InsurTech entering its second wave
Article Synopsis :
The insurance industry, as in the financial services sector as a whole, has reached an inflection point.
Investors are no longer spreading their capital over a large number of proof of concept projects, but instead focusing on InsurTechs that are proven. This investment is often happening, as late-stage or follow-on funding.
Fewer deals, but more cash
In fact, startup activity fell to almost nothing in the first half of 2018 and only four launches appeared on the Venture Scanner’s database by June 30.
This trend started in 2017, when only 88 InsurTechs launched, half that of both 2015 and 2016. This has replicated the tailing off seen in other areas of fintech covering banking, asset management and commercial real estate.
Despite lower startup momentum, the sector still accounted for two-thirds of all new fintechs, as non-insurance launches fell by 73 percent. But the dramatic decline in startup activity does not mean the game is up for InsurTech.
The first half of 2018 saw funding of $869 million, which if continued, should equal last year’s $1.83 billion, the second-highest level of financing the industry has ever seen.
VC fuels personal lines funding
Personal lines InsurTechs remain dominant as they have over the past decade, attracting $479 million in H1 2018 and is on track to beat last year’s $789 million,
This means 55% of funding is being channeled to this tech (43% in 2017) which focuses on customer acquisition, including comparison-shopping platforms and lead-generation solutions, the two of which make up 75% of the investment.
Commercial insurance lines attracted only 6.6% of funding (11.4% in 2017), in part because the market has focused on addressing marketing and distribution issues, which are far bigger challenges in personal lines.
The largest source remains venture capital (VC) funds accounting for 91% of investments in H1 2018 up from 74% last year.
Second wave is coming
Though new launches may be less numerous, investment activity should remain strong as investors shift attention towards more established InsurTechs looking to achieve scale. That said, there may be a second wave of new startups in areas where innovation has lagged behind, such as in small- and middle-market commercial insurance, as personal insurance innovations in customer acquisition, operations, telematic sensors, and analytics are adapted for business insurance applications.
Life is lagging but beginning to engage
Life insurance and annuities are not generating much InsurTech activity, though this is likely to change as life insurers look to streamline products, simplify underwriting, and offer self-service distribution systems.
The use of advanced analytics and wellness relationships are likely to expand rapidly. Annuity writers may benefit from more intuitive and interactive tools to help consumers find their way around these often complex products and better understand long-term investment options.
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Digital Insurer's CommentsA falling number of InsurTech startups does not mean less investment, but quite probably more.
As the industry moves into the second phase of development, investors are looking to give up the speculative punts for a return on investment by backing proven technology.
If they back proven tech, these will be the systems that form the next phase of development of digital insurance businesses and be widely adopted as standard building blocks.
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