The first wave of insurtech startups hit the wall trying to fight the industry's biggest players. Now, insurance CVCs say they're seeking the ones embracing a partnership model.

The last wave of insurance startups failed to live up to expectations. But investors in the sector say a second wave of companies is emerging that aren trying to work with the old insurers, not put them out of business.

“The first wave of insurtech was very much focused around disruption and disintermediation, and there was a general feel that new, emerging technology would cause a fundamental shift in how insurance worked. That hasn’t materialised,” says James Orchard, chief executive of insurance firm QBE’s strategic investment arm.

“We’re seeing a much greater shift towards collaboration now,” he says.

Insurance startups boomed in 2020 and 2021 with a range of direct-to-consumer, online insurers like Oscar, Lemonade and Root going public at high valuations. But their share prices have subsequently plummeted to a fraction of what they were.

Younger insurance startups, meanwhile, have found it hard to raise new rounds with even larger companies such as pet insurance provider ManyPets yet to follow up on nine-figure rounds they closed two or three years ago.

“We see perfectly good companies with good products that, through no fault of their own, are going to the wall”

Francis Lowry, AllState Strategic Ventures

“We see perfectly good companies with good products that, through no fault of their own, are going to the wall,” says Francis Lowry, a senior associate at AllState Strategic Ventures. “A lot of traditional VCs are pulling back on their funds and as a result, good companies are being left to wither on the vine, or they’re going for down rounds.”

James Orchard will be one of the speakers at the GCV Symposium in London. Find out more about the conference agenda here.

Competing with large, established insurers turned out to be harder than startups had imagine. Although their interfaces tended to be much easier to use, they lacked the vast data management teams, long-standing distribution networks and marketing budgets of the incumbents.

“They learned a hard lesson from trying to compete with folks like Progressive, Geico and State Farm who are spending billions of dollars on marketing to provide a similar product,” says Eugenio Gonzalez, who leads insurtech investments for venture innovation platform Plug and Play.

“And then you’re just competing on price. I think a lot of people forgot that [the big insurers] aren’t big because they wanted to be, but because they’re really good at what they do. They have loads and loads of data they can price all their policies with.”

Trying to grow quickly, the insurtech startups took on higher risk and sub-par customers.

“[They] started out with insanely high loss ratios and eventually found themselves adding a lot of bad risk onto their balance sheets. There was a hope that with time, you’d eventually decrease your loss ratio as you were getting better numbers and adding better customers on to your portfolio. But the truth is that some investors wanted growth at any cost, and that meant adding on a lot of bad risk.”

The coming wave of insurtech startups want to partner, not disrupt

Now a new wave of insurance technology startups is emerging, in part to address new risk areas such as cybersecurity and climatetech, as well as technologies like generative AI (We’ll look at these in more depth next week in a second article on insurtech).

“Those startups are learning that it’s very difficult to compete with incumbents,” says Michael Remmes, who leads insurance firm State Farm’s venture office.

A worker holds a calculator in one hand as she uses a laptop with the other
Photo courtesy of Mikhail Nilov via Pexels

“They really have to partner with incumbents instead of trying to beat them, because they don’t have the scale and some of them don’t have the expertise. There are some good things from those startups – I think the customer engagement can be really good on the front end – but it’s very rare to see a small company like that ever make a profit.”

Most startups and investors now recognise that the insurance sector can’t be easily dirupted, says QBE’s Orchard.

“The second and third waves of insurtech are really focusing on collaboration,” he says. “If we are going to advance it’s most likely going to be through a collaboration between those incumbent players and the emerging startups.”

Rather than targeting consumer-focused areas, the new wave of insurance startups is tackling more complex problems and they are entering parts of the industry that still rely more on gut feel and intuition than data and risk insight, Orchard says.

Many are looking at commercial and specialty insurance lines in spaces like marine shipping and construction. QBE Ventures portfolio companies Cytora and Clara Analytics have both carved out business models that specialise in assessing commercial risk.

A rebound may be just around the corner for insurtech companies

After a two tough years for funding, insurance industry investors believe there is finally some light on the horizon.

“I think things are beginning to turn around,” Lowry says. “Any company that can survive through the first couple of quarters in 2024, that has enough capital to keep them going, should be in a good position going forward.”

QBE Ventures is gearing up for an increase in activity according to Orchard, who says that although his unit has had to help some portfolio companies with internal rounds, they are now emerging from that period. The survivors are the startups that focused on the sustainability of their business and finding a path to profitability.

“We’re seeing our key targets readying to raise money this year”

James Orchard, QBE Ventures

“I think overall, 2024 and 2025 is going to be very exciting,” he adds. “We spent most of 2023 either supporting our own portfolio or spending a lot of time exploring our focus areas. We’ve gone deep into the pipeline and now we’re seeing our key targets readying to raise money this year, which will mean a big uptick in investment activity for us.”

The insurance sector is also keen to keep up with tech advances such as artificial intelligence and big data, which will create opportunities for emerging companies.

“It’s a little bit out of favour at the moment, but the industry is continuing to grow,” says MS&AD Ventures partner Tiffane Wang.

“Some of the really advanced computing power we didn’t have 10 years ago – that’s going to be a really big game changer for us. There is so much ambient data being collected and people are so much more comfortable with sharing their data, and so the services in insurance will get better and more things will be able to happen in real time.”

What new technologies are corporate CVC investors keen to back? We’ll take a look in Part Two next week.

Robert Lavine

Robert Lavine is special features editor for Global Venturing.