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Quarterly InsurTech Briefing Q4 2019

Insurance Consulting and Technology|Reinsurance
Insurer Solutions|

January 30, 2020

In this briefing, we assess the role and value of contemporary technology in the claims and settlement arena — where (re)insurers demonstrate their true calling.
Quarterly InsurTech Briefing Q4 2019

The only constant is change — a trite statement for our industry to say the least, but one that feels almost reassuring to remind ourselves of as we review the passing year. 2019 began with many predicting some significant changes for InsurTech at an industry-wide level — ranging from a fundamental full-scale adoption of innovative technology across the board, to the opposite extreme of a total collapse of InsurTech as we know it. Unsurprisingly, neither extreme materialized; what we have in fact observed is that the relative successes and failures in utilizing technology from burgeoning vendors was (and continues to be) highly specific at an individual business level. This was (and continues to be) further amplified at the individual regulatory environment level. Depending on your own position, perspective and geographic jurisdiction within the value chain, InsurTech’s relative applicability remains either an opportunity, a threat or irrelevant.

What has been abundantly clear for all to see is the uptick in investment over the past year. In slight contradiction to our opening statement, global investment into InsurTech had in fact started to stabilize at approximately the US$1.4 billion mark if we look from Q4 2018 to Q3 2019. Q4 2019, however, has bucked this trend as we announce that this passing quarter reached an all-time investment high of almost US$2 billion. In fact, if we look at 2019 as a whole, these last 12 months alone have produced 33.9% of total global InsurTech investment recorded to date. 2019 also saw a 90% jump in investment rounds that exceeded US$40 million when compared with 2018. Those who predicted that 2019 would secure the highest level of funding to date can rightfully boast to be sages in our midst. How this all translates to widespread value creation for our industry and consumers of insurance products and services is still largely to be determined. Perhaps 2020 will be the year to usher in some of those answers — or at least indicators to help find those answers.

Among other things, 2019 will most likely be catalogued as the year of extreme highs and lows at an individual InsurTech company level. The year recorded a whopping eight unicorn-making rounds of investment, creating five new unicorns (Clover Health, Policybazaar and Root were already unicorns before their latest funding rounds; note, there are only 10 InsurTech unicorns globally in total). Only time will tell if this past year has been an anomaly or a sign of things to come in terms of unicorn creation/fortification. On the other hand, the pendulum of success has been swinging aggressively in the opposite direction. While InsurTech news is awash with the huge valuations and postulations of the art of the possible, there is also the very real story that is not so positive: individual InsurTech company cessation. This natural feature of the InsurTech evolutionary cycle gets very little attention in pretty much any of the forums where InsurTech is being discussed, and yet it is such an important facet of what is actually going on.

While it is always extremely difficult to gauge and confirm that a company (especially a start-up) has officially ceased trading (unless the company itself announces it), our data indicates that over the past three years, some 184 InsurTechs might have closed their doors. The true number is actually likely to be much higher than this because we can only really begin tracking a company once it has raised capital; those companies that never raise any investment capital are almost certain to “not make it.” Based on the number of companies that have raised some form of capital and subsequently ceased trading, relative to the number of self-identifying InsurTechs that we believe exist globally, the total number of InsurTechs that have possibly ceased to trade (or are at least considered “vulnerable”) could be many times this number. One thing is clear: InsurTechs operating in obscurity have very short shelf lives if the capital injected at an early level fails to support commercial germination.

Alongside the companies that have failed to stay commercially buoyant sank the very real investment capital, intellectual capital, developed technology and time that was associated. In several cases these InsurTechs had paying customers and sold technology licenses, and with some even selling policies. While no insurer, reinsurer or traditional technology vendor is immune from cessation of trade, the significant percentage of InsurTechs that do not survive (commercial) infant mortality relative to their incumbent older cousins is an important thing to note.

Invariably these InsurTechs end commercial activity for a myriad of reasons — and in many cases, it is not because of bad business ideas, or bad tech, but simply a lack of market appetite or issues with personnel. But this does often beg the questions: Who let these companies trade in the first place? What level of due diligence was performed by investors? Do those investors associated with commercially launching these businesses into the market have the appropriate credentials to offer underweight InsurTechs a “shot” at success?

In some instances, some real damage has been done where businesses have been injected with quick capital but not properly supported in the market. It could almost be considered reckless in several cases where one or two notable investment proponents of InsurTech have backed multiple “frogs” in the hope that one of them might trampoline onto an insurance “throne.” At a high level, this portfolio approach might matter little to investment giants, but to the InsurTechs themselves and their clients, this has arguably been very irresponsible. It is rarely the investors who pick up the pieces.

Narrowing the field

Upon reflection we might also come to remember 2019 as the year when the foundations were laid for a trend that we are quite likely to observe in the future months: individual InsurTechs coming to the fore to lead specific parts of the market, whether it be in lines of business or uses of particular technology. As an industry, we are very blessed to have balance sheets that can support mature InsurTech fundraising rounds (read “more expensive rounds”). As such, proven InsurTechs could now justifiably begin attracting unprecedented levels of “InsurTech domiciled” industry capital, licensing agreements and commercial support. This will create an increasingly narrowed fence around a small number of companies being supported (relative to those that will ultimately fall off the radar). As an industry, we have a history of working with a handful of selected third-party vendors, and InsurTech is no different. To “not make it,” for many InsurTechs at least, may be nothing more than market appetite not being big or broad enough to justify the existence of hundreds of new entrants.

If we look at the dynamics of global investment trends and 2019’s trampolining of individual companies into unicorn status, this theory is already being supported in a very real way. Investment capital from traditional venture capital and private equity funds and investment from corporate venture capital vehicles is polarizing between seed/series A and series B+, respectively. Whereas “less-versed” — in an (re)insurance sense — venture capital and private equity funds are still prepared to make a number of smaller bets across a broader portfolio of companies, industry corporate venture capital vehicles are backing (relatively) fewer but clearly successful InsurTechs in later rounds. This is now leaching into licensing agreements and partnerships as we note a greater number of industry players working with an increasingly narrowing handful of individual InsurTech firms: For example, U.K.-based Concirrus is now clearly the forerunner of behavioral-based analytics for the specialty markets in this space as it continues to procure industry adopters of its solution(s). We expect to see champions in a number of different business domains coming to the boil in the coming months.

A squeezing out of the masses speaks volumes of our industry’s propensity to move together. It also reinforces the replicable nature of technology, where identical (or at least configurable) solutions can be licensed across the board. It is quite possible that in, say, five years’ time there will be a core cohort of technology vendors that were once InsurTechs, that will provide some kind of a solution suite to 70% of the global (re)insurance marketplace (alongside the “traditional” insurance technology vendors). The industry simply does not need (and cannot afford) to support hundreds of companies that all either do essentially the same thing or do it to a lesser standard than does their peer group. The standards are rising – and rising quickly.

Shaping future technology investing

If the winning core InsurTech cohort is being forged in today’s fires, are we actually investing enough now into these companies that might make a difference to our businesses in the long term? Are we investing enough into our own businesses to support these solutions internally? As we have noted in prior quarterlies, InsurTech has been an excellent catalyst to bring the topic of needing to invest in technology onto the agenda item list of most (re)insurance firms. Naturally for several entities this was not a revelation, but for many, the desire to innovate and not be left behind has forced the issue of technology in a very real way. While simply investing in technology and hoping for the best is not a silver bullet to success, the availability and willingness of InsurTechs to work with our industry makes technologically supported solutions an opportunity for all to partake. As the real winners are starting to pull away from the pack, is now the right time to place larger bets?

The drive to appropriately apply relevant technology should be seen as a very good thing; however, we are seeing an increasing number of (re)insurance entities struggle to reconcile the required spend against a history of quarterly focused growth. As a result, the “need to review and invest” will very often stay as a topic of conversation (only), or at best, ceremonial investments may be made but often only to sate temporary appetite with little business rationale behind them. Technological investments are long-term, ongoing concerns that are, in the short term at least, likely to impact a company’s balance sheet. With seemingly more pressing issues to contend with, technological investment invariably takes a backseat. This is a huge issue for our industry, and one that is rarely spoken about. While this issue is not truly unique to our industry, the necessity to report profits on a quarterly basis makes it very difficult for even the bravest executive committee to allocate funds that might never produce a clear ROI into technology. In this regard, one could argue that the mutual insurance model has a competitive advantage over stock companies.

As a point of reference when we compare our own industry with others in the financial services sector, in Q1 of 2019 it was reported that the top four U.S. banks had IT budgets ranging from a high of US$11.4 billion to US$8 billion. This related to approximately 0.43% of total assets held by all four banks, respectively. Furthermore, this represented approximately 20% of annual expense budgets relative to expected revenues. Midrange banks in the U.S. (banks below US$100 billion in assets) were running at approximately 50% of this as part of their own IT spend/ investment. What is not abundantly clear, however, is how much of these budgets is being allocated to designated investment funds, IT maintenance/upgrading and patching, and research and development associated with developing new products and services.

If we were to apply these metrics to a handful of the largest global (re)insurers by total assets and/or annual GWP, the expected average spends on technology-related investment would begin at US$5 billion (if relative to percentage of assets) to upward of US$9 billion (if we can crudely assume that banks and insurance companies allot a similar percentage of cash to annual expense budgets from revenue). Allianz Global published that they had an IT budget of US$4.3 billion in 2018. In addition to this figure, Allianz has put US$1.1 billion into Allianz X (their corporate venture capital arm for InsurTech investment), and an additional US$1.2 billion for “digitalization” projects. As such, one could argue that their allotted spend for InsurTech-related interests were/are not wildly out of line with that of their banking peer group. It is worth noting, however, that Allianz is often considered to be one of the most progressive (re)insurance entities when it comes to openness to technology (irrespective of size). If we consider this to be the very “top end” of carrier spend, then one could draw the conclusion that banks, on average, are likely to spend more on technology than (re)insurers are.

In addition to relatively smaller budgets for IT, the perceived lack of comparative complexities when we look at banks relative to (re)insurers adds further starkness to the investment delta; one can make a very strong case to suggest that there are fewer complex functionalities within banking when compared with the (re)insurance industry. Payments, foreign exchange, asset management, ancillary investment support and security are perhaps the major areas where technology (and FinTechs in this arena) has had the greatest impact in innovating in and around banking. (Re)insurance is a lot more complex, and the avenues for technological innovation are therefore much broader. In the past decade, international banks have essentially homogenized around the same basic offerings to clients, and where there have been FinTech-type innovations, banks have been able to partner or replicate with seemingly few hurdles. Those living in the InsurTech space know this not to be true in our industry.

Prioritizing the evolution of InsurTech

Despite 2019’s unicorns, we may in fact not be investing enough on relevant technology, or enough into the likely winners of the InsurTech arms race. To be clear, we are not recommending that firms go out and spend more money but simply keep the importance of technology, and technology budgets, at top of mind. The winners of the InsurTech race are slowly starting to show themselves, and as such, we are at the crossroads of a massive opportunity.

Despite our recommendations to review technology investment relative to the pressures of the short-term nature of profit reporting, and the aforementioned issue of budget size relative to value creation, we would be remiss not to acknowledge that the past couple of years have thrown some very complex issues at (re)insurers — not the least of which are several significant natural catastrophes, the ongoing impacts of climate change and emerging threat vectors that still remain largely misunderstood (e.g., cyber). We also acknowledge that many (re)insurers have had bad experiences of technology adoption and integration, which makes the conversation around additional technology spend an emotional one. It is also worth remembering that the InsurTech evolution is still a relatively nascent phenomenon. Despite this, we encourage our industry to keep technology top of mind. Bringing it into daily topics of focus and priority is invariably the right thing to do.

8% of InsurTechs currently in focus in the claims and settlement process, 19% in pricing and underwriting, 45% in quote, bind, issue, and 28% in policy administration and central systems.
Breakdown of the InsurTechs in focus in the functional chain

Source: Willis Towers Watson Q4 2019 InsurTech Briefing

2019 Q4’s data highlights

Full-stack InsurTechs continue to drive funding totals. In this quarter, the largest funding round went to Medicare Advantage plan provider Bright Health, which raised a US$635 million Series D, followed by digital small business insurer Next Insurance. Notably, Next Insurance, which began as an MGA, has been acquiring carrier licenses in select states and is issuing policies of its own.

Q4’s funding reached a record high of almost US$2 billion (US$1.99 billion). In this quarter, the number of deals decreased 10% from the previous quarter to 75 deals. Total funding volume, however, reached an all-time high at almost US$2 billion, up 32% from Q3. The growth was driven by four mega-rounds (US$100 million +) to Bright Health, Next Insurance, Duck Creek Technologies and WeFox Group. Additionally, seven deals over US$40 million occurred in Q4.

In Q4 2019, global InsurTechs raised US$244 million in early stage funding. P&C start-ups continued to take a greater share of total InsurTech investment than their L&H counterparts, continuing a trend seen since Q3 2016. The largest P&C early stage round went to Paris-based home insurance provider Luko, which raised a US$22.14 million Series A. Investors also demonstrated interest in ondemand offerings as InsurTechs Thimble and Cuvva each raised US$22 million and $19.5 million, respectively.

Distribution and MGAs represented 57% of deals in the passing quarter. Since 2014, distribution and MGAs have represented over half of all InsurTech deals globally. B2B companies represented approximately 39% of deals, and less than 7% were full-stack insurers. However, in this latest quarter, we see a slight uptick in deals involving fullstack insurers to 10.7% with B2B deals falling to 32%.

“Rest of world” activity marginally outpaced U.S. InsurTech investment in Q4 2019. Since 2012 however the U.S. remained the most dominant market for InsurTech investment activity. U.S.-based InsurTechs are now facing increased competition for funding as foreign competition continues to ramp up. China, Germany, the U.K., and France each have 4% or more of deal volume in Q4 2019. For context, in Q4 2016, U.S InsurTechs absorbed 60% of funding compared with 49% today.

Claims and settlement in focus

As we have reported in our previous quarters, we set our sights this passing year on offering a longer-term, business-first, strategic view of InsurTech. 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 assessed 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.

In taking this “business first” approach, we have encouraged our readers (and those interested in this space) to look through the lens of InsurTech applicability and relativity in a different direction where possible. We continue to support the view that technology needs to work for a well-thought-out commercial strategy (usually reflecting incumbent business goals) to truly add long-term value. Technology is an enabler: The minute one begins to attribute and apportion value to technology in and of itself, without a clear business rationale, the chances of landing upon a successful integration/adoption of technology diminish rapidly. We come to the end of this journey in this review of Q4 when we assess the role and value of contemporary technology in the claims and settlement arena – where (re)insurers demonstrate their true calling. Specifically, we are going to be putting the spotlight on business cases where technology is being used to make the experience of claim management and claim relationships with policyholders as effective and efficient as possible.

InsurTechs in focus

The InsurTech businesses featured in this quarter are Metromile, Benekiva, ClaimVantage, ClaimSpace, Claim Central, DeepFraud, Global Parametrics, Adjoint, BanQu and Spixii.

Incumbent corner

In this edition’s Incumbent Corner, Willis Re’s Chris Brook, global chief operating officer, and Steve Robson, global head of claims, speak with Larry “Cole” Calhoun, general adjuster and Roman Buegler, co-lead of Remote Industries, part of Munich Re’s claims solutions, which is streamlining the property claim process after natural catastrophes.

Thought leadership

This quarter’s Thought Leadership from ICT’s Tom Helm, head of Claims Consulting. In his piece “The road to driverless claims processing,” Tom explores how far away we are as an industry from fully automated claim processing.

Transaction spotlight

Our Transaction Spotlight features this year’s monumental activity in the L&H sector, focusing on Willis Towers Watson’s acquisition of TRANZACT, as well as Prudential’s acquisition of Assurance, and the recent activity of GoHealth, eHealth and PolicyGenius. This quarter’s Transaction Spotlight is introduced by Ryan Jessell, senior director of Benefits Delivery and Administration, Willis Towers Watson.

Finally, we conclude the report with a review of InsurTech market trends and transactions in the InsurTech Data Center. As ever, we thank you for your continued support.

Q4 briefing highlights the claims and settlement process of the insurance function chain
The insurance function chain

Source: Willis Towers Watson Q4 2019 InsurTech Briefing

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