Commercial uncertainty around the future of the insurance sector is taking the traditional industry titans out of their comfort zone, forcing them to play a high‑stakes game in search of investment ‘winners’, to secure their right to play for decades to come.
Disruptive ‘insuretechs’ continue to threaten the market share that traditional carriers and brokers have taken decades to build. With competitive pressure increasing, the established ‘high rollers’ of the insurance industry are responding by placing their chips across a number of different outcomes, preferring to hedge their risk, rather than doubling down on an, as yet, unknown winning formula.
Hg has seen ‘growth funding’ – or early‑stage minority investment – in the Insuretech sector skyrocketing over the course of the last 5 years, reaching levels well exceeding $9 billion over the period. This is significant, especially when you consider that it is a 13x expansion when compared to the preceding five‑year period.
Rather than this funding coming solely from typical early stage investors, such as VC funds, traditional insurance corporates are now also weighing in with their own capital in an effort to stay competitive against these new disruptive forces. In fact, today, around 20% of this funding is coming from corporate funds themselves, including those within large insurance carriers.
In a disrupted industry, traditional insurance companies are hedging their bets. Rather than risk putting all their chips on a losing number, we’re seeing big corporates investing seed/growth capital in a number of new insuretechs. This is, at least, until they’re more confident that they have a winner, where they will then deploy more substantial capital to acquire them. This was recently demonstrated by Prudential Financial’s acquisition of US‑based insuretech start‑up Assurance IQ for $2.35 billion.
Rather than sitting back and refusing to play a hand, the traditional insurance players are primarily betting against themselves. Instead of watching insuretechs erode their market share, around 75% of their funding represents investment into direct competitors, with carriers ultimately helping to seed their own competition, whilst they work out the extent of the threat and how to best counter.
Overall, big insurance players are allocating a greater proportion of funds to buying out the disruptive competition, trying to pick the ‘book of business’ winners in the short term. This explains the huge levels of funding that we’re seeing in this space and it provides an increasing opportunity for the insuretechs themselves.
Insurance – a tech ‘high roller’
Insuretech and digital disruption across the insurance industry is often characterised by the technological advancement of cloud‑based software, driven by increasingly demanding consumer behaviours.
Insurance has been slow to move forward with this technological evolution and the traditional carrier and broker model is still lagging behind their cousins in fintech, legal/reg tech and even govtech. In fact, some of the largest and most established global carriers continue to ‘tread water’ when it comes to technological development.
This isn’t because the large insurance carriers have only just woken up to tech. On the contrary, starting in the 1980s, insurance companies have continued to invest heavily in building vast, software development divisions, many with sizeable $1bn+ annual budgets. These teams have built complex on‑premise technology estates, focused mainly on supporting ‘back office’ activities, particularly around compliance. The problem is that this tech legacy has not modernised fast enough and is now proving expensive to update.
Today the use of modern cloud technology, particularly in consumer facing activities, has left many of these legacy estates behind, unable to keep up with shifting consumer behaviour. This is putting traditional carriers at risk of losing touch with their customers, both in terms of current and potential new insurance products. This, in turn, is creating even more intense competitive behaviour, leading to a new technology arms race between the big insurance companies.
Insuretech – where to place your chips
Traditional carriers are left with two dilemmas. First – which tech to focus investment on – should they update the ageing back office technology or modernise consumer facing technologies, where there is more visible competition?
This is a complex question in itself, but even once a carrier has reached clarity on this, they are confronted with the next dilemma – whether to buy this tech through third party vendors (with the inherent risk of compatibility with old on‑premise systems), buy it in through M&A (increasingly expensive) or develop it in‑house to better accommodate the idiosyncrasies of legacy platforms.
To make these decisions more difficult, both require long‑term commitment and investment, perhaps to the detriment of short‑term performance. This is particularly difficult for large publicly‑listed companies, who have their shareholders to answer to on a regular basis.
So where’s the money flowing?
Disruptive B2C propositions (next gen carriers/brokers) & consumer facing platforms, are receiving most of the attention (and money), accounting for most of the 75% of the corporate investment acknowledged in the introduction. This suggests that money is flowing where there is short term competitive behaviour – often in the consumer facing aspects of their businesses.
It’s very possible that the carriers are using this hedging investment strategy as a stop gap whilst they work through the highly complex task of sorting out their tech estates, a longer term and higher stake gamble.
Time will determine the winners of the industry’s roulette strategy to date. The traditional players will certainly be hoping that, in this instance, the house doesn’t always win.