How the complexity of the insurance space is causing a funding gap in InsurTech

While investments into InsurTechs are increasing, funding is still not nearly as abundant as other areas of FinTech, according to MTech Capital co-founder and partner Kevin McLoughlin.

The volume of capital deployed into the InsurTech space has grown gradually over the years, but in 2018, things took a turn for the better and skyrocketed. Last year, total investment into InsurTech companies increased by around 92 per cent going from $1.6bn in 2017 up to $3.1bn, according to data by FinTech Global.

Despite this sharp rise, it is still far behind other FinTech spaces, namely, PayTech, marketplace lending and WealthTech. A total of $18bn was invested into PayTech companies last year alone, which is over double the amount of capital invested into the InsurTech space since 2014. Between 2014 and 2018, InsurTechs have raised $8.5bn. Sitting behind PayTech for the highest volume of capital raised in 2018 was marketplace lending, which received $9.9bn and then WealthTech, which saw $4.6bn invested.

Kevin McLoughlin said, “This reflects the complexity of insurance as a product and as an industry, which inhibits investors. This includes generalist venture capital firms who may feel unequipped to invest in the sector. At MTech Capital we have received calls from generalist VCs we know regarding InsurTech investment opportunities where they would like our view or to simply pass it to us. That’s a challenge for InsurTechs – A smaller pool of capital because of the relatively complex nature of the insurance industry.”

This mini funding gap has manifested due to the complicated nature of the insurance space. Insurance has notoriously maintained its old way of working, approaching innovation and digitalisation hesitantly. Proof of this lies with the heavy reliance still rested on legacy systems. While other complex industries like investment and retail banking started to digitalise themselves ten or twenty years back, for insurance firms, it’s still only a new mentality.

However, just because the space is intricate and takes time to fully understand, does not mean that the growth rate has been impacted. The market is still new, and with funding nearly doubling last year, it is clearly heading in the right direction. McLoughlin added, “I wouldn’t say capital is abundant, but it is definitely available for the right companies.”

In lieu of bountiful levels of capital from traditional venture firms, several corporate investors have entered the market to fill some of the void. McLoughlin believes that more corporate capital has entered the InsurTech space than in other industries, because of this specialist environment. While corporate investors may have the knowledge of the market and can support growth from within the sector, some InsurTechs do not like the idea of their customer also being a shareholder, he said. Seeing a competitor as a shareholder can even potentially hinder the startup’s appeal to other insurance companies who represent potential customers. Deciding whether to side with one is a heavy decision to make for founders.

Similar to how investment banks have their own embedded insurance groups, McLoughlin does see the potential for some venture firms following suit and hiring people who know the space. This is where MTech Capital believes it comes into its own, as it has the in-depth knowledge of the insurance space and can also provide access to its own limited partners which are entirely made up of insurance firms.

MTech Capital was founded in 2016 and exclusively invests into the InsurTech sector. The investor is currently in the process of raising its maiden fund, with a first close being held last year on $75m – a final goal has been set at $150m. The firm has already tapped the fund, participating in the $9m Series A round of INSHUR. The InsurTech offers mobile-based auto insurance for commercial and ride-share drivers, leveraging data and analytics to offer them the best protection and at a competitive price.

Changing the customer experience

One of the driving factors for starting up as an InsurTech-dedicated investor was the lack of customer engagement on the insurance side. Around 12 years into a 30-year term life insurance policy, McLoughlin noticed that he had not heard anything from the insurer or the broker since the day he bought the policy. No updates or general customer interactions of any kind except annual bills. He added, “What industry can afford to actually treat customers that way today?” With all the opportunities the internet is presenting, the insurance sector needs to change and become up-to-date. 

Internet of Things (IoT) devices are one of the developments which the insurance sector can take full  advantage of. Being able to access highly personalised data around a consumer offers a range of benefits to both insurer and consumer. The insurer is able to offer more personalised products which suit their specific needs at a better premium. A simple example of how a startup can change insurance are IoT devices which monitor how people are driving and the distance they travel. Consumers who drive very infrequently can access cover which matches the amount of time they are actually using the car, rather than paying high premiums for a car which mostly remains parked on a drive.

Not all challenges facing the InsurTech sector are solely on the funding side, and in fact, it is the relationships between insurance firms and the technology companies which are presenting some issues. In the marketplace there have been a handful of InsurTechs McLoughlin has seen become frustrated by working with incumbent insurers. This spawns from having to rely on them to underwrite their policies. While the InsurTech may have revolutionised the front-end of insurance, providing great coverage for a range of industries, they could be let down by their underwriting and the slowness of response.

“We have seen a number of InsurTechs say, ‘We can’t fulfil our brand promise to customers by having a traditional insurance company at the centre of our business processes. Interactions are too slow’ Consequently what many startups want to do now is take control of underwriting and pricing and so they’re adopting the MGA model. This way they get a reinsurer or insurer to provide them balance sheet capacity but they control the underwriting and pricing — within limits. And most still don’t want to become a full stack regulated insurance carrier as that’s a whole different proposition. Instead they actually just want to have greater control over the total customer experience, including the pricing and underwriting and claims.”

In adopting the MGA model, InsurTechs are able to take greater control over the customer journey from front to back and ensure they have the best possible experience. There have already been an increasing number of companies adopting this operating model due to this frustration. The future might be in this direction, but McLoughlin still believes there will only be a very select few which go beyond being an MGA and become a full-stack insurance company.

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