Will increasing InsurTech valuations hinder subsequent funding?

High InsurTech valuations are starting to outweigh the performance of businesses, according to Eos Venture Partners investment director James Tootell in a research interview with FinTech Global.

Over the past year, there has been growing interest in the InsurTech space from both startups and insurers. Firms are exploring how technology might provide the opportunity to create efficiencies in their existing systems and process, whilst driving top line growth through new products, segments and customers, and this is only going to continue. Startups and new propositions will continue to mature and lead to subsequent funding rounds, Tootell said. While the space has somewhat lagged behind other parts of FinTech and RegTech, it is gaining pace.

He said, “We absolutely think this pace will continue. The level of focus from insurers, reinsurers and brokers on technology and innovation will continue and we’ll likely see more great examples where value can be created for incumbents. But also, where startups have been able to create new propositions and really gain scale.”

From a funding perspective, one trend Eos has noticed is the significant increase in InsurTech start-up valuations. “We’re reaching a point where the valuations outweigh the underlying performance of the business. Some corporate venture arms, when looking at investments and valuations, are thinking about it more from an internal strategic point of view and less from a financial exit point of view,” he added.

“Over the next 12 months we will start to see some startups struggling to raise subsequent funding rounds because the underlying performance of their business is not aligned to the valuation expectations set by the founders, or the previous funding round. So, you may start to see down-rounds and some startups struggling to raise money and going under.”

High valuations in early rounds impacts subsequent funding rounds if the company is unable to demonstrate enough traction or generate enough sales to warrant an up round. Tootell believes there will eventually be a realignment and readjustment, but that will depend on the investment appetite and valuation expectations of investors going forward.

Last year, investments into the InsurTech sector hit $1.9bn, making it the second biggest year for funding, according to data by FinTech Global. More capital was invested in 2015, with $2bn being deployed globally; however, this was largely down to a colossal $931m investment to Chinese online insurer Zhong An. There has been a rise in the investment value of deals, as while there was over $400m more invested to the space last year, compared to 2016, there was 27 less transactions.

Unlocking the value of data is the key

Over the last year, blockchain has been one topic that everyone has been talking about, with various companies exploring potential use cases and how to implement the technology. EY, along with other industry and technology players, has recently announced a new Blockchain initiative for the marine insurance industry. The platform is expected to provide businesses with compliance tools, asset tracking, digital distributed of insurance, transparency of data, and automated payments.

Tootell said, “It’s early days at the moment in terms of how Blockchain will be leveraged and adopted in the insurance industry. However, the pace is starting to pick up, in the last few months we’ve started working on three blockchain driven initiatives, including Riskblock in the US”

Insurance has traditionally relied heavily on historical data and this is ripe for innovation with new developments and integration of technology. Blackbox telematics has been used by motor insurers for a number of years, however innovation of smartphone technology and IoT devices has improved the process of capturing and analysing data. The key is being able to unlock the value from this new data by combining with historical data, such as claims. Eos has noticed startups working alongside incumbents to drive value from new data sets by enabling real-time analysis and insights, helping to better understand trends and behaviours, impacting pricing, underwriting and claims management.

He added, “The businesses that have had the greatest success thus far, are those that have been able to integrate with insurers existing systems, and drive tangible value. Often these businesses that have create an end-to-end solution have more success selling their proposition into insurers, compared with start-ups focussing on very specific pain points in the value chain.”

Another area of focus for many start-ups is the on-demand/usage based insurance products- solutions where a consumer can pick and choose when they want to be covered. This proposition is largely driven by changing consumer behaviour, and the changing expectations of the consumer set up by likes of Amazon and other digital brands. Trov, which collected a $45m Series D investment led by Munich Re / HSB Ventures, is a good example of a company in this space, which generates personalised quotes for specific items on a pay-as-you-go basis.

Many solutions we are seeing focus on creating efficiencies in the value chain, from distribution and pricing, to underwriting and claims.

“There are currently a significant amount of players in the value chain that each take a slice of the premium. This is likely to evolve over time and we’ll start to see a more efficient value chain through adoption of technology, and likely to see more non-insurance players playing their part, given many already have the digital platform and own the customer relationship. We have already started to see the likes of Apple and Amazon show an interest in the insurance market for this reason.”

The core of Eos’ business model is close strategic partnerships with their LPs to drive return on investment and innovation. Eos works closely with its LP’s to develop, refine and execute a tailored innovation strategy to drive growth, improve profitability and enhance customer propositions.

“There are tremendous opportunities to drive innovation and Eos is positioned at the heart of this new and exciting sector. InsurTech is one of the fastest growing investment sectors globally. The insurance industry is experiencing a fundamental rebalancing, we expect to see a significant shift in profit between the winners and the losers.”

Copyright © 2018 FinTech Global

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