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
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