The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2018

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Silicon slip

Matthew Neill

In an episode of the hit HBO tech-centred television programme Silicon Valley, the gifted-but-awkward protagonist of the show Richard meets an old friend and fellow start-up CEO Javeed to discuss the future of his company.

Richard's start-up, Pied Piper, is under pressure to secure new investment, and he is hoping to glean some advice from his hitherto uber-successful colleague on where he should get the money he needs to save it.

Javeed, downcast and dishevelled after he being forced to sell his own company and walk away without a cent, offers Richard a warning: "You take money from the wrong dudes, you'll get smoked as bad as I did."

The scene has become familiar to many since the concept of the tech start-up entered the mainstream consciousness in the 1990s, and the conundrum has now become a feature of the (re)insurance landscape.

As InsurTech start-ups have bloomed over the last few years, they have brought with them a new ecosystem of investors. Individuals and firms that previously ignored insurance in favour of its more alluring sibling - the banking sector - are now jostling each other to get to the front of the queue and invest in companies with the potential to "disrupt".

Belying its reputation for backwardness and inertia, the insurance industry has responded by setting up venture capital divisions, research arms and investment vehicles of its own to ensure it is not left in the dust.

The industry's upper echelons have been quick to act. Companies including XL Catlin, Munich Re, MS Amlin, Allianz, Axa, Scor and Swiss Re have, in one way or another, marked out their territory in the InsurTech space.

These firms have swept into the room with venture capital divisions of their own, by partnering for research into technology that could benefit all participants - such as with the blockchain consortium B3i - and by sponsoring a multitude of accelerators and incubators across the world.

Opportunities abound for insurance industry entrepreneurs, but who is winning the battle for funding supremacy in InsurTech?

Breaking new ground
According to venture capital research firm CB Insights, InsurTech companies secured $1.7bn of funding across 173 deals in 2016 - the second consecutive year investment has topped $1bn.

These are astounding figures for an industry that just a year before operated in a small and seldom visited corner of the FinTech galaxy.

But while the scale of the investment in itself is enough to make serious people sit up and take notice, it is the source of the funding for these ventures that will drive the future direction of the industry.

An analysis of several high-profile InsurTech ventures on start-up online database Crunchbase shows almost all have received funding from a mixture of (re)insurers, often through a company's venture arm, and from traditional venture capital firms that have made a foray into the industry.

Previously, start-up CEOs looking to launch an insurance business would have to scrap it out for their investment in a sector deemed unattractive by the powers that be in the venture capital world.

Now that trend has reversed as more firms want to ensure they have some skin in the game and don't miss out on lucrative investments or lose out to their competitors on technology that could be of use in their own company.

Insiders' club
Adrian Rands established his data integration and analytics company QuanTemplate in 2012. His professional background and subsequent change of career are emblematic of the changes taking place within insurance. Previously a Lloyd's reinsurance broker with Howden, Rands left the firm to pursue his start-up idea.

The QuanTemplate CEO says the InsurTech investment landscape has changed markedly since he originally struck out alone in 2010, particularly as corporate entities and venture capitalists have begun to take notice.

Having initially self-funded the operation that would grow into QuanTemplate, Rands now receives numerous enquiries from interested investors every week. "At the time it felt like the industry would take time to adopt to new technology. But things are moving much faster now," he says.

Rands first received venture capital backing in 2014, as Silicon Valley money began to see the insurance industry, often perceived as staid and inefficient, as the next frontier for the digital revolution.

While slow to realise the potential for change in (re)insurance, venture capital firms have now descended en masse. Rands estimates over 100 firms are now active in the insurance software sector, with the majority of investment clustering around a handful of well-regarded companies.

He says: "Insurance has traditionally been an insiders' club. The network of people is relatively closed and there hasn't been much crossover with other industries. Much of the capital and funding has come from within the industry."

But with the advent of InsurTech, Rands has noted a change in the landscape. Now (re)insurance companies have become more influential, and have started to hire InsurTech veterans to run their corporate venture arms.

Venture capital invasion
Indeed, some major Silicon Valley venture capitalists have taken notice of the insurance sector. One of the most high-profile InsurTech start-ups, New York-based Lemonade, has received $60mn of funding from eight investors, including a Series B funding round totalling $34mn, according to Crunchbase.

The backers include California venture capital behemoth Sequoia Capital, alongside Thrive Capital, Expansion Venture Capital and Israeli firm Aleph.

Click to enlarge Similarly prominent start-ups including Trov, Slice Labs and Bought by Many have also received venture capital funding from firms such as Oak Capital, Anthemis Group and Octopus Ventures.

However, in none of the above cases has the start-up received backing exclusively from venture capital sources. Each funding round has included the participation of a major incumbent company. Munich Re has been particularly active in the space, as has XL Catlin's venture arm XL Innovate.

David Hill, managing director of Advent Solutions Management, has worked with start-ups across the (re)insurance industry for over 14 years.

Hill says the biggest change he has observed in the industry over the last few years, as InsurTech has come to prominence, is the changing attitudes and approaches of the insurance companies themselves.

He says that while mainstream capital providers were reluctant to invest in companies at the "seed" stage of funding, reinsurers in particular were keen to provide this initial capital boost. He argues that the reinsurers' approach was in part influenced by the conditions of the broader reinsurance market.

Hill explains that global reinsurers are now faced with a contracting core book of business as insurers continue to reduce their use of reinsurance. As this problem has increasingly bit into reinsurers' balance sheets, they have become more willing to embrace the growing opportunities offered by InsurTech companies.

"For reinsurers it is a double bubble," he says. "The likes of Munich Re started [InsurTech divisions] because their core book is beginning to dwindle."

Cooperation or competition?
While they are often castigated for their inertia in the face of radical change, the major (re)insurance companies have by and large joined the venture capitalists on top of the InsurTech bandwagon.

In addition to their venture capital arms, many companies have set up internal research divisions to see how InsurTech can be made to work for them, and almost every conference in the industry addresses the topic through one moniker or another.

But the question going forward is not whether the (re)insurers continue to get more involved in InsurTech - it is clear at this point that the issue is not being ignored - but whether they opt for continued cooperation in the space or choose to go it alone.

There are those who believe that the saving grace of incumbent companies in the face of the InsurTech onslaught will be the barriers to entering the industry.

High capital requirements, a regulatory quagmire and the importance of branding are often cited as a defence against companies being disrupted out of existence.

In this context, a partnership with a (re)insurer could be viewed as the golden ticket for a start-up. The young company gets all the help and funding it could dream of, and the (re)insurance partner gets the tech they want or need.

The shape of funding for InsurTech start-ups thus far seems to bear out this scenario for future investment.

Venture capitalists, of course, want a piece of the pie, but at this stage they have neither the expertise nor the willingness to commit in full to InsurTech start-ups.

The entry of an independent, solely insurance-focused venture fund into the mix, InsurTech Venture Partners, may be a sign of things to come.

But for now, (re)insurers hovering around the entrance to the InsurTech space, waving venture capitalist investors and start-ups through, would do well to take a deep breath and walk right in before the door shuts in their faces.

This article was published as part of issue Spring 2017

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