Phil Edmondson-Jones
Once the uncool sibling of a flourishing fintech sector, insurtech is now one of the hottest areas of a buoyant venture market. Zego’s $150 million round at unicorn valuation in March, a rumored giant incoming round for WeFox, and a slew of IPOs and SPACs in the U.S. are all testament to this.
It’s not difficult to see why. The insurance market is enormous, but the sector has suffered from notoriously poor customer experience and major incumbents have been slow to adapt. Fintech has set a precedent for the explosive growth that can be achieved with superior customer experience underpinned by modern technology. And the pandemic has cast the spotlight on high-potential categories, including health, mobility and cybersecurity.
This has begun to brew a perfect storm of conditions for big European insurtech exits. Here are four trends to look out for as the industry powers toward several European IPOs and a red-hot M&A market in the next few years.
Full-stack insurtech continues to conquer
Several early insurtech success stories started life as managing general agents (MGAs). Unlike brokers, MGAs manage claims and underwriting, but unlike a traditional insurer, pass risk off their balance sheet to third-party insurers or reinsurers. MGAs have provided a great way for new brands to acquire customers and underwrite policies without actually needing a fully fledged balance sheet. But it’s a business model with thin margins, so MGAs increasingly are trying to internalize risk exposure by verticalizing into a “full-stack” insurer in the hope of improving their unit economics.
This structure has been prevalent in the U.S., with some of the bigger recent U.S. insurtech IPO successes (Lemonade and Root), SPACs (Clover and MetroMile), and more upcoming listings (Hippo and Next) pointing to the prizes available to those who can successfully execute this expensive growth strategy.
Transition to a full-stack insurtech carrier will be increasingly common as competition and investment intensify — exemplified by Hedvig and Getsafe in Europe. Public markets in the U.S. are rewarding their prospects with some tantalizing comparable valuations versus incumbents. This will spill over into Europe, with both WeFox and Zego among the more likely candidates to list publicly in the near term.
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Improve customer service or lose out
The rise of full stack as a model and an intensifying competitive landscape have caused insurers to focus on improving customer service as a priority. Areas like real-time customer support, instant claims processing and personalization at scale are increasingly becoming table stakes rather than differentiators reserved for only the most premium options.
B2B software startups like Lightico and Hi Marley have revolutionized the way insurers interact with their customers by focusing on creating a frictionless customer journey. Low-code/no-code tools are at the vanguard here, helping insurers rapidly iterate and optimize experiences. Consolidation seems likely as larger insurers look to cut development costs to maintain competitiveness of their customer-facing propositions.
Niche opportunities emerge in the mid/back office
An orchestration layer for the “invisible” part of the insurance stack isn’t new — Duck Creek has been around for over 20 years! But much of the early-stage B2B momentum is now appearing further down the value chain in “nichier” areas. There is enough low-hanging fruit to improve some of the less visible but equally important components of great insurance products and services: risk management, pricing models, customer onboarding/renewal and claims management.
As in most industries, better data utilization remains a challenge that hyperfocused startups can leverage: Insurers have a lot of data on claims patterns, for instance, but many lack the tools to use this data for business efficiency. Category consolidation looks likely here, too, and connecting previously distinct areas can lead to interesting opportunities for new software business models. Imagine successfully connecting modern risk management capabilities with real-time dynamic pricing, for example.
Embedded insurance opens up the market
Embedded insurance offers the ability to seamlessly incorporate insurance into a separate customer journey. Embedding offers the potential for (re-) insurers to access new clients through vertical partnerships, as “white label” embedded products allow brands to retain customer relationships and user experience.
Businesses like Goodlord have been a great example of the early promise of this proposition, offering hyperrelevant property insurance products to a captive audience as clients onboard to their new home. When done well, this can benefit the insurer due to a structural cost advantage in customer acquisition and also benefit the customer due to hyperrelevancy and ease of sign-up.
Several exciting opportunities exist here — firstly to architect and distribute the embedded insurtech infrastructure rails (in a comparable way to the open-banking movement), and secondly to provide more creative, targeted embedded policies in areas that are poorly covered or with very large underpenetrated markets – e.g., in cybersecurity.
Disclaimer: Oxx is a current investor in Lightico and Goodlord.
Insurtech startups are leveraging rapid growth to raise big money
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