Is Lemonade IPO the model for insurtech? Probably not

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Investment in insurtech is big business. Just this month, investors warmly welcomed Lemonade's IPO, boosting the company’s opening day stock price by 139%, resulting in a $3.8 billion valuation – all for a company yet to post a profit. And back in December 2019, Wefox, a Berlin-based InsurTech, closed the decade – and a second tranche of B-round funding – with a cool $110 million, bringing its total for the year to $225 million. This cash infusion capped off a remarkable quarter – and year – for insurtech at large, with industry watcher Willis Tower Watson reporting the quarter’s tally at nearly $2 billion and the year’s, spread across 300+ deals, at over $6 billion – both records.

The numbers don’t lie, but they also don’t tell the whole story. On the one hand, unicorns, or those soon to be minted, regularly attract more than $100 million investments just as leaders in AI, 5G, and other hot technology markets do. On the other are the dozens of new companies, typically niche providers, that seemingly crop up every day all over the world. Headlines from the first two mainly pre-COVID months of this year heralded early round raises for insurtechs specializing in everything from ride-sharing to pets and bicycles.

This great variety of players and categories, captured nicely in the plethora of charts depicting the InsurTech “ecosystem” – signals both health and hype, a tantalizing mix for investors typical of a young market with explosive growth potential. As insurtech innovates its way to the center of the new decade’s insurance practices, the time is right for an examination of the insurtech phenomena from an investment perspective.

The insurance industry is massive and venerable with legacy carriers boasting trillions of dollars in managed assets and centuries-old pedigrees. The first generation of insurtechs has looked to capitalize and disrupt traditional carriers completely by offering an “Amazon-like” experience to 21st-century insurance consumers.

But while the prospect of disrupting the insurance industry by building a better kind of insurance company – a technology “pure play” – sounds good, it is also a tall order. Insurance is a highly regulated field, very complex, and requires massive amounts of capital to sustain it. Ironically, the large raises of insurtechs that closed out the 2010s aren’t likely to issue in a new decade of pure-play dominance or signal the demise of legacy insurers. Instead, they will be remembered as a wake-up call.

As traditional carriers nervously watched the rise of this new breed of tech-forward competitor, they deliberated how best to modernize, struggling with the question of whether to “build” or “buy.” While the notion of building applications “in-house” appealed to insurers’ desire for control, that approach has run headlong into some real-world limitations, some particular to the insurance industry itself. For example, developing best-in-class solutions to meet the needs of 21st century digital consumers would require a heavy investment in IT talent (IT talent which hasn’t flocked to insurance), expensive bets on quickly evolving technology (will what I purchase today still be best-in-class tomorrow?), and extensive time to deploy and upgrade (in-house implementations can take 18 months).

Combined, these forces are pushing traditional carriers off the fence. Facing a new decade, savvy consumers, and fast-moving, well-funded digital competitors, incumbent carriers have decided to buy. So who are they turning to? Between the insurtech pure plays and array of niche, specialty providers lies a fertile field of innovative companies called “enablers.” This class of insurtech company -- of which mine, Breathe Life, is a part -- is actively partnering with legacy carriers to make them better, not displace them.

It’s a crowded field, but that’s the point. Improving digital engagement is imperative for life insurers to win new business, including today’s huge untapped market of un- and under-insured consumers today, which Accenture sizes at $12 trillion in the U.S. alone. Modernization holds the key to conversion at scale.

But after marketing “end-to-end” platforms, insurtech enablers are likely to find that owning every step of the customer journey and every process in the insurance fulfillment chain just isn’t sustainable for one technology firm. With so many innovative companies in the mix, such rich potential for future applications of AI and data, and so much business opportunity ahead, platform players instead will reposition themselves as best-of-breed providers, doubling down on what they do best – whether that’s acquiring customers, managing policies, or assessing risk.

Taking their cue from Plaid, insurtech enablers will develop API-friendly solutions that facilitate smooth integration with both internal carrier systems and external ecosystem providers, offering consumers, advisors, and IT teams seamless, easy-to-manage digital experiences. Insurtechs will begin to partner with and acquire each other, leveraging complementary strengths to broaden their solution capabilities and rapidly amass customers and market share As these changes unfold, and as legacy carriers adopt these solutions en masse to become modern-day, digital juggernauts, expect a dynamic insurtech market replete with investment opportunities beyond Lemonade.

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