Fintech

The (continuing) rise of insurtechs

The insurtech landscape has evolved rapidly in recent years. There are now more than 20 insurtech unicorns globally and insurtechs are increasingly plugged into the full insurance value chain. Why have they been seemingly so successful in disrupting the insurance industry and how will they develop from here?

The keys to growth and disruption

Innovation has been key to the success of insurtechs, which are transforming insurance products by making them more accessible, more customer-centric and more user-friendly. Existing and new insurance users are choosing these beneficial solutions and are able to engage with insurance in new ways that are more suited to their needs, often via smartphone apps. This aligns with the ‘CARE’ equation proposed in the World Insurtech Report 2021, which suggests that by prioritising ‘CARE’ – that is, convenience, advice and reach – of their insurance products, insurtechs are better positioned to impact the future of the insurance value chain.

Accessibility means more than simply providing digital access for existing or new products; it also means promoting accessibility for more diverse groups of people (for example, Marshmallow devised an algorithm enabling it to offer lower car insurance premiums to UK migrants) and ever greater geographical diversity (with insurtech funding growing in countries such as Botswana, Mali and Vietnam).

The acceleration of the digitisation of almost every aspect of our lives, for which the pandemic has been a catalyst, has undoubtedly played to the strengths of insurtechs. These companies are nimbler, more digitally focused and are able to identify new trends and gaps in the market much more quickly than traditional players. Given their growth potential, we anticipate sectors such as health/wellness tech, ESG/sustainability and the future of digital (eg the metaverse, Web3 and NFTs) to grow in 2022, with digitally focused insurtechs well-placed to capitalise.

One of the biggest challenges facing the insurance industry is the ‘protection gap’ and the ability of insurers to offer products to consumers to insure against their biggest risks. Aon’s 2021 Global Risk Management Survey lists cyber-attacks/data breaches as the top risk facing businesses, and this is an area that many insurtechs (including Vouch, CyberCube CFC Underwriting, Coalition and UpGuard) have been focused on. Unsurprisingly, a number of the other top 10 risks are pandemic-related, with business interruption second, pandemic risk seventh and supply chain or distribution failure eighth. It will be interesting to see what products and solutions insurtechs develop to help consumers with these challenges.

What’s next for the insurtech landscape?

More funding and an ever-growing pool of potential investors. According to the CB Insights Insurance Tech quarterly reports and State of Fintech 2021 report, in the first half of 2021, investors poured $7.4bn into insurtechs, surpassing by more than $300m the $7.1bn raised throughout the whole of 2020. Funding in Q3 of 2021 did fall from its previous record high but remained elevated, raising $3.1bn across 113 deals, with Q4 of 2021 reaching another record high with $5.3bn of insurtech funding across 139 deals.

So how will this funding be deployed and what are the key insurtech trends for 2022? These are the questions the Freshfields insurtech team have been considering and you can read our primary conclusions below (some of which were previewed in our 2022 fintech predictions mini series):

1. BigTech’s (further) expansion into insurtech ­– Tesla has offered auto insurance products in California since 2019, and in 2021 expanded this to Texas. It seems unlikely that its foray into the auto insurance world will stop there, particularly with its access to real-time driving data for all of its cars allowing highly individualised pricing for products. Amazon has been ever more active in the space since selling its own-brand protection insurance in 2016 and has now established the ‘Amazon Insurance Accelerator’ a digital insurance initiative which has seen Amazon offer business insurance in the US and the UK (through partnerships with insurers). There are plenty of other examples and it makes perfect sense as these BigTech companies have the three most important elements to being a successful insurance carrier: (i) access to, and ability to process, a vast amount of data; (ii) a digital insurance ecosystem that the product offerings can be plugged into and sold from; and (iii) brand loyalty (consumers feel safe purchasing insurance from these companies).  

2. More full carrier insurtechs – initial insurtech offerings consisted of products and add-on services or technology to established insurers. These included tools to help collect and analyse data, customer engagement applications (for example, insurance ‘check-up’ services) and digital claims handling and fraud prevention services. However, the World Insurtech Report notes that full carriers are the fastest growing and most funded category by volume for insurtechs in both US and Europe – and this is a trend we think is likely to continue. Full carrier insurtechs, for example, Lemonade, Root and Metromile, are benefiting from higher revenue valuation multiples and, it would seem, an acceptance from shareholders/investors that growth and disruption is more important than short-term profits (which is not the case for traditional insurers). Crucial to the ability of insurtechs to become full carriers is access to the reinsurance market for effective risk mitigation strategies (in particular to reduce the amount of regulatory capital which needs to be held by the insurtech). For now, reinsurers seem willing and available to tap into and support this growing insurtech space.

3. Greater access to funding – this may seem an obvious prediction given the funding statistics but we think it is worth a place on our list. Insurtechs are getting access to increasing amounts of funding – with the range and growth of potential funding events (particularly with the growth of the SPAC market) and investors (private equity houses are looking at ever more insurtech targets, for example EQT recently made a significant investment alongside Vitruvian into CFC Underwriting). We have previously looked at the Lemonade IPO, IPO and SPAC trends for insurtechs and the changing UK listing landscape that could be advantageous to insurtechs.   

4. Data and ‘open insurance’ – in every sector, data considerations are critical. ‘Open insurance’ presents many exciting benefits to the insurance sector, and there are numerous opportunities in data-sharing. We think this will be a topic that will attract ever more attention, particularly as insurance becomes accessible to an ever wider and more diverse group of consumers, but it is certainly not without its challenges. We have explored the benefits and opportunities here.

Each of these topics is indicative of an increasingly mature insurtech market, which often goes hand-in-hand with increased M&A activity. There are opportunities and pitfalls in insurtech M&A, and there are signs of big-ticket deals. Large incumbent insurers have been investing, partnering and monitoring insurtechs for many years and many are well-positioned and experienced in the insurtech market (grappling with issues such as potential reputational damage and founder risks sometimes associated with these businesses), but the next – increasingly digital – era of the insurance market feels as though it has arrived.

Tech in the regulatory crosshairs

As we look further ahead into 2022, insurtechs’ legal and compliance teams will need to take more time to consider the impacts of an increasingly tech-focused regulatory pipeline, as regulators grapple with evolving market dynamics and new players in the insurance space. European regulators in particular are taking steps to tackle tech-enabled regulatory fragmentation and to ensure that a ‘same activity, same risk, same rules’ principle is applied. Planned regulatory changes (such as those around operational resilience) will not be limited to the insurance landscape. For example, EIOPA is currently feeding into the EU’s ‘Digital Finance Strategy’, which focuses on how to future-proof the broader financial services ecosystem and in particular on how to supervise: (i) fragmented value chains; (ii) platform business models; and (iii) mixed-activity groups (ie Big Techs participating in financial services). In the UK, the PRA has said that it is considering barriers to entry for small insurtech start-ups, and as part of its review of Solvency II, the regulator is looking into how it can create a more proportionate regime that helps to mobilise new entrants, provide more space to innovate, and bring new products to the market.

Still a challenging market for insurtechs

It is clear that the insurance industry is ripe for disruption, and a number of insurtechs have successfully started that journey. However, given the huge scale of the insurance industry – with $700bn a year in premiums in the US alone – and the fact it is largely dominated by ‘traditional’ insurance companies, most of which were founded decades ago, breaking the mould will not be simple. The main reason for this being that size and experience matter in insurance; it is beneficial to have greater diversification of risk, for example with policyholders spread further around the globe and/or multiple insurance lines written. New technologies, particularly those powered by AI, are closing the gap, but can they really match the vast amounts of claims history data and experience of underwriting that the incumbent insurers possess? These are just some of the challenges being grappled with by the insurtech community.

The Freshfields insurtech team believe there will be some new big names in the insurance industry from the insurtech space – but this is more likely to be in the medium term rather than the short term, and these names could come from the next wave of insurtechs.