While investments into InsurTechs are increasing, funding is still not nearly as abundant as other areas of FinTech, according to MTech Capital co-founder and partner Kevin McLoughlin.

The volume of capital deployed into the InsurTech space has grown gradually over the years, but in 2018, things took a turn for the better and skyrocketed. Last year, total investment into InsurTech companies increased by around 92 per cent going from $1.6bn in 2017 up to $3.1bn, according to data by FinTech Global.

Despite this sharp rise, it is still far behind other
FinTech spaces, namely, PayTech, marketplace lending and WealthTech. A total of
$18bn was invested into PayTech companies last year alone, which is over double
the amount of capital invested into the InsurTech space since 2014. Between
2014 and 2018, InsurTechs have raised $8.5bn. Sitting behind PayTech for the
highest volume of capital raised in 2018 was marketplace lending, which received
$9.9bn and then WealthTech, which saw $4.6bn invested.

Kevin McLoughlin said, “This reflects the complexity of insurance
as a product and as an industry, which inhibits investors. This includes
generalist venture capital firms who may feel unequipped to invest in the
sector. At MTech Capital we have received calls from generalist VCs we know regarding
InsurTech investment opportunities where they would like our view or to simply pass
it to us. That’s a challenge for InsurTechs – A smaller pool of capital because
of the relatively complex nature of the insurance industry.”

This mini funding gap has manifested due to the complicated
nature of the insurance space. Insurance has notoriously maintained its old way
of working, approaching innovation and digitalisation hesitantly. Proof of this
lies with the heavy reliance still rested on legacy systems. While other
complex industries like investment and retail banking started to digitalise themselves
ten or twenty years back, for insurance firms, it’s still only a new mentality.

However, just because the space is intricate and takes time
to fully understand, does not mean that the growth rate has been impacted. The
market is still new, and with funding nearly doubling last year, it is clearly
heading in the right direction. McLoughlin added, “I wouldn’t say capital is
abundant, but it is definitely available for the right companies.”

In lieu of bountiful levels of capital from traditional venture
firms, several corporate investors have entered the market to fill some of the
void. McLoughlin believes that more corporate capital has entered the InsurTech
space than in other industries, because of this specialist environment. While corporate
investors may have the knowledge of the market and can support growth from
within the sector, some InsurTechs do not like the idea of their customer also
being a shareholder, he said. Seeing a competitor as a shareholder can even
potentially hinder the startup’s appeal to other insurance companies who represent
potential customers. Deciding whether to side with one is a heavy decision to
make for founders.

Similar to how investment banks have their own embedded
insurance groups, McLoughlin does see the potential for some venture firms
following suit and hiring people who know the space. This is where MTech
Capital believes it comes into its own, as it has the in-depth knowledge of the
insurance space and can also provide access to its own limited partners which
are entirely made up of insurance firms.

MTech Capital was founded in 2016 and exclusively invests
into the InsurTech sector. The investor is currently in the process of raising
its maiden fund, with a first close being held last year on $75m – a final goal
has been set at $150m. The firm has already tapped the fund, participating in
the $9m Series A round of INSHUR. The InsurTech offers mobile-based auto
insurance for commercial and ride-share drivers, leveraging data and analytics
to offer them the best protection and at a competitive price.

Changing the customer
experience

One of the driving factors for starting up as an InsurTech-dedicated investor was the lack of customer engagement on the insurance side. Around 12 years into a 30-year term life insurance policy, McLoughlin noticed that he had not heard anything from the insurer or the broker since the day he bought the policy. No updates or general customer interactions of any kind except annual bills. He added, “What industry can afford to actually treat customers that way today?” With all the opportunities the internet is presenting, the insurance sector needs to change and become up-to-date. 

Internet of Things (IoT) devices are one of the developments
which the insurance sector can take full  advantage of. Being able to access highly
personalised data around a consumer offers a range of benefits to both insurer
and consumer. The insurer is able to offer more personalised products which
suit their specific needs at a better premium. A simple example of how a
startup can change insurance are IoT devices which monitor how people are
driving and the distance they travel. Consumers who drive very infrequently can
access cover which matches the amount of time they are actually using the car,
rather than paying high premiums for a car which mostly remains parked on a
drive.

Not all challenges facing the InsurTech sector are solely on
the funding side, and in fact, it is the relationships between insurance firms
and the technology companies which are presenting some issues. In the
marketplace there have been a handful of InsurTechs McLoughlin has seen become
frustrated by working with incumbent insurers. This spawns from having to rely
on them to underwrite their policies. While the InsurTech may have
revolutionised the front-end of insurance, providing great coverage for a range
of industries, they could be let down by their underwriting and the slowness of
response.

“We have seen a number of InsurTechs say, ‘We can’t fulfil
our brand promise to customers by having a traditional insurance company at the
centre of our business processes. Interactions are too slow’ Consequently what many
startups want to do now is take control of underwriting and pricing and so
they’re adopting the MGA model. This way they get a reinsurer or insurer to
provide them balance sheet capacity but they control the underwriting and
pricing — within limits. And most still don’t want to become a full stack
regulated insurance carrier as that’s a whole different proposition. Instead they
actually just want to have greater control over the total customer experience,
including the pricing and underwriting and claims.”

In adopting the MGA model, InsurTechs are able to take greater
control over the customer journey from front to back and ensure they have the
best possible experience. There have already been an increasing number of
companies adopting this operating model due to this frustration. The future
might be in this direction, but McLoughlin still believes there will only be a
very select few which go beyond being an MGA and become a full-stack insurance
company.

Copyright © 2019 FinTech Global




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