Insurance probably isn’t the industry that comes to mind when you think about disruption. Dry, low-margin industries seem like they should be shielded from Silicon Valley’s influence. Yet among the subsectors of financial technology, insurance technology, or “insurtech,” attracted more institutional funding last year than better-known spaces like personal finance or money transfer.
At first glance, insurance is an unlikely industry to target. Profit margins tend to be low and incumbents are difficult to knock off. Consumers are notoriously price-sensitive, and regulatory and marketing costs are significant. It takes a lot of capital just to be competitive, which is no guarantee of survival. Guevara, a peer-to-peer car insurance upstart that failed in 2017, was one of the more promising “digital insurers” to break into the scene. While several others, such as Oscar and Lemonade, are still at it, there aren’t many insurance startups with the appetite to take on the big guys.
If most insurtech companies aren’t looking to replace traditional insurers, what’s the opportunity? Like much of the broader fintech sector, the answer lies in developing platforms that can work in concert with established players. Large organizations are often the slowest to change, but what they lack in innovation they make up for in customer trust. Trust is a hard-won commodity in the financial industry, and most newcomers will never achieve the same level of customer confidence as brands like MassMutual or Blue Cross Blue Shield.
Partnerships between private capital investors and the insurance industry may be the way forward. Many of the biggest insurance organizations have corporate venture capital arms, which connect their brands with new tech innovations. VC arms of insurers like American Family Insurance, Aflac, Nationwide, Allianz and Liberty Mutual have made dozens of insurtech investments over the years. The insurance giants may or may not eventually acquire their venture funds’ holdings, but either way, insurtech M&A is expected to boom in the coming years. That’s one reason why the industry is attracting investment dollars. Last year saw more than $2.8 billion invested in insurtech, a record that will likely be eclipsed this year. As of June, $2 billion had already been funneled into insurtech startups.
Investors will capitalize on their existing insurtech holdings while expanding to serve other sectors, such as the gig economy. Part-time driver insurance for ride-sharing employees is one type of offering, and autonomous vehicle insurance is on the way. While many of the biggest incumbents offer cybersecurity insurance products, there’s room for insurance companies that focus solely on this market.
Like most up-and-coming industries, insurtech’s beginnings are humble. The earliest platforms were used to help insurance agents find new clients, but over time, insurtech has found far more uses and applications. Today, insurtech offers new insurance models tailored for the modern world, something traditional insurers haven’t yet been able to perfect on their own.
This edition of Midpoints originally appeared in the September/October 2019 issue of Middle Market Growth. Find it in the MMG archive.