More insurers become venture capitalists to get digital edge

Register now

Most insurance companies have set up venture capital units, or plan to do so, with the goal of getting a foothold in emerging technologies. That's according to a recent KPMG survey of 200 insurance executives, titled "The New Deal: Driving insurance transformation with strategy-aligned M&A."

Fifty respondents said they already had a venture capital (VC) unit set up to make investments in technology companies. Half of those VC units have $250 million or more to invest, with several reporting $1 billion in investment outlays. A further 37 percent of the total respondents said a VC unit was in the works.

"With a deep desire to take advantage of emerging technology and innovation trends, many insurance organizations have established (or are considering establishing) their own in-house corporate venture capital investment capabilities," the KPMG study says. "The investment decisions being made by these corporate venture capital funds suggests that a period of swift and exciting innovation is upon us."

VC investments cover both insurance-specific startups and companies whose technologies will be relevant to the insurance industry, but have horizontal applications as well. This includes investments in worker-safety technologies, cybersecurity firms and smart-device manufacturers.

“Whatever the investment strategy of the organization, corporate venture capital is playing a vital role in the insurance landscape," says Ram Menon, global lead partner, insurance deal advisory for KPMG U.S. "The key, as always, is to make sure that the VC investment strategy is aligned intimately to the strategic goals and direction of the company as a whole."

Digital driving partnership appetite

The study also found that insurers are looking to make partnerships, if not investments, in companies that will help them further digital transformation. Three-quarters of respondents said that they "will partner to gain access to new technology infrastructure." Only about a quarter said that straight-up mergers or acquisitions would take place to get access to new tech.

"Respondents were focused on securing partnerships and alliances that will help enhance and transform their business models, followed by those that will help enhance or transform their operating models — focusing on capability, new technology infrastructure and talent," the KPMG report says. "Insurtech start-ups are now attracting widespread attention and have increasingly become targets for acquisition and partnership."

Insurers are more focused on partnerships and investment when it comes to new technology, rather than actually buying firms, because they want to be able to better manage their return on investment and preserve the technology company's innovative spirit.

"There are, of course, inherent risks and difficulties involved in both acquisitions and partnerships — upon post-deal reflection, many acquisitions do not deliver the value they had promised," the report says. "This unfortunate outcome is often the result when the additive value of a target is unclear to the organization."

For that reason, insurers tend to see "co-creation" via partnership as a way to realize the benefits of digital without the increased pressure of M&A. Instead, M&As tend to be focused on geographical expansion, with most insurers planning a buy citing "foreign operations and footprint" as a motivator.

"The bottom line is that insurance executives and shareholders expect investments to deliver more than just size and scale,” Menon adds. "They also need to deliver on the longer-term strategy for the organization. And that is where the big challenges will lie."

For reprint and licensing requests for this article, click here.
Venture capital