The hype died, the venture capital money dried up, and 2023 might have been the year the insurtech business came face to face with reality, abandoning notions of massive technological revolutions, transformations, and disruptions, and settling into the cold, hard vagaries of the traditional insurance market and reasonable values.
“I think by most measures and for the most part, [insurtech] hasn’t delivered—at least not on its most exuberant promises,” said Dale Gonzalez, chief product officer at Axio, a leading Software as a Service (SaaS) provider of cyber risk management and quantification solutions. “We’ve certainly seen tech applied to the consumer space successfully. But we haven’t seen the promised tech-enabled disruption of traditional insurance.”
Gonzalez and a many other executives contacted for this story said similar things. Many felt the initial attempts to provide technological support selling insurance beyond the consumer interface, was met with significant and unexpected headwinds.
“The connection between the client, the broker, and the insurer is still very manual and ad hoc with lots and lots of rekeying of information,” Gonzalez said. “The unstructured nature of the documents supporting the process and lack of standardization has led to real limits in terms of what else can be automated. On the other hand, we have seen the emergence of alternatives to the initial “automate the existing process” approach.”
After coming up with mobile apps and lightning fast computerized underwriting for consumers, the next leap will be more behind the scenes, automating the and streamlining the repetitive back office tasks of insurance underwriting and selling.
“Insurtech has made significant strides, but it’s fair to say that it’s still evolving toward its full potential,” says Gregg Barrett, CEO of Waterstreet Company, a Montana-based provider of insurance software for P&C insurers, Managing General Agents, insurtechs and start-ups. “Initially, there was a lot of excitement around how technology could revolutionize the insurance industry. But the transformation is ongoing. The real potential of insurtech lies in the industry’s ability to continually adapt and innovate in response to changing market demands and technological advancements.”
Not quite as exciting as initially advertised. Moreover, the insurtech business was bereft of funding in the last six months of 2023, as the venture capital industry came to its senses and realized that insurtechs that excelled in quickly recruiting millions of customers, as many did, weren’t going to generate returns if their loss ratios continually exceeded 100%, as some did. So, the bubble burst.
Insurtech 2.0 ‘more B2B’
“A lot of the publicly traded, formerly venture backed insurance plays, were consumer facing or direct-to-consumer and a lot of their innovation was less about ‘How do you build a better insurance machine’ and more about ‘how do you reach customers fast and efficiently because these customers are using mobile phones for the first time and are willing to buy insurance with them,’” said Raja Ghawi, partner at Era Ventures LLC, a New York venture capital firm. “That was Insurtech 1.0. Now we’re on to 2.0 and many of the companies are actually more B2B businesses.”
Indeed, the most obvious change in the business is that it has become quiet, less flashy, and less braggadocios. Much like the legacy companies they were supposed to replace.
“This year signaled a shift from the early chapter of insurtech to the next chapter,” said Chris Kessler, vice president of corporate development at Bold Penguin, an Ohio-based commercial insurance exchange connecting customers, agents, and carriers for quotes in record time. “This year was all about companies with strong value propositions, teams, and execution, continuing to build and win, and digging in and figuring out how to provide real value for the insured or the segment of the insurance value chain that they serve.”
There was a tremendous amount of “quiet work” going on behind the scenes, Kessler said, as the best founders guided their companies through this new iteration.
He pointed to companies like Wunderite, and DAIS – which was acquired by Origami Risk, a risk management and insurance Software as a Service (SaaS) technology firm – and even his own company, which doubled down on helping agents and carriers connect or transact more digitally with an expanding set of markets.
For companies focused on the excess and surplus lines (E&S), a market that protects high-risk businesses that traditional insurers won’t cover, companies like Pathpoint and CrossCover, continued to execute and deliver value to agents and their customers.
Some firms quietly build success
“On the servicing side and claims side, insurtechs like Glovebox and Snapsheet continued to build and execute to improve the efficiency and experience on the back end of the insurance process,” he said.
These companies might not make the flashy headlines that insurtechs with novel names like Lemonade, Marshmallow, Root, Simplesurance, and CoverGenius do, but are nevertheless plugging along quite well in the emerging fields.
The insurtech industry, in retrospect, suffered from overhype and blinded investors to real performance.
“The hype outweighed the performance in the early days,” said Adam Cherubini, chief revenue officer at Send Technologies, a London-headquartered commercial insurance technology platform. “There was a lot of pressure put on these startup organizations to just blossom and insurance is not an industry where you can try and grow really fast.”
The early adopters ran completely counter to the way the industry works, Cherubini said.
“They’d go out and hire an absolute ton of people that go chase customers and try and grow as fast as they could,” he said. “But they didn’t pay particular attention to the things that matter, like expense ratios, and loss ratios. And that’s why I think you saw a few cracks in the insurtech foundation.”
But the second and third generation companies have learned from their predecessors, he said, and are poised to compete in the coming year. And much of it is thanks to legacy industry partners and executives.
‘Better balance’ of industry knowledge, tech
“Some of the new entrants, have a little bit more of an appropriate mindset about how you can compete in the insurance industry,” Cherubini said. “They have a better balance of insurance professionals and tech savvy people. The early inusurtechs were weighted a little bit more towards heavy tech people who were good at building systems that attracted new customers.”
Those companies should still be able to attract investors, even in the difficult market, Cherubini said.
“Reinsurers are putting more scrutiny over how they deploy capital than ever before,” he said. “ And that means it’s harder to come by for your existing portfolio of products, it’s harder to come by for if you’re attempting to expand your product portfolio. And certainly, if you’re a young company, or dare I say somebody’s trying to create a new entrant into the space, trying to get the reinsurance community to fund you, from a risk capital perspective, it is enormously, enormously difficult.”
Partly as a result, this year marked the beginning of major consolidation in the insurtech industry and ushered in a number of partnerships and acquisitions with and by the stodgy old legacy insurers.
Just last month (November) insurance giants Allstate and Allianz made a $265 million strategic investment in Next Insurance, which is nearing $1 billion in premium revenue but remains unprofitable, to develop products including commercial auto policies.
“Now why would Allianz and Allstate do that,” asks Cherubini. “It wasn’t because they want to power a competitor. It’s because they see Next doing things they simply can’t seem to do as an organization. And they see that that smooth operating model that they have is going to continue to scale.”
At about the same time, The Travelers Companies said it agreed to acquire Corvus Insurance Holdings, Inc. for about $435 million. Six-year-old Corvus is an industry-leading cyber insurance managing general underwriter, powered by proprietary technology.
Insurtech opportunities still exist
And in spite of the deflation in the insurtech industry, opportunities still abound, the industry insiders say.
“Improvements in document and language processes are likely to make new systems capable of introducing automation without requiring the wholesale reworking of all parts of the process,” said Axio’s Gonzalez. “Likewise, we are seeing insurance products beginning to be coupled with tech-solutions that support the companies buying the insurance instead of just trying to automate its purchase—and these avenues are really interesting.”
Others agreed there’s still hope for that much vaunted insurtech revolution, but maybe not as a disruptive one as initially hyped.
“Despite a recent dip in venture capital funding, the insurtech industry still holds abundant opportunities,” said Sarah Kim, a partner at Centana Growth Partners, a private equity firm in Palo Alto, Calif. “Ongoing innovation, especially in leveraging new datasets, AI models, and sensors can improve our understanding of emerging risks, develop new products and improve market efficiencies. Startups, despite funding challenges, can tap into opportunities by being resource-efficient and optimizing their business models to make every dollar count.”
Kim points to Zesty.ai, a San Francisco-based insurtech firm, as a standout for successfully addressing industry-wide insurance challenges.
“Leveraging powerful data and analytics models, Zesty.ai’s property analytics platform includes a groundbreaking risk rating model, providing 12 times more predictive power than typical insurance models,” she said. “Its innovative modeling also extends to comparing consumer-provided information against satellite imagery, offering insurers up-to-date property details. This approach not only enhances insurers’ understanding of property risks but also empowers homeowners by providing insights into risk mitigation strategies.”
Even Lemonade, a Wall Street darling and perhaps the leading insurtech buzzmeister when it went public in 2020, is showing signs of adapting to the new reality and paying more attention to the bottom line. It now has nearly 2 million policyholders; its premiums have increased by nearly 20% and the company announced major reductions in operating expenses and losses. With its stock up almost 24% year-to-date, the company said 2024 might be the year it finally earns a profit.
Yet, the buzz hangover still exists, and some experts are wading carefully in the market
Reminded about Lemonade’s prediction it might become profitable in 2024, Era Ventures’ Ghawi said: “I’ll believe it when I see it.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at firstname.lastname@example.org.
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