COVID-19 Comes for Insurtech Investments

The COVID-19 pandemic has altered nearly every aspect of life, and the insurance industry is no exception.

The pandemic profoundly affected the way brokers and insurers conduct business. Lockdown orders and other government actions to address the pandemic forced many of their employees to work from home, and with that came a surge in adoption of digital tools.

According to a new report from Deloitte, “COVID-19 shifts InsurTech investment priorities,” insurtech investment strategies were also influenced by the pandemic’s impact on the industry. Leader’s Edge had the opportunity to speak with Mark Purowitz, principal and insurtech co-lead at Deloitte and one of the authors of the report, and he offered key insights into the insurtech investment trends described in the report.

By the Numbers

One eye-catching fact from the report was that despite the worldwide economic downturn resulting from the pandemic, funding for insurtechs for the first half of 2020 was just as robust as it was in 2019, at nearly $2.2 billion of funding. If funding continues through the second half of 2020 at this pace, insurtech funding for the year will come in at the second-highest annual total recorded, behind 2019, the report notes.

Purowitz explained that this was at least partially to do with the fact that the industry is now in a “second wave” of insurtech. The number of startups launched each year has declined precipitously from 2015-2016 levels—only 38 startups launched between 2018 and the present, for example, according to the report—as the insurtechs launched in previous years have matured, grown, and now occupy much of the space. “We’ve started to see evidence in the past four to five years that investments are moving away from seed, A, B rounds to be more concentrated in later rounds.”

These later rounds of investment typically require more capital. “Investments are now predominantly being made in insurtechs with more proven capabilities for the industry [to] consume and use,” Purowitz said. “The investments are going toward them to extend and expand capabilities and scale their business. For example, the top 4 [by size] insurtechs from the Venture Scanner data took 44% of funding, the next six picked up 20% of the funding, and the rest divvied up the other 36%.”

Another factor behind the continuing steady pace of investment was the “pivoting of some business models. You’ve got a class of digital MGAs—for example, Next Insurance, Metromile, Root—that are now pivoting to be full-stack insurance carriers,” Purowitz said. Naturally, to assume the amount of risk a typical insurance carrier would, these companies need to build a balance sheet to take on that risk, and to build a balance sheet, a company will need a higher level of capital, and thus a higher level of investment, than required in the past.

“Digital at the Core”

“Because of the pandemic, we have actually seen a spike in the level of and amount of investment going toward insurtechs that are enabling core operations,” Purowitz said. “In the past, there was a significant level of investment going toward customer experience and distribution. But in the first half of 2020, we have seen a significant amount of investment going into those insurtechs that enable insurance operations over customer acquisition,” he explained, highlighting data from Venture Scanner, which showed investment in insurance operations leading the way (over investments in commercial insurance, personal insurance, P2P insurance, and customer acquisition) at $831 million.

This reflects how the pandemic has forced the insurance industry to turn to digital methods to maintain their operations—the concept of “forced innovation,” which was been discussed before in a previous Leader’s Edge article. Lockdowns stemming from the pandemic compelled companies to virtualize their workforce and accelerate their digital capabilities to enable a smooth transition to working from home. Digital tools (Lloyd’s of London Placing Platform Limited, for example) have become a crucial part of day-to-day businesses for brokers and insurers alike.

And this links back to why investors were more interested in investing in companies that had “ready-to-use solutions,” especially those that can “help overcome operational challenges and speed up digitization efforts,” according to the report. Examples of this include offerings facilitating automated underwriting or virtual claims management. Healthtechs supporting telemedicine were also noted as essential, according to those interviewed for the report.

“We call it ‘digital at the core,’ because it’s really about beefing up the core operations,” Purowitz explained. “One of the outcomes of the pandemic is a significant acceleration of the need to digitize—the pandemic forced the hand of those parts of the industry that had chosen not to [digitize] previously. We’re seeing about 25 years of change done essentially overnight.”

A Catalyst for Change?

The idea that the pandemic will continue to accelerate digitalization and virtualization efforts on the part of the industry suggests that the pandemic is galvanizing the industry and may therefore represent a chance for legitimate, transformative change. “We’ve seen a wave of change three times in the past few years. In the late 90s, it was all about integrating the internet, and in 2006-2007, there was this next wave of transformation with new policy and claims management systems. But after each wave, the industry reset. It was all about us as an industry. But what’s different about this time is that the rest of the world outside the industry is changing so dramatically that the insurance industry no longer completely owns the narrative,” Purowitz explained.

But what form could this change take? One trend Purowitz noted is the beginnings of movement away from investing in discrete pain point solutions and more toward solutions for broader problems. “There’s been a tremendous amount of investment in point solutions over the years. But what we’re starting to see now is early stages of companies coming together to build out and round out traditional capabilities. I think we’re going to see a wave of consolidation over the course of the next couple years where investors bring together complementary capabilities to build a more integrated solution.”

This consolidation seems likely considering the shift in investor priorities discussed previously. Many investment firms are in the middle of “portfolio triage,” determining which of the insurtechs in their portfolio are positioned to best help the industry respond to the pandemic. One London investment firm predicted, “VCs are going to get tougher or change strategies to bridge together adjacent solutions to realize the entirety of a customer’s needs,” according to the report. And as most of the investment dollars are vacuumed up by the top 10 insurtechs, other insurtechs may turn to mergers to compete more effectively for the remaining capital by combining their individual solutions into a more comprehensive suite of products.

“The pandemic has accelerated the understanding that there is a greater need for ramping up the evolutionary cycle,” said Purowitz. “Look at all of the things we do in our daily lives via our phones, our apps, and our tablets that frame a very different way that we want to have a relationship with a potential company. Take a look at the products that are out there—no one ever really contemplated a workers comp product for working from home in the numbers that people are [now]. I could see a package product for the homeowner that combines some form of workers comp, medical liability, cyber, and so on, to address this massive shift towards working from home.”

Insurtechs’ shift from “disruption” to “collaboration” in the past few years means that they are better positioned than ever to work with legacy carriers and brokers to confront the challenges posed by the pandemic. The question now is whether legacy companies will settle for digitizing normal processes or seize the opportunity the pandemic presents to reimagine their business models for, as Purowitz said, “an outside world that is changing on a daily basis.”