In the summer of 2016 leading figures from the insurance industry gathered in London to discuss the sector’s future. It was the beginning of the fintech boom and delegates at the Airmic conference could have been forgiven for feeling nervous. Their counterparts in banking were watching anxiously as start-ups like N26, Revolut and Mondo (now Monzo) were luring away their customers with nimble digital offerings. Some insurance insiders feared they would be next.
“If we cannot deliver [our products] in an efficient manner, we are open to disruption and we will, and are, being disrupted,” said one panellist. “Disruption in our industry,” said another, “will absolutely happen in a short timescale.”
Over the following six years, venture capital investors in the US and Europe funnelled billions of pounds into the “insurtech” sector. This funding spree peaked in 2021, driving record valuations for some of the sector’s leading start-ups. At the time, it looked like 2022 would represent a bumper year for stock market listings, too.
But the mass sell-off of tech stocks in May, driven by the Federal Reserve’s interest rate rises, derailed those plans. Entrepreneurs in the sector, and the wider fintech community, are now finding it significantly harder to raise late-stage investment. While the challenger banks have successfully gained market share from their larger rivals, particularly in the small-business banking space, not a single insurtech start-up has been given approval by the Prudential Regulation Authority (PRA) to underwrite their own offers. Expectations about the sector’s capacity for disruption have been pared back, but many entrepreneurs and investors remain bullish about its long-term prospects.
The sector’s exposure to disruption was perhaps always exaggerated. The rise of mobile apps made it easier to reach new customers and develop the infrastructure underpinning digital financial services, but the regulatory requirements have not changed. It is much harder to insure an individual or a business than it is to set up a current account on their behalf. For one thing, insurers are subject to strict capital requirements to ensure that if they need to pay out to several of their clients simultaneously they have the reserves to do so.
They face a range of other complex regulatory requirements, too. This is one of the reasons that new businesses have entered the market in partnership, rather than in competition, with existing players. Lemonade is one of the most high-profile insurtech start-ups globally. The New York-headquartered business has raised more than $500m from deep-pocketed investors, including Softbank, Sequoia and Alphabet, as well as the German insurance giant Allianz. Its AI-powered software helps its customers register and file their claims more efficiently. The company has expanded into four European countries to date. But when it arrived in the UK in October, it did so in partnership with Aviva. The insurance giant reinsures Lemonade’s UK business. Reinsurers typically provide financial support, and sometimes guidance, to enable insurers to underwrite more deals. Lemonade hasn’t needed to secure PRA approval because its offers are underwritten by its Dutch subsidiary.
James York, the former chair of the Insurtech UK trade association, says it will become increasingly common for larger players to serve as reinsurance partners to younger companies. “Someone will fast-track themselves,” York tells Spotlight, “by starting off as an appointed representative [AR], working with an insurer that’s effectively underwriting them and that then adopts the position of reinsurer.” While the pound remains weak, many expect that more US businesses will enter the UK market. York believes that some will begin as ARs before pursuing PRA approval, while others will apply for a licence to sell their own products from the outset.
Amazon, which has long threatened to disrupt the sector, is also working with existing providers. The company has major ambitions in financial services, but is primarily focused on providing a platform for other firms’ insurance products, rather than selling its own. The online retail giant launched a price-comparison site for home and buildings insurance in the UK last month. Its European payment products chief, Jonathan Feifs, said at the time that this was “just the beginning” of its ambitions, but signalled that the company isn’t prioritising its own products. “There are opportunities,” he added, “to improve other insurance shopping experiences as well.”
In recent months investor confidence in start-ups has diminished amid the wider tech stock sell-off. Insurtech is not immune to this trend. In the UK, investment in private insurtech start-ups topped £800m last year. So far this year it has reached less than half that amount, according to analysis produced by Beauhurst, an investment data platform. While many VCs and entrepreneurs ultimately expect the sector will rebound and grow again in the coming years, the challenging investment landscape will prove perilous in the short term. Even in less turbulent times, three in four venture-backed start-ups fail.
If late-stage investment remains hard to secure, there may be an uptick in bankruptcies in the coming months. Meanwhile, for those businesses that were hoping to list on public markets this year, exiting via acquisition may become more common. The insurance giants will see insurtechs as appealing targets, given their customer bases. Software-as-a-service (SaaS) providers, which can help incumbent insurers to keep pace with start-ups, may also become attractive to established firms, says Philip Edmondson-Jones, a principal at Oxx VC, which specialises in SaaS businesses.
“Because valuations are a little bit down across the whole of tech,” says Edmondson-Jones, “you might well end up seeing some of these large traditional insurers use the advantage of their balance sheets to start acquiring either some core infrastructure technology to bring that competitive advantage in-house, or maybe even buying some of the largest start-up carriers to improve that customer-facing proposition.”
But even insurtech’s champions acknowledge that those who are seeking to overhaul the industry face a challenging future. “Let’s face it, could the economy be more primed for a better, more empathetic, listening-based service from insurance? Oh my gosh, yes and the rest,” says James York. “The opportunity is there for disruption. It just happens that the water flows to collaboration, because that’s where the taps are open.”
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