Venture Funds Like InsuranceTech, But Patience - Not Their Strength - Is Needed

No one has ever accused the insurance industry of explosive growth - and it appears venture investors in insurance applications for telematics and AI are learning that. 

The economic potential remains manifest, but it will take time for startups to generate the necessary data in order to optimize risk monetization. JL 

Jon Sindreu reports in the Wall Street Journal:

Global insurtech funding fell to $4.5 billion in 2023, a 44% decrease from the previous year. Venture funds demand explosive rates of expansion, but tech-inspired, consumer-centric buzzy optimism mixes badly with an industry in which attempts to grow fast fail, because it brings in the riskiest clients. Incumbents such as Allstate, Prudential and AXA

have a lot more data to price risks correctly, offsetting the advantages that digital tech and AI were supposed to bring newcomers. The first wave of insurtech startups has nudged old-school insurers to move online, invest in telematics and start looking at AI.

Silicon Valley entrepreneurs hate it when the audience gets bored, but they may need to elicit more yawns if they are to transform insurance.

Enthusiasm for artificial intelligence continues to power the stock market, but it isn’t giving a second wind to companies committed to revolutionizing insurance through technology, or “insurtech.” Shares in listed players such as 

Lemonade

, 

Root

 and 

Hippo

 have been trading sideways.

Meanwhile, global insurtech funding fell to $4.5 billion in 2023, a 44% decrease from the previous year, according to fresh data by reinsurance broker Gallagher Re. While the sector is coming off the free-money craze of 2021, participation in megadeals was the lowest since 2017 last year. Insurance needs innovation. Natural catastrophes are pushing up premiums and leaving households unprotected. Personal car insurance has become prohibitive while still losing money for underwriters. Some smaller insurance lines remain an afterthought. Almost a decade since Californian innovators descended upon the industry, however, few such issues have been solved.

Indeed, most insurance success stories predate the recent venture-capital boom. Among the exceptions, Texas-based broker 

Goosehead Insurance

 listed in 2018 and has multiplied its stock-market value tenfold, though it was founded in 2003 and puts agents front and center. Perhaps a better example is Parsyl, a Lloyd’s of London syndicate specialized in perishable marine cargo insurance. This is a data-driven firm backed by venture capitalists such as HSCM Ventures and GLP Capital Partners. They have allowed it to grow steadily while preserving a good underwriting record.

More often, venture funds demand explosive rates of expansion. Take Koffie Financial, a promising startup that sought to upend truck insurance—a niche where traditional players have reduced coverage. It is now letting most of its employees go, after an inside investor pulled out of its commitment to extend a bridge loan.

“We will only do responsible underwriting. Unfortunately, that’s not what investors care about: They said the growth wasn’t sufficient,” said Ian White, Koffie’s chief executive.

This is the paradox of insurtech: Tech-inspired, consumer-centric buzzy optimism mixes badly with an industry in which attempts to grow fast and appeal to cool customers fail, because it brings in the riskiest clients. Incumbents such as 

Allstate

, 

Prudential

 and 

AXA

 have a lot more data to price risks correctly, offsetting the advantages that digital technology and AI were supposed to bring newcomers.

 

There is a silver lining. This first wave of insurtech startups has nudged old-school insurers to move online, invest in telematics and start seriously looking at AI. Not long ago, many of them didn’t even have the ability to issue digital policies.

Silicon Valley is now refocusing on a smaller number of ventures. To leave a more permanent mark, it should stop propping up flashy challengers that promise to insure better using tech, and concentrate on the tech itself.

In November, Spanish insurer 

MAPFRE

 teamed up with California-based Cyberwrite, which uses AI to provide more accurate information on companies’ vulnerability to cyberattacks. Startups such as Charlee.ai employ it to scan claims and spot fraud. Many ventures are also vying to generate better estimates of climate risk.

 

Then there is Sure, a startup with a $550 million valuation that aims to be a one-stop tech shop. Its services include actuarial models, back-end tools to generate quotes and process claims quickly, software for agents, customer-service chatbots and direct distribution channels such as websites and smartphone apps. It wants to replicate the sleekness and speed of insurtech firms such as Lemonade, while leaving the underwriting risk to companies that have the necessary data—namely carmakers, real estate marketplaces and rental platforms that want to launch their own “embedded” insurance lines.

On Wednesday, Sure announced a new solution that automates the legal filings involved in launching new policies and pre-integrates them with the technology to distribute the products digitally.

It often takes more than a year to launch new insurance products. If policy templates can be easily tweaked, the process can be sped up and the results better tailored to specific needs to close coverage gaps. AI has the potential to take this one step further and allow insurers to know how specific policy language is affecting the claims being paid, said William Mauro, head of coverage for commercial lines at data provider 

Verisk Analytics

. 

This is the type of grunt work ripe for disruption. In insurance, too much excitement is never a good sign.