Huge amounts of capital are flowing into insurance-focused technology companies.
The dollars invested are matched by the stakes: opportunities to reap gains — in cost savings, productivity increases and industry-disrupting changes to business processes — that could displace established incumbents.
This was the common theme during a panel discussion held at the 7th annual Insurance M&A Symposium held recently in New York City. Produced by the Knowledge Center and SNL Financial, divisions of S&P Global Market Intelligence, the session brought together four experts from the insurtech/fintech and M&A worlds.
Most agreed that the pace of activity is quickening.
"We're looking at about 1,000 companies per year, and perhaps 20 to 45 percent are now insurance-related," said Drew Aldrich, a senior associate at AXA Strategic Ventures. That's up from 5 to 10 percent in recent years. There's a tremendous resurgence in venture capital deal flow across primary lines of insurance — commercial, property and casualty, life and health."
Just how much is the industry investing in insurtech companies? Mark Purowitz, a principal for financial services strategy, M&A and digital, at Deloitte Consulting LLP, says the 500-plus companies tracked by the company have invested close to $6 billion in the field over the last three years.
Among them are major life insurers including Allstate, American Family, AXA, MassMutual, Nationwide, Transamerica and USAA. These, plus established venture capital firms, collectively have boosted venture capital under management to $165.3 billion, reversing a three-year decline, according to Yearbook 2016, published by the National Venture Capital Association.
Pointing to American Family, MassMutual and Nationwide, session moderator Cathy Seifert, an industry analyst at S&P Global Market Intelligence, suggested that mutual life insurance companies may be uniquely positioned to play in the insurtech market and broader fintech spaces. That's because they're not answerable to shareholders for their investments, only their policyholders.
AXA's Aldrich disagreed, noting that a carrier's involvement is less a function of its corporate structure than of how it views insurtech from a strategic perspective.
AXA, which boasts a $250 million venture capital fund, is investing in seed- and early-stage companies that are developing innovative solutions with applications for insurance, asset management, financial technology and health care services. (Photo: Thinkstock)
The big insurtech questions
Major decisions — about which types of insurtech companies to invest in, the extent of their involvement, what the business objectives should be and how great a return is expected — will determine how active a carrier will be in the market. And these decisions, Aldrich said, may or not align with the focus of other venture capital firms looking to invest in a startup company of mutual interest.
"[Some venture capital firms] refuse to deal with strategic investors because they're more focused on investment returns. The difference between a 2X and 10X exit" — one venture capital firm may expect a 2-fold return on investment, but another 10-fold ROI — "can make or break a VC fund," he said.
These issues aside, more life insurers are likely to join the insurtech fray in the coming years. And for good reason: survival. Many of the fintech and insure-tech start-ups, the panelists warned, threaten to upset long-established conventions in a conservative, button-down industry. Every aspect of the business — from back-office operations and underwriting to handling policy applications and claims — is up for grabs.
"There are major pockets of stagnation in our industry," said AXA's Aldrich. "People who have zero knowledge of insurance are trying to disrupt the industry because they see tremendous areas of unmet needs."
AXA, which boasts a $250 million venture capital fund, is investing in seed- and early-stage companies that are developing innovative solutions with applications in insurance, asset management, financial technology and health care services.
A particular promising growth market for the VC investors is the so-called "Internet of Things" (IoT). This refers to smart, web-connected devices that will enable insurers to better tailor products, achieve operational efficiencies and boost sales. Two leading reinsurers, Aldrich noted, play in this space: Munich Re and Swiss Re.
In July 2016, Swiss Re launched InsurTech Accelerator, a 16-week intensive program that will mentor and help curate startups aimed at disrupting insurance practices. The program is reportedly the first-ever initiative by a reinsurer to foster technology innovation among India-based insurtech startups.
Munich Re, for its part, teamed up with Alma Mundi Ventures in Spain to kickstart its own seed or startup "accelerator," MundiLab. Munich Re has also funded several IoT startups including Helium, Waygum and Augury through its corporate venture capital arm, Munich Re/HSB Ventures.
"Munich Re and Swiss Re are taking an extremely aggressive approach to VC investing in start-ups," said Aldrich. "They're investing in IT capabilities and infrastructure that will support emerging innovations."
More broadly, added Michael Dombrowski, a managing director of BDO Consulting, insurers' tech investments aim to significantly expand the amount and sources of data available to ease and speed business operations. For example, information about policy applicants gleaned from public records could potentially be used in lieu of medical data (such as attending physician statements that can be more time-consuming to secure) for underwriting and risk selection purposes.
