With the stock prices of marquee insurtechs such as Lemonade, Hippo and Root down as much as 95% from their peaks, doubt has been growing for some time about the future of the insurtech movement. Concerns have accelerated as Policygenius laid off 25% of its staff, and as venture capitalists talk about how inflation and the threat of recession are putting pressure on startups across all industries. There is even talk of -- perish the thought -- down rounds (in which startups will have to raise money at lower valuations than they previously held).
So, what does the future hold for insurtechs?
I wrote at the end of January that I thought the future was still bright, especially for insurtechs that serve as what Silicon Valley calls "arms suppliers." Even though so much of the valuations of dot-com companies turned out to be air during the internet bubble of the late 1990s, companies that supplied the "arms" -- servers such as those from Sun and IBM -- still thrived. The same should be true for insurtechs, I reason: There will always be a market for technology that makes insurers smarter and more efficient.
Rob Moffat, a partner at Balderton Capital in London, now weighs in with a smart piece I wanted to share on the outlook for "full stack" insurers such as Lemonade. The headline: "Reports of insurtech's death are greatly exaggerated...."
He goes into some detail on the reasons for the plunges in stock price -- high loss ratios, poor unit economics and slowing growth, as the companies try to deal with those loss ratios and unit economics. (For more detail, check out the smart analysis Matteo Carbone has been publishing with us for years.)
Rob is nonetheless optimistic because:
"There are a number of private insurtech businesses reaching real scale: Zego, ManyPets, Next Insurance, Ethos Life, Alan, Atbay, Coalition, etc. Having seen some of their numbers, I can say that their loss ratios are good, their unit economics are sensible and they are growing strongly. They are achieving this through great execution, and some combination of the following:
- Addressing new markets that didn’t exist before, such as cybersecurity
- Using telematics and novel data to meaningfully reduce losses and fraud
- Targeting underserved segments such as SMEs and the self-employed
- Operating in ‘easier’ lines of business where there is less competition and loss ratios aren’t as tight as in home and motor, such as pet insurance."
He says others can prosper, too, based on the key lessons that we've learned about insurtech, which include:
- "Underwriting is crucial. As an insurtech, you start with the disadvantage of not having a base of loyal good customers. Where are you using tech to give you a real edge over incumbents? But also do you have enough actuarial talent and data to complement this?
- Telematics (real time data) works. Whether in motor or health insurance, telematics data has repeatedly demonstrated the ability to reduce loss ratios. As data collection becomes cheaper and universal, expect telematics to become widespread across many insurance lines....
- Your unit economics have to work. This starts with a good loss ratio, and requires you to have happy clients who stay with you. It also requires you to have a good customer acquisition cost, which in insurance is never easy.
- Automation will bring down expense ratios dramatically, but only at scale.
- Brokers are very hard to dislodge. Many startups have tried to bypass brokers without success. Some of the large private insurtechs above have ended up building a successful broker channel.....
- Disrupting a large sector takes time. Disruptors start off being worse than incumbents in all respects other than one really crucial one. Look at the early days of SaaS or Fintech for examples."
In terms of the Gartner Hype Cycle, insurtech is in the Trough of Disillusionment, having passed the Peak of Inflated Expectations, but we've all seen what happens next in these technology-driven cycles: Real progress happens for those who stay the course.