Funding for insurance technology startups is outpacing the sector as a whole, according to industry analysis.

So far this year, the insurtech sector, which includes companies creating new underwriting, claims, distribution and brokerage platforms, as well as enhanced insurance-specific, customer-experience offerings -- has seen 47 venture capital investment deals totaling $1 billion, compared to 74 deals totaling $2.5 billion in 2015, according to “Pulse of Fintech,” a quarterly global report from KPMG International and CB Insights that explores equity transactions to venture capital-backed financial-technology companies.

That's despite the fact that for the fintech sector as a whole, deal activity fell in Q2, hitting a five-quarter low in the United States with just 97 deals, compared to 130 in Q1. Fintech startups also saw funding decline to $1.3 billion in Q2 2016 -- compared to $2.4 billion for the same quarter last year -- and drop 24% compared to $1.7 billion in Q1. Globally, funding for fintech startups dropped 50 percent in Q2 largely as a result of declining investment in Asia, where funding to VC-backed companies dropped to just $800 million in Q2 from $2.6 billion in Q1, despite a rise in the total number of fintech deals.

“We are seeing a lot of alignment between these insurtech companies and the carriers,” says Gary Plotkin, principal of KPMG’s insurance management consulting practice. “Insurers want to be able to influence these companies and keep them out of the hands of their competitors.”

Capturing Customers via Insurtech

The list of factors driving the rise of insurtech is long, Plotkin says, including a softer market, the fact that insurers have cash to invest and the expectation that insurtech can enable them to sidestep the risk and expense associated with large-scale legacy-modernization projects. “Everybody has one every year; then they realize the cost of change and the lack of return and they stall,” Plotkin says.

Much of insurtech’s appeal is in cutting development time and speed to market while partnering with companies that already have cracked the digital code or appeal to millennials, he says. “Fundamentally, the biggest concern insurers have is the ability to capture the customer. These insurtechs offer light-weight capability to move forward. Suddenly, COOs and CIOs don’t have to go build. They can subscribe to it.”

Buy, Build or Fund

The growth trend for insurtech is supported further by traditional insurers that are creating venture capital funds to invest in insurtech manufacturers as they attempt to catch-up with banking and financial services, the report says.

“There are a number of carriers that are doing joint ventures with these firms and taking shares to see what they can do in the marketplace,” Plotkin says. “They are saying, ‘We will share our data if you help us move into this space faster.’ This allows them to expand their footprint and expand their brands to millennials and other markets. We are seeing more of that activity, particularly in the Fortune 1000 carriers.”

Another trend noted in the report is that some insurers, such as Aviva, Allianz and MetLife, are bringing fintech and other technology firms together in innovation labs or “garages” in an effort to engage customers in more meaningful ways across online and mobile platforms and improve policy-handling and claims-payment processes, the report says.

While the insurance industry has been slow to change, insurers also increasingly are working to develop proof-of-concept initiatives around analytics, wearables, the Internet of Things, blockchain and other technologies to offer more customer insights, enable more effective insurance operations and engage millennials. “I foresee a lot of activity in the P&C space because there’s an aspect of innovate or die there,” Plotkin says.

In the next couple years, Plotkin expects investment in insurance technology to significantly outweigh investments in banking and capital markets, much of which has been regulatory driven.

“Insurers have so much more room to grow,” he says. “Not only to defend their existing market space but to move into new spaces while keeping those third parties out. It’s a whole new world with new options and execs need to understand what this can mean for top-line growth before their competitors do.”

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