Tech revo­lu­tion shak­ing up the in­sur­ance sec­tor

Lemon­ade is just one chal­lenger adding some sparkle to a cen­turies-old in­dus­try that was re­sis­tant to change, finds Han­nah Boland

The Daily Telegraph - Business - - Technology Intelligen­ce -

Pri­vate in­vestors, it seemed, had pushed Lemon­ade’s val­u­a­tion too high. Just over a year ago, the buzzy in­sur­ance start-up was val­ued at $2.1bn (£1.6bn), with in­vestors rav­ing about its “ac­com­plished founders tack­ling such a size­able in­dus­try”.

But in the pric­ing for its float in June, the com­pany said it was aim­ing for a mar­ket cap­i­tal­i­sa­tion of just $1.4bn.

There were some who weren’t sur­prised. Lemon­ade, headed up by Lon­don-born en­tre­pre­neur Daniel Schreiber, is try­ing to digi­tise the in­sur­ance mar­ket and ap­peal to younger, mil­len­nial cus­tomers, us­ing an AI-pow­ered bot to set poli­cies and process claims rather than bro­kers.

Un­usu­ally, Lemon­ade op­er­ates what is known as a “give­back sys­tem”, mean­ing that users pay a monthly fee, part of which is taken by the com­pany and the other part set aside for claims. If those re­serves are not used for claims, they go to a char­ity of the cus­tomer’s choice, mean­ing Lemon­ade isn’t mak­ing money if it turns down claims.

The com­pany has its vo­cal crit­ics. “Ul­ti­mately, Lemon­ade is just an­other AI-backed, un­prof­itable fin­tech com­pany with no real prod­uct or value propo­si­tion ad­van­tage,” Hugh Tal­lents from man­age­ment con­sult­ing firm cg42 had said.

Yet, in re­cent weeks, it has be­come clear its prod­uct res­onates with many. Since float­ing, de­mand for Lemon­ade’s shares has been sig­nif­i­cant and the com­pany is now worth $3.5bn, its mar­ket cap more than dou­bling in the first day of trad­ing. Even with shares slip­ping slightly since, it is still val­ued at well above what it achieved in the pri­vate mar­kets.

This is not just a sign of Lemon­ade it­self prov­ing at­trac­tive to in­vestors. Across the world, in­ter­est in the so-called “in­surtech” sec­tor has been spi­ralling, with a wealth of bur­geon­ing start-ups look­ing to use tech­nol­ogy to trans­form what is of­ten seen as a change-averse in­dus­try.

Glob­ally, in­vestors poured $6.7bn into the in­surtech space in 2019, around one third of all the his­toric fund­ing that has gone into the field, ac­cord­ing to Wil­lis Tow­ers Wat­son.

Even this year, with many funds rein­ing in spend­ing, cash is still be­ing fun­nelled into the space. Around $1.56bn was raised by in­surtech firms in the sec­ond quar­ter.

“It’s su­per ac­tive at the mo­ment,” says Fiona Kinghorn, founder of cy­ber in­sur­ance firm In­surtech­nix. “It’s re­ally in ev­ery area of in­sur­ance, so from pet in­sur­ance, to per­sonal in­sur­ance and life in­sur­ance.”

She says in­vestors are start­ing to get on board be­cause “the in­no­va­tion that was hap­pen­ing in the bank­ing sec­tor 10 years ago is now re­ally start­ing to hap­pen in in­surtech”.

This is not to say that in­surtech has not been around for a while. For at least the past decade, com­pa­nies have been de­vel­op­ing ways to use tech­nol­ogy to make it eas­ier for both cus­tomers and in­sur­ance com­pa­nies.

Big data and ar­ti­fi­cial in­tel­li­gence have been seen as key themes, which could trans­form an in­dus­try that re­lies upon us­ing in­for­ma­tion to mea­sure risk.

Yet, what is true is that up un­til now, many in­surtech firms have been op­er­at­ing on the pe­riph­ery. At least in the UK, val­u­a­tions haven’t spiked too sig­nif­i­cantly, bar­ri­ers to en­try re­main­ing high.

Mean­while, the in­cum­bents in the field, in a sim­i­lar way to the bank­ing gi­ants, have been very slow to shift to dig­i­tal.

Back in 2016, a re­port by PwC sug­gested that more than two thirds of in­sur­ance firms thought part of their busi­ness was at risk from dis­rup­tion. How­ever, that same year, only 32pc were plan­ning to es­tab­lish any re­la­tion­ships with fin­tech com­pa­nies. By 2017, a third of in­sur­ance com­pa­nies were still not look­ing to in­vest in any dig­i­tal in­fra­struc­ture.

In part, this was likely down to the fact in­sur­ance has been around for thou­sands of years, with ways of work­ing em­bed­ded in the in­dus­try.

But, also, says PwC’s Jim Bichard, there was a mis­trust of th­ese newer start-ups. “We saw a lot of in­sur­ance com­pa­nies wary of in­surtech,” he says.

Since then, things have changed. “What’s emerged is that the in­sur­ers re­alised the start-ups did not want to be the next in­cum­bents, what they wanted to do was par­tic­i­pate in the value chain.”

What this has meant in re­cent years is that in­sur­ance firms have in­creas­ingly part­nered with buzzier, more nim­ble start-ups.

Pay-by-mile in­surer By Miles is among those to have part­nered with an older, more es­tab­lished com­pany, with Axa un­der­writ­ing its mo­tor in­sur­ance poli­cies.

Boss James Black­ham says it has been a re­ally “ben­e­fi­cial part­ner­ship” in that Axa “gets to work with a young com­pany that is do­ing some­thing dif­fer­ently, and we get their back­ing and his­tor­i­cal ex­per­tise”.

By Miles is cer­tainly grow­ing as a brand. In May, while many other start-ups in the UK were strug­gling to at­tract cap­i­tal, the com­pany raised £15m in a se­ries B fund­ing round. The next few years could be pretty busy, with Black­ham say­ing he was hop­ing to get By Miles to a sim­i­lar po­si­tion as Lemon­ade.

Con­sumers are clearly get­ting on board. In April, By Miles saw its busiest month, which it says was down to the fact that, through its ser­vice, car own­ers only have to pay for their in­sur­ance when they’re us­ing the car. “It’s ac­tu­ally kind of ac­cel­er­ated what we’re do­ing.”

By Miles isn’t the only com­pany to be look­ing ahead to a pos­si­ble list­ing. US firm Hippo, the home in­sur­ance start-up that re­cently raised $150m to land a $1.5bn val­u­a­tion, is also re­port­edly plan­ning to float.

Chief ex­ec­u­tive and co-founder As­saf Wand says the mar­ket is a “bit crazy” at the mo­ment – for ev­ery sec­tor, not just in­surtech. But, he sees huge po­ten­tial for how com­pa­nies can de­velop in this space. “It’s such a vast mar­ket, hun­dreds of bil­lions of dol­lars that we haven’t even started tap­ping into yet.”

It might not be in­sur­ance com­pa­nies, though, that are mak­ing waves in this space. Ama­zon has re­cently started en­ter­ing the field, a com­pany known for crash­ing into new in­dus­tries and swal­low­ing huge chunks of the mar­ket. Late last month, Ama­zon started of­fer­ing au­toin­sur­ance in In­dia to cover two and four wheel­ers.

Soon, it said, the com­pany would be look­ing at health in­sur­ance and travel in­sur­ance. But it is not a done deal that Ama­zon will ac­tu­ally con­tinue to push into this space across the world. “Do tech gi­ants like Ama­zon re­ally want to be an in­sur­ance com­pany?” PwC’s Bichard asks. He doesn’t think so.

He be­lieves th­ese firms ac­tu­ally just want to find a dif­fer­ent way of mon­etis­ing the data they al­ready hold on in­di­vid­u­als. What this could mean is the mar­ket is set for a whole se­ries of new tie-ups and part­ner­ships.

In­sur­ance may have been around for cen­turies, but what is clear is that it has never been more set for dis­rup­tion. For many in the space, they see huge changes down the line.

“There’s a good chance that one of the big­gest in­sur­ance com­pa­nies in the world in the next 10 years might ac­tu­ally be a tech­nol­ogy com­pany,” Hippo’s Wand says. He might just be right.

‘There’s a good chance that one of the big­gest in­sur­ance com­pa­nies in the world in the next 10 years might be a tech com­pany’

In­surtech busi­ness Lemon­ade floated on the New York Stock Ex­change in July. Its mar­ket cap dou­bled on the first day of trad­ing

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