By Murray Raisbeck, Global Co-Fintech Lead and Partner, KPMG in the UK and Ram Menon, Global & Americas Lead Partner, Insurance Deal Advisory, KPMG in the US
Venture Capital (VC) investors across the world see exciting potential in Insurtech. Insurance is an industry ripe for disruption, with increasing industry challenges combined with insurers looking for ways to transform their age-old operating models ridden with legacy IT systems and processes. Current trends are clear: emerging Insurtech technologies will play a critical role in the industry’s long-term transformation, and VC and corporate investors alike are eager to be part of the developing trend.
A developing subsector with a strong future
While Insurtech is a less-mature area of the broader financial technology (fintech) market, recent investor interest and startup activity have established the sector’s permanence. Interest in Insurtech increased dramatically in 2015, though the sector is widely believed to have come into its own a year later, with Insurtech startups attracting more than $1.7B  worldwide in 2016. Investment is off to a slower start in 2017 indicating more the effects of timing than any seismic shift in the insurtech space at large.
To date, the majority of Insurtech VC funding rounds have remained small, focused mainly on seed and Series A rounds. However, as many of the early entrants into the field are now seeking later-stage funding, a larger average deal size—and perhaps even some megadeals—may be on the horizon.
Breadth over depth – for now
Diversity of offerings is the current hallmark of this growing tech subsector. Many Insurtech companies’ solutions target individual components of the insurance value chain, such as distribution, underwriting, claims, or customer service. However, investor interest and activity is evident across all insurance types, with current high-activity areas including health and life insurance, P2P solutions, chatbots, risk management for small businesses, insurance comparison tools, self-service claims,and more. Digital challenger insurers, such as Lemonade and Trov, have also drawn interest for their innovative delivery models. Trends elsewhere indicate that the market may soon deepen, with Insurtech solutions using Artificial Intelligence and Internet of Things marked as potential high-growth areas.
Corporate investment continuing to increase
Corporate VC activity also plays an increasingly important role in the developing Insurtech ecosystem. While the global insurers and some of the larger US insurance firms have been most active in the space to date, many other firms are looking for ways to connect with Insurtech startups. In fact, in a recent KPMG survey of insurance industry executives, 62% indicated that their company either had or was planning to create a venture capital fund to invest in Insurtech.
Partnerships with Insurtech companies are increasingly on insurers’ radar, as is M&A activity. As insurers redefine their business and operating models to better align with the needs of today’s customers, strategic deals to partner with, invest in or buy companies that provide key technologies become ever more important. Enhancement or transformation of the insurer’s business model are key drivers for this activity, though the hunt for innovation is increasingly likely to shape insurers’ rationale for deals in coming years. However, corporate investors and buyers need to remain conscious of how each investment and purchase fits into the broader corporate strategy, goals, and company direction. Such alignment will become increasingly critical to success, especially as larger insurers begin to drive global M&A activity and deal competition rises.
Insurtech-focused accelerators, designed to encourage startup growth and innovation, are also important elements in the subsector’s growth. In fact, 36% of insurers from around the globe are involved in an innovation hub or lab, and some are already using these hubs as a way to enhance, transform and eventually replace their current operating models. Tellingly, major insurers have also begun working together on innovation labs and digital garages, prioritizing technology innovation over competition.
Clear variation in different geographical areas
Insurtech is expected to remain a hot global investment area in 2017. To date, the majority of Insurtech investments have been centered in the US, but this is beginning to change, especially as insurers increase global investment and M&A activity to diversify their geographical risks and earnings profile. While current political uncertainty in the US has slowed investment in a number of areas, including the largely healthcare-focused US Insurtech market, activity is expected to rebound.
The Insurtech market in Europe is more fragmented, though considerable activity is seen in niche areas. Early stage Insurtechs attracting seed and Series A deals dominate, though recent activity in Israel has created a number of emerging Insurtechs looking to gain access to global markets. In Asia, India is gaining attention as a testing ground for Insurtech products due to the country’s large population, tech savvy consumer base, and skilled and relatively inexpensive labour pool.
Activity patterns may shift in the next few years as different regions attempt to become financial capitals in a post-Trump, post-Brexit landscape. Regulators are currently working to promote local fintech and Insurtech activity through efforts such as the creation of regulatory sandboxes.
A bright future for Insurtech
Despite the current interest from VC funders and the diversity of Insurtech solutions already reaching the market, Insurtech is still an evolving subsector with considerable growth potential ahead. Some volatility should be expected, both in terms of funding rounds and hot investment areas. As Insurtech matures and different models become proven, clearer trends should emerge.
As customers’ needs change, so too must insurers. Despite the challenges associated with legacy IT systems and in-process transformation projects, the viability and adaptability of new and emerging technologies may provide the key to success in transforming the legacy insurance business model. With that said, increasingly more and more, corporate venture capital investors at insurance companies are carefully evaluating the strategic-fit of their Insurtech investments to ensure alignment with their broader corporate growth strategies and operating model transformation goals.
For a deeper dive into strategy-aligned deal making for insurers, please see The New Deal: Driving insurance transformation with strategy-aligned M&A.
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