InsurTech’s investment opportunities are found in back office innovation

Insurance firms are beginning to understand technology’s importance in back office processes, according to Aquiline Capital Partners Aquiline Technology Growth head Max Chee in a research interview with FinTech Global.

The insurance sector has been rather slow to take on technology, with most other main line sectors, like WealthTech and stock trading already having made big strides in modernisation. This could soon change for the insurance sector too, with Chee believing the rise in investments to the sector is only going to continue. High level executives are beginning to understand how they need to update their back office to be able to compete with the change in consumer demands.

Aquiline Capital Partners Aquiline Technology Growth head Max Chee said, “InsurTech has been a laggard when it comes to FinTech investing, but is rapidly catching up.  In the last couple of years there’s been real interest in how technology can transform the industry at the c-suite level and a resurgence of start-ups entering the space. On the one hand you’ve got a lot of technology innovation, you have the proliferation of data and the digitization of the economy, and you also have technology causing seismic changes in other industries, such as automotive, retail, logistics and manufacturing.  Overall, technology is penetrating more mainline industries and it has come to insurance as well.”

In Q2 2017 InsurTech investments hit a record high, with the sector pulling in a total of $872m in 34 deals, according to research data by FinTech Global. This figure is in stark comparison to the opening quarter of the year which only raised $189.8m, but in 53 deals. This new surge in investment has also ended the QoQ downfall in funding since Q1 2016, where funding had dropped from a high of $640.4m.

Chee said, “So you therefore have a recognition from executives of leading insurance firms that they need to modernise, and they need to update their back office. They also need to do more to address what we call the consumerization of IT. The fact that people are always on their mobile phones and technology has penetrated every aspect of their life, means that policy holders and users of technology have higher expectations than what has traditionally been delivered by insurance and financial service firms.”

This inevitable realisation on the need for technology in insurance has led to several firms already taking a bigger look at the sector. Last month even saw State Automobile Mutual Insurance’s innovation department partner with Rev 1 Ventures to raise a $25m venture capital fund to back InsurTech companies.

There have been real strides made in the InsurTech sector with Chee believing carriers are onboard with the impact it can have on their businesses. He expects the sector will not be a fad, but will lay out over the decade, as they are nurtured by corporate venture capitals and finance investors.

Should investors target the front or back office?

Aquiline Capital Partners partner Vincenzo La Ruffa, who was also part of the research interview, said, “Technology adoption happened sooner for other areas of financial services but through very similar themes. Whether it be the way stock trading electronified or when wealth management and banking went online. The significant increment of opportunity in the insurance industry today, from the back to the front office, after years of a low interest rate environment and changes in consumer demands, have created a perfect storm for the industry to now embrace technology-driven solutions.”

La Ruffa said that the low interest rates and the change in consumer product demands or even the way policies are bought contribute to the rise of InsurTech. However, it’s not just this demand that is causing interest in the sectors potential, as administrative processes for claims and handling of the claims efficiently can only be solved through technology.

The US-based firm is actively looking to deploy nearly $1.3bn into the FinTech space, with a particular focus on the InsurTech space. Aquiline has closed two funds in two years, with its Aquiline Financial Services fund closing on $1.1bn, and more recently its maiden FinTech venture fund Aquiline Technology Growth, which closed on $190m. A key area both funds are taking a particular interest in is the back-office processes, this is because it is little complex and not the typical area for FinTech companies. Aquiline has had experience with the InsurTech sector and last year the firm acquired online small business insurance provider Simply Business for an undisclosed amount. The

La Ruffa said, “For the average technology investor, insurance is not an obvious market, particularly in the back office.  Most investing activity in this space by venture investors has been focused on the front office as they think they have a view of the consumer… I think it is much harder for folks to understand the back office.”

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