Like every other market, insurtech will feel the effects of the COVID-19 pandemic in the coming years. But unlike many sectors, the global health crisis may slow the growth but will not stunt insurtech’s progress. Rather, it will push it into new phases of maturity as scrappy direct-to-consumer model investments give way to technology investments that transform and enrich key processes at established insurance providers.
Since 2014, insurtech has been one of the most promising and attractive sectors for investors; the total annual value of venture deals in the insurtech space has grown at a CAGR of 60 percent. Over the next couple of years, we can expect to see this growth slow modestly due to the fallout of the pandemic, but make no mistake: Insurtech is still going to be attracting significant funding. Moving forward, we’re going to see late-stage VC deals increasing in size as startups continue to gain scale. At the same time, the focus of investment is going to transition in a way that reflects a new phase of development for the insurtech space.
The early wave of insurtech growth
As in other sectors, the early investment push in insurtech was focused on digitizing and enhancing the customer experience. Recognizing the tedious and unpleasant nature of so many dated processes inherent in the traditional insurance model, investors poured funding into companies that promised to revolutionize the sales, distribution, marketing and servicing of policies. The early wave of insurtech was primarily comprised of companies with direct sales models, especially in the property, casualty, health and life segments.
Starting back in 2014, startups rode the digital transformation trend as a way of entering the insurance business. They did this by offering a differentiated digital experience that enabled customers to research, compare, buy and file claims electronically. Startups like Root Insurance Co.—which has raised more than $500 million in venture funds—challenged traditional auto insurance models with new applications of data and technology, with companies like Lemonade ($480 million) doing the same in the renters insurance space.
Starting in 2017, however, attention began shifting toward a new model of insurance innovator: early stage companies supplying enablement technology to legacy insurance providers. These technologies—which focus on key unmet needs in customer acquisition and policy issuance, underwriting, and administration and claims—are the ones that we’ll see gain momentum among the investment community in the coming years.
Insurtech grows up
Deal sizes in the insurtech space have been steadily rising in recent years. Between 2017 and 2019, the median early-stage VC insurtech deal increased 50 percent from $6 million to $9 million. The median later-stage VC deal rose from $14 million in 2017 to $33 million in 2019. Overall, in 2019, the insurtech space saw 329 deals, for a total value of $6.2 billion, compared to 257 deals totaling $4.1 billion in 2017.
Insurtech valuations have also climbed significantly since 2017. The median early-stage pre-money valuation grew 132 percent between 2017 and 2019, from $19 million to $44 million. The later-stage counterpart grew 135 percent from $100 million to $235 million. Market analysts expect to see these figures continue to grow, particularly when it comes to technologies that improve the underwriting, administration, and claims processes of established companies.
The core administrative functions of many life, commercial and health insurance companies still reside largely within client-server-based systems, and some companies are wrangling multiple systems due to growth via acquisition over the years. By current standards, these systems tend to be inflexible and inefficient, resulting in degraded experiences on the customer end and expensive maintenance for the insurers. However, the transition to new systems represents a challenge due to the sheer scope of data transfer and system configuration needs. On the investment side, startups that are helping to alleviate these challenges—for example, those developing bolt-on systems that enhance core administrative functions by improving data quality, reducing errors or improving processing efficiency—are receiving well-deserved attention. The shift to cloud is starting to take place; several of the bolt-on applications—whether in CRM, sales, analytics, etc.—have started to deploy cloud tech and integrate seamlessly with the core administrative systems. Larger insurers are still very reluctant to transition from their legacy core admin systems due to challenges in data migration and integrity, as well as the costs involved in new system implementations.
Meanwhile, the digitization of underwriting represents another new frontier for insurtech and its investors. A handful of start-ups are now employing artificial intelligence and machine learning to streamline premium pricing for smaller products, in some cases based on photo uploads. Greater efficiencies and new automations will enable established insurers to compete with challenger companies more effectively in their spaces, laying the groundwork for a competitive landscape in which the customer experience takes center stage. Ultimately, growing investment in enablement technologies over the coming years will push insurtech to a new phase of maturity, in which seamless, intelligent customer experiences become table stakes rather than a competitive advantage.
