The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2018

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Matthew Neill

By this stage of its development, it has become clear that InsurTech is not a passing fancy.

The voices of denial have become more muted over the course of the past two years as the global (re)insurance industry has begun to grasp the opportunity that InsurTech has presented, with incumbents scrapping over which piece of the pie is going to become theirs.

This progression from the traditional industry should be lauded. Many sceptics have come around to the potential benefits of these new and developing technologies, while on the other end of the scale the tech zealots have become more nuanced in how they present the benefits of their wares.

But the spoils of InsurTech have not been distributed evenly. The United States' gravitational pull on tech start-ups has sucked in a great deal of the investment and talent on offer, while the profile of InsurTech in Asia is continuing to grow.

Given the scale of capital available in the latter region, you would bet against it becoming an international hub for (re)insurance tech start-ups at your peril.

However, one region that is often underappreciated in our industry has emerged as a powerhouse for the development of InsurTech: Continental Europe.

Leader of the pack

The argument over the future of London as an international centre of the (re)insurance industry is repeated interminably - and nowhere more so than in the great city itself.

London's perceived weaknesses are often laid out with the ominous tone of a prophecy, point by point, until the audience finds itself in a state of fear bordering on hysteria: London's lack of relevance, competition from other geographies, the market's outdated infrastructure, and so on. These points are usually directed at the incumbent industry; Lloyd's and the broader London company market.

But in the race to become an InsurTech hub these issues are just as important - and start-ups have taken notice. The UK has only the fifth highest level of funding for (re)insurance-focused start-ups in the world. It falls behind the US, India and the rest of Asia. But more interestingly, out at the front of the pack is Continental Europe.

For anyone with only a fleeting interest in politics it should come as no surprise that London's future as an international financial centre has come under threat.

Uncertainty over the future of the UK's relationship with the EU single market, fears of isolationism and political instability are just some of the reasons Lloyd's and a number of London market companies have made short work of sorting out another base within the EU.

London has made much of its credentials as a global tech hub. The phrase "Silicon Roundabout" has quickly become a mantra for the city's policymakers, in the hope that venture capitalists (VCs) like the mighty Sequoia Capital will soon be eagerly queueing at the door.

But other cities on the European mainland have made similar efforts to attract nascent companies.

Berlin, Munich, Amsterdam and Milan have all got the credentials - and a traditional (re)insurance industry presence - to be serious players in the battle for InsurTech supremacy.

They also have a substantially lower cost of doing business and higher standard of living than would-be entrepreneurs currently find in London.

1-0 to Germany

Perhaps not surprisingly, given its reputation for investing in technology across a range of industries, Germany has been the major player in Continental Europe.

According to start-up data provider CB Insights, the country accounted for 6 percent of all global InsurTech funding deals in 2016. While this is some way behind the 59 percent of deals struck in the US in that period, Germany has emerged as the largest market for (re)insurance-focused start-ups in Europe.

Dr Nikolai Doerdrechter, managing director and co-founder of Germany-headquartered life insurance trading platform Policen Dirket, knows the market better than most. His firm has been doing what we now refer to as InsurTech for over a decade. The company operates in the German traded endowment policy (TEPs) market, using its own online-based platform.

While Doerdrechter acknowledges London's strengths, he thinks the current political issues in the UK are negatively impacting the city's competitiveness in attracting InsurTech start-ups compared to its Continental cousins.

"Brexit is worrying people. If you are a new start-up from San Francisco thinking of setting up a new branch in Europe, then London is now not the first choice," he says.

However, Doerdrechter recognises that despite its difficulties, London maintains its status as an international financial hub. This, he says, still makes it an attractive place for start-ups: "London is very condensed - almost all the international banks and institutions are there."

This close proximity to expertise, as well as its status as the (re)insurance industry's main hub, can still offset the negative impact of political instability, Doerdrechter believes. However, the city remains prohibitively expensive for cost-sensitive start-ups, he adds.

That said, Doerdrechter also highlights the lack of an equivalent city in Continental Europe as a barrier to any competitors outstripping London's potential to become an InsurTech hub.

Serious money

The depth and breadth of London's funding community is another factor that pulls start-ups towards the UK capital.

Doerdrechter says that new companies seeking to set up on the European mainland have easy access to funding from so-called "angel investors" or early round backing. However, the continent does not have the resources to fund ventures that have made it past the start-up and development stages to the so-called "Series C" round or further - in other words, the point at which serious sums of money are involved.

He continues that Europe is "catching up" on providing suitable venture capital backing for the number of start-ups in need of funding. But he highlights that a dearth of funding by local backers is not a problem that is unique to Continental Europe: "Even in London, a very large share of funding is done by UK branches of US VCs."

Ruth Foxe Blader, former head of Allianz's investment arm AllianzX and current director of investments at financial services-focused VC firm Anthemis, echoes Doerdrechter's comments on the gap between funding supply and demand in Europe. She says that, compared to London, Europe does not have as many investors, particularly outside of the big markets, and has fewer that are actively making plays in the InsurTech space.

But, she adds, the "tremendous" level of deal activity is forcing investors to take notice of the potential for growth in the Continental European market.

Foxe Blader cites the differing nature of the London and European incumbent markets as a cause of the varying ways that InsurTech is developing in the two geographies.

"The idea you can disrupt the value chain to help the end customer is especially true in the tight agent market," she says.

"Maybe that has something to do with where certain technology propositions feel like they are really making a massive improvement over the way people are currently doing business."

A new home?

The vote by the UK to leave the EU has sent shockwaves across all industries that call the City of London home, prompting many to reconsider their future there.

But, as with the wider financial services picture, InsurTech is unlikely to find one new capital city to call home.

None of the European alternatives provide everything London has and, while it remains expensive, the UK's capital is still an attractive place to do business for both traditional companies and start-ups alike.

But the Continental hubs are not likely to stop chasing London's business anytime soon. They have big enough markets and deep enough pockets to attract nascent businesses that may follow in the footsteps of some of their heftier brethren by bidding adieu to the UK.

This article was published as part of issue Summer 2017

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