Innovation in insurance has had mixed success. Some large-scale investment has not seemingly achieved the expected returns.

Shares in recently listed fintechs have fallen an average of more than 50% since the start of the year, compared to a 29% drop in the Nasdaq index.

Fintech cumulative market capitalisation has fallen $156bn in 2022, and if each stock is measured from its all-time high, around $460bn has been lost, reports the FT.

Great things, for example, were promised by US insurance start up, Lemonade, back in 2020 but two years later it is one of the biggest victims of the dramatic rout in the share prices of many startups.

The Insurtech sector is facing a credibility crisis due to rising rates and mounting losses. Novel insurance businesses are seeing their NAVs or share prices drop as their underwriting is called into question and losses mount. Higher growth startups are suffering while more established profitable traditional firms attract investment.

Crisis management

Is there a real danger that insurance could suffer an innovation crisis if investment is not forthcoming to fund new tech? “Innovation is the hunt to remain relevant, which is why innovation is always future-focused,” says Harvey Wade, Founder & Managing Director, Innovate21. “Investing in the future is the cost of learning what works and what does not. Reducing investment may mean that the future is not found or not found as fast.”

“From a broker perspective, I don’t believe we will suffer a crisis but we will suffer if we don’t evolve,” says Richard Tuplin, CEO Towergate Insurance Brokers.

“We also need to consider what ‘new tech’ is considered to be. It's a combination of changes in business models and better utilisation of data, both supplemented by technology to deliver better outcomes. Those better outcomes can include improved risk management and underwriting capabilities through broader data sets, removal of manual efforts, or making it easier for clients to do business with the industry, but it's not about technology in isolation.”

Wade agrees: “Innovation does not always equal new tech,” he points out. “Innovation is about solving user/customer problems better than they are being solved today. Insurtechs can often be a solution looking for a problem, and as a result fit into insurance’s product-driven mentality, rather than taking a customer-centric perspective.”

There is an argument that what is happening in insurance is similar to that experienced in banking a few years ago when fintech was drawing in significant investments into a sea of startups all seeking to find a niche play that would drive market-wide innovation.

“There were many companies looking to revolutionise and innovate in the payments space - now most of us use Apple Pay, PayPal etc. and very few niche players,” says Tuplin.

“Innovation will not be stifled if investment is not forthcoming at scale but instead, by not having a "gold rush" mentality of investment which can create a lot of noise in innovation leading to great ideas being lost, it will benefit from targeted investments. More limited investment will help to focus efforts into the most credible ideas, more capable players, and better execution to deliver better outcomes.”

Danger ahead?

A more focused set of short-term investments will mean that only the strongest most viable investment opportunities will stay the course. “Darwinian style, the most agile and adaptable will survive and thrive, leading to a better longer term, better solution than an overly financially buoyant insurtech sector could deliver,” comments Tuplin.

There is also an element of market correction at the moment; the funding is there, but investors are being more selective. “Reducing a startup’s runway will mean a need to focus on core target users, crisper value propositions and a need to demonstrate value faster. Most startups fail because the future is unknown. Perhaps people have forgotten this?” says Wade.

Philip Goss, Chief Risk Officer, Volante Global points out that the onus is on startups to prove demonstrable benefits of their tech more quickly than ever before.

“Given the current environment post-covid, insurers are not going to be as free with their investments as they were before,” he says. “Any new startup is going to have to demonstrate sustainable advantage that can be obtained from their solution.  I think before, ‘new and sexy’ was good enough.  Additional investment will follow successful implementations.”

Heightened scepticism

Will this heightened scepticism extend to acquisitions?

Novel insurance always runs through a lifecycle before maturing – and it takes several cycles to produce sufficient data to allow for effective risk modelling. Early phase underwriting will be risky where there is insufficient historical modelling and a changing threat landscape to be factored in.

“This may drive acquisitions where there is insufficient funding to cope with the uncertainty and the novel insurance offering needs the backing of a wider portfolio of products to de-risk it during the early lifecycle of the product,” claims Tuplin.

So, how do tech startups cope in an environment of low growth and higher losses?

“It's all about doubling down on the key startup success areas; how will the big idea fit into the current industry eco-system? What are they key benefits and who are the beneficiaries? How will it be monetised? And how it can scale up,” says Tuplin.

“Many insurtech startups are unclear on these and are delivering a solution to a problem that either isn't clear or not widely understood. So starting with a solid answer to ‘what's the problem you are trying to solve?’ followed by a clearly articulated view of how they will bring it to market and scale it is key.”

Wade goes further. “This is wider than just tech,” he says, “as every startup must have clarity in the problem they are solving, why it is such a big problem for their customer and – the bit that is really importantly and is usually missing – why can they solve it better than anyone else does or can? Investors will know that the power balance is shifting and may use this to their advantage.”

While this will mean that startup investors are likely to be slower to invest, it will also, ultimately, lead to a better partnership based on mutual benefit.

“Hard times always reduce the availability of funding, but in a time of scarcity, the best companies often emerge,” adds Wade. “Tough times means that something different is needed, and perhaps an insurtech may just have the answer.”

Overall, the message is, there will always be opportunities for good ideas. “Underwriting and pricing is often referred to as an arms race with insurers trying to stay one step ahead of their competitors,” says Goss. “Insurers will still be open to fintech firms who bring a unique proposition that can give insurers a market advantage.”