Insurtech Predictions: Insurance, the industry technology forgot to change is now changing

At the start of 2022 the (neo)insurance moment is in full swing. While still in the early innings, the future holds many changes for a centuries old industry. In this final piece I outline my predictions of what insurance trends are here to stay (part III of a III part series).

Predictions are hard, but they are also fun. In this final piece of a III part series (Part I, Part II), I will outline my view of what the next ten years of insurtech looks like. While this part will be longer than the previous posts, the TLDR is simple: the insurance industry is changing for the better; hop on the train before it’s too late.

There are four major insurtech trends that will mature over the next ten years: 1) digital full stack insurtechs will see major profitability at scale driven by superior underwriting and efficient acquisition 2) insurtech infrastructure companies will allow every company to become an insurance provider 3) insurtechs will emerge globally as consumers demand user friendly insurance in under-penetrated markets 4) a new concept of ‘insurance’ will be rewritten in the Web3 world for the next wave of DeFi users.

Prediction 1 — Full stack insurtechs will be profitable at scale by doubling down on underwriting and take major business from brick and mortar incumbents

The main Insurtech 1.0 lesson we learned from Lemonade, Root, and Metromile is that underwriting really matters. I know this might sound a bit obvious, but in wave one of insurtech innovation the mantra of many insurtech leaders was simple: grow fast at all costs. When they went public they kinda shit the bed. Oops. It’s because they focused on growth and not on high quality underwriting. If you’re writing bad business to high risk customers, you’re going to get your head handed to you. Growing faster just speeds your losses. Lemonade’s S1 highlighted their ability to acquire customers quickly (see flywheel graphic to the left). The graphic makes a ton of sense. It’s intuitive, but unfortunately if you grow fast and feed the insurance engine bad, high risk customers your loss ratios look more like my feeble childhood lemonade stand than a highly functioning insurance business.

In the next wave of insurtech, success will come from efficient underwriting first and customer acquisition second. A digital first approach can help with customer acquisition but must be done in lock step with superior underwriting. Insurtechs have a unique advantage here vs incumbents. The innovator’s dilemma tells us it’s hard for incumbents to change how they’ve underwritten insurance policies for 100+ years. Take telematics; few incumbent insurers have fully integrated telematics into an insurance premium. Progressive has used telematics better than the rest. However, broadly only 16% of drivers are underwritten using real time driver data, where digital first trucking insurance companies like Nirvana use it for 100% of their drivers.

So, if it’s the underwriting that matters, then how will insurtechs scale efficiently? A reinsurer once told me, it doesn’t matter if you are 100% better at pricing risk if you never place it. Because of high capital requirements, getting to scale is more important in insurance than most other industries. Luckily, the Managing General Agent (MGA) playbook allows insurance challengers to underwrite policies with outside capital as they build a deeper understanding of how to price and underwrite risk. By testing and improving underwriting, insurtechs can bring on the ‘right’ customer at the right pace. Then when the underwriting model is trained, shift to take on balance sheet risk and become a full stack insurance provider. The best insurtechs will do this while also tapping into an embedded distribution (more in the next prediction).

Companies like Ladder, a full stack life insurance company, have shown what underwriting focus looks like. By doubling down on underwriting during COVID, they have produced strong financial growth of 4x in 2020. Other insurtech leaders like Kettle have grown sustainably by introducing a hybrid MGA approach where they raise captives to back a small portion of their portfolio risk, while still using part of the MGA asset light approach. These examples highlight what we will see from other top insurtechs in the next decade: superior underwriting and market capitalizations in the high billions.

Prediction 2 — Every tech company can become an insurtech company

While many of the (neo)insurance players are already well developed, the next major wave of insurtechs will be made up of insurance infrastructure companies. Similar to what happened in banking or payment infrastructure (ie Plaid and Stripe), the insurance industry needs developer first infrastructure tools to harbor the next wave of insurtech innovation.

Understanding what pipes to build and where to build them is important. Much of the insurance book of capital sits within legacy insurance carriers or reinsurers. Most of them haven’t built APIs (at least not modern developer friendly APIs). To open this pool of capital to tech companies and consumers, insurance infrastructure must be built. Companies like Herald (commercial APIs), Ascend (payment APIs), and Noyo (health insurance APIs) are already doing this. While the category of digital full stack insurtechs may be a threat to incumbents, traditional insurance carriers should and will embrace the next wave of infrastructure development.

One natural result of this infra development will be a burgeoning influx of embedded insurance products. Embedded insurance companies like Socotra, Sure, and Trellis have already proven that with the right tools, many tech companies can provide insurance products. However, embedded insurance has a lot of different flavors. Patrick Klas at MGV has developed a definition that I have adapted slightly.

Embedded should be looked at on a spectrum. On one end you have “insurance for insurance” or companies who already provide insurance, but don’t want to offer other insurance lines or specific products natively. On the other end of the spectrum, you have pure “distribution” plays where net-new companies want to offer an insurance product within their current business. A lot of times these companies have already captured a unique customer and are looking to further monetize by selling an external provider’s insurance product.

As insurtech infrastructure companies build, understanding the differing use cases will be vitally important. While this infrastructure wave will be a slog (full of many integrations and slow moving carriers), within the next ten years nearly every auto, home, consumer goods related business will offer insurance products. Furthermore, the full stack insurtechs mentioned in Prediction 1 will use embedded relationships to both distribute and incorporate novel signals (from their partners) into tighter underwriting patterns.

Prediction 3 — Insurtechs will rise globally

The concept of insurance is a human, universally demanded concept. Unfortunately, much of the world does not have the option of buying insurance from one of the ~6,000 US carriers. The OECD publishes a global insurance statistics report that highlights the lack of insurance penetration across many countries.

This chart above paints an opportunity for digitally native insurtech companies abroad. Many incumbent insurers in LATAM or MENA are decades behind US insurtechs from a technology perspective. Over the next ten years, I expect insurtechs to serve these under penetrated markets. By using unique, tech driven underwriting methods and reaching customers via mobile distribution, insurtech players in Latin America, Africa, and the Middle East will gain sizable market share. In a country like Egypt, with over 100M people, total insurance premiums sit below $2B. This is a massive opportunity for an insurtech to capture.

Companies like Jooycar, Justos, and Amenli are taking advantage of this overly attractive low incumbent insurance penetration and the lack of stringent regulatory rules. Of course there is a downside; some markets may be too small for outlier companies. Nevertheless, there will be substantial businesses captured by at least a few insurtech startups and more importantly consumers globally will finally have access to the insurance products they need.

Prediction 4 — Insurance will become a staple of the Web3 world

While it’s topical to say the Web3 world is going to eat the Web2 world, I won’t go that far (yet). For purposes of this conversation, let’s agree that global DeFi adoption is going to scale rapidly and an insurance organization must provide consumers with financial coverage. Furthermore, I’d postulate that Web3 insurance is not only needed, it will be the next big unlock that allows a billion users to enter the DeFi world. Put simply, my 60+ year old dad won’t buy tokens without insurance protection from hacks or attacks.

There is currently $275 billion in total value locked (TVL) in DeFi today across L1 and L2 ecosystems. DeFi TVL has grown exponentially, up ~17x YoY. If we were to conservatively forecast DeFi TVL to grow at a minimum 30% CAGR, DeFi TVL will reach $785 billion by 2025. Assuming a 10% insurance penetration rate, there is a $78 billion market for the taking. In reality, this number could be 10x this simple market sizing.

Bottom line, someone needs to capture this burgeoning market. DeFi users do not have the required insurance tools to cover and protect against malicious activity. What’s cool here is that Web3 insurance companies get to rewrite the insurance world from scratch. While there are many players building here (see below) I think the winners in this space will take the best from the Web2 world and dump the legacy insurance bureaucracy.

I think Web3 insurance companies must be parametric and asset light. Parametric models solve one of the biggest issues in insurance today: claims. Not only are claims cumbersome, costly, and full of fraud they suffer from an agency problem. An insurer’s interest aligns with not paying claims. The less they pay out, the better their loss ratios look. In Web3, the insurtech winners will algorithmically settle claims instead of using governance or claims adjusters. Additionally, the community is both the underwriter and the user. This creates better alignment and naturally better behavior.

The second big issue with insurance is the asset heavy nature. To scale and provide more coverage, an insurance carrier needs to raise huge external balance sheets in order to grow revenue. In Web3, the liquidity can be found in the user base. By utilizing risk pools that earn modest yield, users can stake other user’s coverage. I view this as almost a rewrite of the old mutual insurance model. While we don’t fully know what the Web3 insurtech world will look like, companies who learn from Web2 insurtech failures will have the best chance of winning and someone will win big.

But where’s the public comp?

Many pessimists might ask: so all the startup innovation is great, but show me the successful public market comp? We don’t have to look far to see the faltering of insurtech wave 1.0. Lucinda Shen of Fortune commented that it isn’t just Metromile struggling, “Hippo Insurance for instance, which also went public via SPAC, is down about 66% since its listing, valuing the company at $2.3 billion. Root Insurance has fallen about 79% since its Oct. 2020 IPO, valuing it at $1.2 billion. Even Lemonade, which has held up well in comparison, is down 11% since its July 2020 IPO, and is now valued at about $3.8 billion.” While the present doesn’t look great, the best is yet to come. I’d argue the major reason we’ve seen poor public market performance is that companies in insurtech wave 1.0 simply went public too early. The good news is that insurtechs are learning. They are now doubling down on underwriting, focusing on loss ratios, and building in the Web3 world instead of just quickly acquiring customers.

In the next few years, I think three companies will serve as good examples and pave the way for sustainable public market performance. Additionally, at least one company will dominate the Web3 world. WeFox, Coalition, Clearcover, and Risk Harbor are all showing signs of sustainable growth in their respective markets. In Europe, WeFox has utilized a mix of DTC and brokers to distribute policies across Europe and expects to surpass $336M in revenue in 2021. The company’s insurance captive is already profitable and expects the entire business to be cash flow positive by 2023. Coalition, a leading cyber insurtech alongside At-Bay and Resilience, has grown to over $150M in GWP serving more than 41k business in 2020. Clearcover, while smaller, boasts 100% yearly growth aligned with a focus of “build[ing] the bones of an insurance company — from the very beginning — with the digital consumer in mind.” In the Web3 world, Risk Harbor, a DeFi risk protocol, has built a parametric product positioned on capital efficiency. I believe these four future winners will show the world what insurtechs can do at scale.

Insurtech is sexy

I started my first post by saying people don’t think insurance is sexy. Let me refine that statement: insurance isn’t sexy, but insurtechs are. The sheer amount of technological innovation pouring into a nearly $7 Trillion global industry is impressive. Whether its Web2 solutions for insurance problems or a Web3 rewrite of insurance, the world of insurance is changing rapidly. As an early stage fintech investor, I have been through the 7 stages of grief wrestling with the insurance industry. I’ve been told insurance ‘sucks’ too many times. Good news. I have made it to acceptance. If you are building in the insurtech space, I would love to hear more. I believe the future of insurtech dominance is only just starting. Reach out at clove@lsvp.com or on twitter @ConnorLoveCA.