Why life insurtechs will likely go public in 3 to 5 years

Life insurtechs will likely enter public markets in the next three to five years. While there's residual fear around what will happen when any insurtech enters the public market, that fear is particularly unfounded when it comes to life insurtechs. 

Insurance onlookers often judge all insurtech products by the same success markers, assuming they all profit in the same ways. This confusion around the differing business models within insurtech has made it harder for some startups to chart their own paths and achieve industry attention. 

As we know, all insurtechs need to be successful in three areas: 

1. Acquiring a potentially profitable book of business (i.e. customer acquisition of target demographic)

2. Achieving profitability in its underwriting solution (i.e. accuracy in actuarial pricing and loss ratio estimations) 

3. Continuing smart investment of the "float" (e.g. float is the money held by insurtechs that has not yet been paid out to claimants) 

In the early waves of insurance innovation—what we sometimes call "insurtech 1.0"—property and casualty (P&C) insurtechs came out guns blazing, looking to "disrupt" the traditional industry with digitized distribution and new underwriting methodologies. Subsequently, many P&C startups received investor attention for their fast growth, their ability to acquire a young, digital-first demographic of consumers, and the story of a better way to engage and therefore underwrite their customer base. 

For P&C, revenue growth is typically dependent on underwriting profitability, and hence the wave of MGA and MGUs within the space. When venture capitalists ask P&C insurtechs to grow their customer base quickly, they also encourage some patterns that might bring about a potential downfall; when P&Cs move fast and break things, they accept customers based on an assumption of risk—they say "yes" to too many customers too quickly without proper validation of that risk. This pattern is driven by the typical "grow at all costs" venture-backed startup M.O. But, because of their now not-so-profitable book of business, these P&C startups will struggle to maintain their initially assumed lifetime value in order to justify a high customer acquisition cost. Not to mention, many of the 1.0 insurtechs have also taken on the capital intensive burden of becoming a full-stack carrier, which has not only been a drag on them financially, but has pushed the market towards valuing them on public carrier multiples of which have proven to be less than competitive. 

The venture timeline and the insurance business lifecycle are not always aligned 

We can only truly measure the success of a P&C insurtech when its underwriting solutions are tested: when an insurtech begins paying out to claimants, and in turn, understanding the accuracy of its loss ratio estimations. From a venture perspective, this specific turning point might come after a startup has already entered public markets. 

When 1.0s entered the market (e.g. Hippo, MetroMile and Lemonade), venture-backers saw extreme and unprojected losses. We witnessed a massive crash in the market, but mainly because we approached an inevitable moment in the insurance life cycle: a test of the insurtech's loss ratio estimates. Simply put, for P&C, profit isn't only based on how many people buy policies. Profit comes from the efficacy of the underwriting solution over time. This misalignment between the P&C insurance business lifecycle and the venture capital lifecycle is why there's continued confusion and fear around investments in the insurtech space. 

The venture world is still in its learning curve with insurtechs 

Life insurtechs will likely enter public markets in the next three to five years. Some may ask: why not sooner? 

Today, when life insurtechs start fundraising, VCs ask them about their loss ratios—an impact of the insurtech 1.0 market crashes. But this question signals that venture capitalists still have a nascent understanding of the overall insurtech ecosystem and the various business models within. 

For life insurtechs, growing a customer base is actually the source of profit vs. underwriting margins. Why? Unlike P&C insurtechs—where the majority of innovation is focused on increasing underwriting profitability—life insurtechs aim to innovate around distribution. These insurance vehicles are not a mandatory purchase in the way P&C products are, so the real game is around how a player can capture the market's attention and effectively build purchasing intent. 

There has not been significant innovation around mortality tables as the lifecycle of proving loss ratio assumptions is multiples beyond venture lifecycles (and possibly even our own lifetime). Innovation, instead, happens when life insurtechs prove a competitive edge in the existing market or the ability to grow the market into new underserved segments, of which there are many. Therefore, the venture lifecycles are much more correlated with life insurtech lifecycles as the LTV (loan-to-value) is more or less stable once a customer is acquired and the primary driver of revenue growth is simply based on customer acquisition. 

To gauge whether a life insurtech will be a good investment and/or contender for the public markets: 

1. Think about life insurtechs as more similar to a traditional B2C or SaaS startup. Selling life insurtechs products at a levelized premium is just like a typical transactional purchase. While it might make sense for P&C, asking a life insurtech about loss ratios doesn't make much sense since you're talking about claimant payouts across a mortality table: a much longer lifecycle, 30+ years post-operation in the public markets and churn can be evaluated similarly to SaaS churn. 

2. Ask life insurtechs about their book of business. In life insurance, the most valuable book of business is one of which has acquired the healthiest and wealthiest customers, which defines a potentially long time horizon to build and invest the premium float. The average millennial is under-insured—with only 45% holding life insurance policies. For life insurtechs, the holy grail is capturing and engaging a young and healthy cohort that is also actively building and inheriting wealth. To drive continued interest and availability in capacity partners and to stay relevant long term, today's life insurtechs need to make sure they are targeting a demographic of 'good risk' and ensure they're supporting profit margins for their partners. 

Another reason why the venture community is less familiar with life insurtechs is there are simply less of them. Basically, the value chain is less developed for life insurtechs than they are for P&C. By value chain, we mean: the way in which the fundamental elements of insurance (e.g. retention of policyholders, precise segmentation, and efficient payment of claims) link together.

For example—fronting carriers are built for startups that are MGAs (managing general agents)—meaning fronting carriers are much more technologically advanced for the P&C process; the API infrastructure for these integrations is much more of a norm. In the life insurance space, startups have to consider whether or not they want to operate as an agency and work with manual and legacy operations of carriers or if they want to invest in co-developing an API infrastructure with carriers or taking on additional services within the value chain in order to control the customer experience. Today's insurtech innovators are solving these issues by rearranging roles and responsibilities within the existing value chain of traditional carriers and distributors. 

Contrarian investors who see opportunity within this massive industry should ask key questions to understand the nuances and the general "sum of parts" of an insurtech in order to truly put a proper value on a given opportunity. To those investors who got burned by investments in the insurtech space: I tell them that a massive market opportunity still exists and the biggest players are yet to be identified.