While you weren't looking, InsurTech became a thing

First of all, a definition: Insurtech is the emergence of new technologies that are transforming the insurance industry, reducing costs for consumers and insurance companies, improving efficiency, and enhancing customer satisfaction.

InsurTech - the technologies and products leading innovation in the insurance industry- is challenging the status quo and energizing it, with intriguing names like Alan, WeFox, Hippo and Lemonade:

[InsurTech] startups totaled $10.5 billion in the first nine months of 2021, a record high level for the period, the first half of 2021 oversaw the most significant amount of global InsurTech funding in a six-month period on record, with a staggering US$7.4 billion raised in 183 days. Four InsurTech unicorns were created in 2018, five in 2019, five in 2020 and eight in 2021. Depending on your definition of InsurTech, it could be argued that there are now 24 InsurTech unicorns in existence.

For a list and description of 24 InsurTech unicorns, see: Discovering the Top 23 InsurTech Unicorns.

As an industry, insurance is not known for being on the cutting edge of technology. "Compared to many other industries, (insurers) are still playing catch-up. The sector has a very traditional culture, "said Catherine Barton, partner at EY.

Part of the problem is extensive regulation, particularly for those "personal lines" of auto and homeowners and offerings of life insurance companies too. Existing insurance companies are burdened with a tangle of systems, both self-imposed over decades, and the difficult integration of other proprietary systems of acquired companies or portfolios over time.. Some estimates are that, for legacy companies, 60-70% of investments in technology go to maintaining regulatory compliance with inflexible legacy technology.

There are fifty-six state and territory insurance commissions, and regulation is not uniform. Some regulators see technology as an over-priced effort without a great track record and disincentivize it, preferring to protect consumers by keeping expenses low. In addition, most regulators require auto insurers to file policy pricing that limits the insurers' ability to react to competition.

Insurers are subject to a sort of paradox with technology. The large insurers were early adopters of mainframe technology, beginning in the 1950s. But mainframes weren't solutions, they were platforms for proprietary development of record-keeping and transaction systems. These systems required an army of programmers to build and maintain developed in obsolete programming languages like COBOL or FORTRAN, or IBM-proprietary languages like Assembler or DL/1.

Over time, these forward-thing systems became a burden, and the companies could not take advantage of the expanding technology options. Each insurer developed its systems to operate their business, from claims, to underwriting to filings to regulators. There was reluctance to undertake renewal due to limited competitive pressure to innovate or improve. As newer requirements erose, programs were opened and amended, leading to long cycles of development and testing, and the existing systems became brittle, and difficult to rebuild.

The rise of InsurTech over the last five years is starting to change that, as insurers increasingly focus on tech across new areas, including accident detection, claims settlement, and renewal processing.

A problematic funding picture

WillisTowersWatson, in Quarterly InsurTech Briefing Q3 2021, sums it up like this:

However, two-thirds of the total volume so far on 2021 raised went into only 15 InsurTech deals; in other words, approximately 0.5% of the world's InsurTech businesses shared $3.3 billion between them, while the remaining $1.5 billion was distributed among 147 companies. This seems very promising for Insurtechs that capital funding is flowing for most of the InsurTech business because deal count and volume are quite healthy. The downside is that the lion's share of the capital is flowing to only a tiny number.

One reason for this is that most of the funding is going to firms engaged in insurance (the industry term is gross written premium.) But hundreds of InsurTech businesses that focus on distribution and business-to-business (B2B) software vendor models that could be highly original and creative efforts may not see elevated company valuations that their carrier-model InsurTech cousins are commanding.

My take

Willis' observation that the capital funding Insurtech favors the risk-originating businesses (in other words, actual insurance companies) indicates that funding is predicated on them being acquired by the legacy insurance companies for a quick payoff. What this less-funded, technology-focused Insurtech is not clear. It seems that Insurtech itself may have a limited lifespan, and the insurance "elephants" have gotten the message that the adoption of technology is no longer optional. Willis continues:

One cannot help but think that this current trend of overvalued businesses going public might not be a blessing at all. Will some of these underwhelming InsurTechs ultimately jeopardize our overall view of technology as it continues to enter our industry? Will they be the heat that dries up investment funding that should be looking for a better home? Only time will tell, but one thing is for sure: The vast majority of InsurTech businesses are unlikely to receive many of the dollars that dominate most InsurTech news stories.

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