2017 was the year insurtech stepped up. Many insurance-focused startups were funded from 2014 to 2016 – but they truly came to market in 2017. This was the year that saw some of the first big acquisitions, like Guidewire acquiring Cyence, major market expansion from brands like Lemonade, and conferences devoted to the sector seeing big attendance gains.
Retrospectives are always a bit dull, though. Instead, let’s look at the future. What can we expect from insurtech in 2018? Here is what we’re seeing from the ground level.
Companies will fail
The number of funded insurtech companies continues to accelerate. In Q2 of 2017 we saw a record $946 million invested across 64 companies. So, the coming issue will not be due to a lack of funding – it is that too many startups are focused on the low-hanging fruit. The 12th renter’s insurance company developing a better UI is unlikely to be a breakout success. Companies that have been in the market and haven’t been able to articulate a unique solution or gain traction will fail. There are too many other opportunities within insurtech that will become attractive to investors.
Valuations will be hit with a dose of reality
As understanding of the market increases and the market matures, investors will more accurately judge what products and services can influence the insurance value chain – and which cannot. Founders will seek harder-to-solve problems across bigger and more ingrained aspects of insurance. Investors will become more discerning, differentiating valuation based on the value of the problems being solved.
Expect some big acquisitions
The Cyence deal was only the beginning. We will see a step change in the number of acquisitions. Most insurtech companies are still in early stages, but due to the talent wars driven by tech, the insurance industry is suffering from FOMO. How can they get access to AI, machine learning, and data sciences talent? They will have to buy them.
Meanwhile, those acquired companies will likely operate as semi-independent entities for some time. It’s no secret founders and Silicon Valley-style technical talent need to be building interesting things and moving quickly. In order to keep talent post acquisition, insurers and acquirers will need to keep them separate from more sluggish or traditional aspects of the business, like with Vertafore’s acquisition of RiskMatch.
New early stage venture entrants will slow
The number of new-to-insurtech VCs at the seed and Series A funding stages will slow down. The venture opportunities within insurance will still be huge, but they will lean towards more complex use cases with a deeper understanding of intricacies within the insurance value chain. Those general technology investors who have not started to get educated about insurtech are even less likely to jump in as these ventures become more complex.
The FAANGs won’t become insurers…yet
FAANG companies -- an acronym for the five tech giants Facebook, Apple, Amazon, Netflix and Google -- loom over legacy players with their scale and data prowess. There have been rumblings of some tech giants getting into the insurance space: Tesla is “reinventing” car insurance and Google knows more about you and your propensity for risk-taking than most insurers. The bottom line, however, is that these companies do not want to become insurers yet, but they do want to deliver insurance coverage to their customers. When Tesla wanted to offer insurance, they partnered with incumbent Liberty Mutual to do the heavy lifting. When Amazon launched their warranty service, Amazon Protect, in Europe, they partnered with The Warranty Group.
Startups will outgrow innovation departments
An important aspect of a successful venture-backed insurance product is the ability to scale. So far, many startups have been relegated to proofs of concept within insurer innovation groups, which are providing access to data to see what teams can do with it. For those companies that prove themselves, they will need to move from innovation departments to business groups that can better assess how to adopt and implement offerings at scale. If it cannot scale appropriately, it cannot be used by insurers or achieve great margins as an insurer.
Insurance corporate VCs will invest beyond Insurtech
Corporate VCs from insurance companies like American Family and Liberty Mutual will continue to expand in scope. Not only will they continue to back insurtech startups, but they’ll start to look at any vertical that relates to risk and data (the possibilities are quite broad – from weather analytics to IoT to self-driving cars. We’ll see more investment in tools and products that can be applied to insurance, but that are not solely reliant on insurers as customers. Non-insurance specific startups will accept their funding in order to establish a promising new vertical.
2018 is the year of commercial insurtech
One major industry gap we’ve identified this year, is a dearth of startups focused on commercial and industrial insurance. While personal lines insurance is a massive industry, P&C goes beyond homes and autos. Technologies like IoT and blockchain can bring a deeper understanding of risk for commercial and industrial applications. Commercial insurance is an approximately $300 billion market ripe for new technology solutions and data sources. It’s about time ventures tackle the space.
Overall we’ll see a move from ornamental products that change consumer experience, to core solutions that will bring greater efficiency to an industry with $5 trillion in premiums in the U.S. alone last year. Even a 1 percent increase in cost savings translates to a multi-billion-dollar opportunity. Watch for things to heat up as insurers and tech startups get into the details and identify where they can work together to make an impact.
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