promise of a new firm meets the reality of commercial success criteria. With so many fantastic InsurTechs in our midst, investors can be pickier and hold the knowledge that the winners will be relatively few. Similarly, with so much clear reliance on technology, ‘less risky’ bets are been fiercely sought after. This particular phenomena is a version of the barbell strategy in InsurTech (a reluctance to support the intermediate growth of InsurTechs with additional investment). While we try not to overinterpret any particular quarter and ascribe a theory as to why something might be happening in the short-term, this particular issue is something we have been observing for a while – for want of a better description, we are seeing clear evidence of a widening funding gap.

Graph 1 illustrates a barbell strategy for Q3 2020 InsurTech investment — with most capital going toward less expensive, earlier funding rounds and later stage funding rounds.
Graph 1: Visualization of the barbell strategy with Q3 2020 InsurTech investment data

As a result of these investment evolutions, relatively well-known but not particularly well-established InsurTechs across the board could be about to face their toughest moment to date. With global markets preparing for one of the largest forecasted recessions in a generation, most insurers and reinsurers will look either to accelerate, conclude or temporarily slow down their ancillary technological endeavors to focus on ensuring that their core business functions are able to operate in this new digital and remote environment. Consequently, (re)insurers appetite to support well-established InsurTechs will be much greater than that of InsurTechs that still have things to prove. Traditional investors, the principle drivers of the earliest stages of investment, are pushing extremely hard to make sure that they make the most of the digital revolution which our industry is undergoing at scale. This is creating an investment no man’s land in-between.

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The toughest challenge that less well-established InsurTechs will face pertaining to this expected slowdown of investment (and most likely partnership) activity is its duration. While this ‘gap’ is undoubtedly a natural feature of investing, it is also a symptom of the current COVID-19-induced recession. This impending recession could be with us for a good while. Incumbent technology strategies will be clear: surviving this brave new world. The impact of an economic slowdown, coupled with a surge in remote operations, presents less well-established InsurTechs with a cruel irony: Never has the true value of technology been more real and manifest in our industry, and yet the lifeblood of budding InsurTechs who rely on Series B and Series C rounds to scale is, relatively speaking, drying up.

For very well-established InsurTechs, the situation could be quite different. The current climate presents a great opportunity to continue to support the incumbent landscape. Those InsurTechs that originate remote risks can arguably write more business as their traditional competitors catch up. We are seeing a big push toward digitalization, and well-known InsurTechs can play a big role in this process.

Looking to the future, we also expect to observe inhouse technological initiatives ramping up as technology and technologists become increasingly pervasive and synonymous with our industry, as (re)insurers grapple with the challenges of remote environments. As such, we will most likely see a growth of organic projects – this could well squeeze certain InsurTechs who have, until now, enjoyed a lack of competition in certain areas. We also anticipate that (re)insurers and end consumers will continue to be increasingly better informed and better experienced with regards to judging successful engagements with technology.

Arguably we are on the brink of a very healthy milestone, and this next step should be celebrated by those InsurTechs that have a clear digital strategy and those that have been successful in building solutions for our industry. If nothing else, there will be greater scrutiny on what is out there and how technology can be leveraged most effectively. For both incumbents and established InsurTechs alike, we expect that the more successful initiatives will be those that can react quickly to the changing environment and those that show a true appreciation for the direction in which our industry is headed.

Q3 data highlights

In Q3 2020, InsurTech companies globally raised a whopping US$2.5 billion across 104 deals – this represents notable increases in both funding and deal count. Compared to the prior quarter, funding and deals increased by 63% and 41%, respectively.

The strong get stronger...

Six mega-rounds drove 69% of total funding. These companies include Bright Health (US$500 million), Ki (US$500 million), Next Insurance (US$250 million), Waterdrop (US$230 million), Hippo (US$150 million), and PolicyBazaar (US$130 million). Overall, the number of mega-round deals grew by 50% compared to Q2 2020.

...but investors still see opportunity in early-stage companies

Q2 2020 was a very difficult quarter for InsurTech broadly as investors pulled back activity. Early-stage companies (Seed/Angel and Series A) were hit especially hard with its share of deals falling to a record low of 42%. This quarter, however, early-stage deal share grew to 57% — a 15 percentage point increase from the prior quarter – returning to pre-COVID-19 levels. The activity was bolstered specifically by P&C start-ups, which represented over 70% of early-stage deals.

It is worth noting that this quarter also saw four Series A rounds in excess of US$20 million. Notably, Buckle, Drover, Branch and Sana Benefits. Over half of all InsurTechs who raised a Series A round this quarter, were raising any form of capital for the first time. Including those InsurTechs who raised over US$20 million, the average Series A round size was US$10.9 million, excluding them, the average round size shrinks to US$7.9 million.

As we previously mentioned, the cohort most adversely affected this quarter were those companies looking to cross "the chasm" —Series B and C deals — which saw deal share shrink by almost 9 percentage points. In particular, securing capital between US$20 and US$50 million proved to be extremely difficult for InsurTechs globally.

India overtakes China for the first time since 2017

For the first time since Q4 2017, InsurTech start-ups based in India raised more funding rounds than those based in China. This quarter, six companies from India including PolicyBazaar and Acko General Insurance raised capital compared to China's five companies. U.S.-based companies continue to capture the most deals representing close to 42% of funding rounds, followed by the U.K. at approximately 9%.

L&H companies represent a disproportionate number of the quarter's largest rounds

Life and health (L&H) InsurTechs’ share of deals continues to trail behind that of P&C, however it grew to approximately 30%, up from 27% in Q2 2020. Notably, of the largest deals this quarter, a disproportionate amount of L&H start-ups raised large rounds. Of the six mega-rounds of Q3 2020, 50% went to L&H companies and L&H start-ups were responsible for 49% of the mega-rounds’ funding. Start-ups in this cohort include Bright Health, Waterdrop, PolicyBazaar, BIMA and Eden Health.

Commercial InsurTech builds funding momentum

This quarter, we saw several companies focused on offering or facilitating commercial coverage attract significant funding. Usual suspect Next Insurance secured a US$250M Series D as it continues to build out small-to-midsize business coverage. In addition, in the top 25 largest deals, companies including Buckle, Growers Edge, and High Definition Vehicle Insurance have all landed funding for their commercial-focused offerings. This particular briefing will focus on commercial insurance in great detail.

Mind the gap

In addition to the increased issues associated with securing Series B and C funding as technological arenas evolve, we are also observing an increased polarization of the types of investors who operate in the earlier rounds, and those in the later rounds –compounding further the issues associated with raising amounts between US$20 million and US$50 million. Investments at the “lower” and “upper” ends are beginning to split between nonindustry investors (e.g., venture capital [VC] and private equity [PE] firms) and industry investors (e.g., corporate venture capital firms [CVCs]), respectively. Non-industry investors typically write a lot of smaller checks to hedge their bets, whereas industry investors tend to back fewer investments that typically represent less of an operational risk, as they generally invest in later-stage InsurTechs - and industry investors are prepared to pay to play in these later, more expensive rounds. Graph 2 is a crude interpretation of what is (arguably) happening in the global InsurTech space right now as the barbell strategy of investors, coupled with a continued separation of investor types becomes manifest. While seed, venture and growth (per the x axis) are better defined by U.S. dollar amount, we can broadly interpret seed as ‘Seed/Series A’, venture as ‘Series B and Series C’, and lastly growth as ‘Series D plus’.

Graph 2 shows increased polarization of the types of investors who operate in the earlier funding rounds, and those in the later rounds – compounding further the issues associated with raising amounts between US$20 million and US$50 million.
Graph 2: Expanding funding gap

While this particular quarter very strongly supports the theory that crossing the investment chasm from Series B and Series C to Series D (where true ‘growth’ capital is invested) has become increasingly challenging for InsurTechs, Graph 3 is a clear indication that this phenomena has been growing over time.

Graph 3 illustrates that crossing the investment chasm from Series B and Series C to Series D (where true ‘growth’ capital is invested) has become increasingly challenging for InsurTechs,
Graph 3: Average round size year-on-year

If we take 2017 as the proxy for the beginning of ‘mass interest’ in InsurTech from our industry, and work forward to the present day, it is clear that the average round size in Series D (‘growth phases’) has been growing in size relative to the seed and venture phases. One could easily argue that it is natural that growth rounds will increase as InsurTechs become increasingly pervasive and valuable, and they would be right, but the same increased valuations (and round sizes) have not been occurring in seed and venture rounds of funding – in fact, they have stayed relatively static. This supports the theory that those InsurTechs who are seen to be clear winners in our industry will not struggle to raise significant amounts of capital, and the gap of success is widening.

Investor resilience in the gap

Despite an overall forecasting of a gap widening in critical stages of investment, it would be remiss not to acknowledge those InsurTech investors who are remaining bullish about the opportunity to invest into InsurTech at all stages, and those who are mastering the combination of LP funds with (re)insurance expertise. Notably, we have observed a number of syndicated InsurTech funds, often managed by third parties, being supported with fresh LP capital from our industry for the opportunity that undoubtedly lies ahead: better priced investment opportunities for those with the capital to invest and the expert eye to gauge a likely winner. These funds have been in existence for a few years and are arguably best placed to take advantage of the gap — true “venture” investors who understand (re)insurance and InsurTech. The fact remains, however, that some 2,000-plus InsurTechs globally could be looking for additional capital in the next 24 months, and despite the size and positioning of some of these InsurTech-specific funds, there may well still be a stark mismatching of demand and supply.

And, watch the gig!

Where we do see opportunities for less-established InsurTechs that are still figuring out their paths in the short-term and this period of fierce uncertainty is to focus on those areas of the economy that are likely to grow substantially in the next couple of years.

In particular, the global gig economy is set to expand exponentially as many people look to bolster their daily income — in some cases using personal assets for commercial purposes. The rise of the gig economy will undoubtedly create a greater demand for on-demand/episodic/usage-based products that can seamlessly shift between personal and commercial coverage (and price appropriately), as behavior is changing. Enriched blending of demographic and behavioral data targeting a risk vector in flux will be the lifeblood of an InsurTech initiative that can bring products and services to the market to match this demand.

Will it ultimately be big tech firms that technologically revolutionize our industry?

In July of this year, Amazon announced that it would start offering motor/auto insurance products and services in combination with Acko General Insurance. The products and services are offered through Amazon Pay and will cover motorcycles and cars; existing members of Amazon Prime will be entitled to discounts and other benefits. The quote-to-bind process takes less than two minutes and supposedly includes zero paperwork (all policy-related communication is stored on the incumbent Amazon platform).

In the same month, Tesla’s Elon Musk called for actuaries to join him in making a “revolutionary” insurance company. According to a press release, Tesla wants to harness the data from its telematics on its cars and drivers to build a new insurance operation that goes beyond California. It would use the car’s data and telemetry to assess probabilities of crashing and then offer a live assessment of premium on a monthly basis to the driver/owner of the car. The plan is to have this insurance initiative rolled out nationwide in the U.S. by the end of 2020. Note, this will not be Tesla’s first attempt at launching an insurance proposition.

Graph 4 illustrates deal and funding volume from 2012 – Q3 2020, and shows that 2020 has already recorded the second largest investment amount and deal count.
Graph 4: Annual InsurTech Funding Trends: Deal and Funding Volume (US$ million) – 2012 – Q3 2020

Google has also joined the insurance party through a number of initiatives. One, in conjunction with Brit called Ki, is discussed later in this briefing in the Incumbent Corner section. Another is through Google’s sister company, Verily. Backed by Swiss Re Corporate Solutions, Verily is offering self-funded employers stop-loss coverage through its subsidiary, Coefficient Insurance Co. Verily — itself a subsidiary of Google Alphabet, focusing on life sciences and health care — develops tools and devices to collect, organize and activate health data. Coefficient plans to integrate Verily’s suite of health devices and tech-driven interventions for workers and dependents into its product, to be available in 30 U.S. states by the end of this year.

As an industry, have we been naive to believe that contemporary innovation could only come from self-identifying InsurTechs and in-house incumbent technology initiatives?

As an industry, have we been naive to believe that contemporary innovation could only come from self-identifying InsurTechs and in-house incumbent technology initiatives? Has this naivety potentially left us exposed to firms that, despite not being (re)insurance experts, as controllers of business in their own domains wielding state-of-the-art technology, are in fact a much bigger threat? Could Amazon, Tesla and Google (or some version there of) effectively come in and disrupt an entire swathe of our industry? Similarly, could they provide the technological innovation that the industry could benefit from in one fell swoop? It is unclear at this stage, but it is worth reminding ourselves that our industry is seen as a big prize by large firms currently operating outside our industry; access to technology has never been the difficult part in bringing successful innovations to bear fruit. Digitally savvy incumbents and maturing InsurTechs who can successful forge relationships with these large technology/lifestyle firms could be very well positioned to take advantages of the changes our market is experiencing.

Four major lines of (re)insurance business
Four major lines of (re)insurance business

IPO arms race

In the slipstream of Lemonade’s IPO in the second quarter of this year, we have observed a handful of InsurTechs looking to follow suit: Duck Creek completed an IPO this quarter as their software-as-a-service (SaaS) model continues to take hold in our industry. There are also clear signs that InsurTechs Hippo, Root, Oscar and Next might similarly look to float publicly in the near-term. While it is likely that these kinds of firms would have looked to complete this trajectory at some point in their future anyway, the impending recession like waves that will soon be hitting our shores could be playing a role in speeding this process up. Similarly, if the Lemonade IPO does not provide the expected returns to its new public investors, the fuse on bullish public investment sentiment into InsurTech could be relatively short-lived. Consequently, we expect to see an acceleration to go public this year for some InsurTechs to still take advantage of that time frame.

This quarterly’s contents

This quarter as previously mentioned we will be focusing on commercial insurance. In particular, we will be featuring the following InsurTechs:

  • GWTInsight, a U.K-based company targeting property data analytics in the commercial property space
  • Next, a U.S-based InsurTech unicorn that provides insurance to small businesses
  • Anapi, a Singapore-based digital platform that provides insurance solutions for start-ups in Asia.
  • Foresight, a U.S.-based workers’ compensation provider with proprietary risk management software that specializes in the middle market
  • Briza, a U.S-based commercial insurance API that streamlines small commercial quoting, payment collection and policy issuance
  • eBaoTech, a China-based digital insurance solutions provider
  • Bold Penguin, a U.S.-based company that operates a commercial insurance exchange that connects businesses, agents, and carriers to the right quote quickly

Investor perspective

In this quarter’s The Art of the Possible, we speak to Gen Tsuchikawa, Chief Investment Officer at Sony Innovation Ventures. Gen discusses Sony’s investment mandate, the future of work and the impact COVID-19 has and will have on the future of InsurTech and related investments.

Incumbent corner

In this quarter’s Incumbent Corner section, Willis Re’s Printhan Sothinathan speaks with the CEO of Ki, Mark Allan, (also Group CFO of Brit) on the company’s latest Google powered venture – a fully digital and algorithmically-driven Lloyds of London syndicate.

Thought leadership

This quarter’s Thought Leadership comes from Willis Towers Watson’s Richard Clarkson who discusses the potential for new trading models in the London commercial insurance market and the role of algorithmic follower underwriting.

Technology spotlight

We also feature in our Technology spotlight section Willis Towers Watson’s latest technology offering, Radar Workbench, an agile technology platform that allows underwriters to work on an individual risk while having useful insight highlighted to them. In a break from tradition, this will feature immediately after the introduction.

Transaction spotlight

In this quarter’s Transaction spotlight, we feature PasarPolis’ US$54 million Series B funding round. The round is the largest InsurTech Series B recorded in Southeast Asia (and one of the largest recorded at any investment stage for an InsurTech in Southeast Asia.)

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Contacts

Andrew Johnston
Global Head of InsurTech, Willis Re

Haggie Partners