Invest, adapt or be left behind?
Insurtech investment deals in the first three months of 2018 marked a new high, according to a the latest quarterly insurtech briefing from Willis Towers Watson (WTW).
The WTW briefing said that there were a total of 66 deals in the quarter, and that transaction sizes continued to increase and the line between insurtech funding by incumbent (re)insurers and traditional venture capital was blurred by newer ‘hybrid’ investment funds.
Insurtech investment volume of $724 million in the first quarter of the year was 16 percent greater than the $624 million recorded in the fourth quarter of 2017, and up 155 percent from the first three months of 2017.
There were seven $30+ million investment rounds were completed during the quarter, as investors continued to make increased bets in selected companies. The briefing finds that insurance sector incumbents prefer minority investments in start-ups developing technology which will ease their own commercial pressure points, including distribution costs, claims handling, and underwriting excellence. They seek improved processes and focus on nodes within the value chain that present the biggest challenges. Achieving an outsized investment return is secondary to incumbent investors.
However, traditional VC investors tend to focus on insurtechs which address customer pressure points such as price, ease of access, and underserved markets through innovation. They tend to be product- not process-focussed, and look to developments in other sectors for ideas. Unlike incumbent (re)insurers, traditional VC insurtech capital is likely to take majority positions and focus on integration across the industry value chain. Traditional VCs are solely driven by investment return. However, they often lack meaningful access to the insurance market, and therefore tend to pursue revolutionary ideas.
WTW said that as insurtech investment surges, companies are finding a third way. A subset of specialist insurance investors is creating a ‘hybrid’ model in which they seek to blend the best of both traditional and incumbent (re)insurer venture capital models. These ‘hybrid’ models are looking to combine the traditional VC investor mentality with the industry expertise of incumbents to create a more aligned model that targets both financial and strategic returns for its investors.
“For insurtech start-ups, the funding scene is more complex, and finding the right investment partner has become more difficult,” said Rafal Walkiewicz, chief executive officer of Willis Towers Watson Securities. “Hybrid models will continue to evolve, and may be the ultimate answer for insurtech entrepreneurs looking to balance industry expertise and the traditional VC value-creation mentality.”
Paddy Jago, global chairman of Willis Re, said: “The incumbent market has actually been relatively receptive to taking a serious look at the digital innovation that is going on around us, and those driving it. Most of us know that to remain relevant, we need to embrace change. I have always believed that we cannot view change and not change ourselves.”
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