Since 2014, The Bowery Capital team has published their perspectives on software verticalization in a piece titled “Opportunities In Vertical Software.” We recently released the 5th edition and are highlighting some of the verticals covered in the report. In this post we will be looking at the third vertical in the report, Insurance.
The insurance industry's relationship with technology is evolving as both customers and the problems insurers must address are changing. Customers expect higher levels of service to match what they receive from other service providers. Other industries, some covered in our report such as travel and hospitality, have invested heavily into technology to try and meet these expectations of a quick, reliable, and digital experience.
Climate change, technology, and disease are producing not only more risks, but new kinds of risks. Cybercrime is increasing. The US experienced a record number of both wildfires and hurricanes in 2020 that caused almost $60 billion in losses. On the other end of the spectrum, road travel is the safest it has ever been with death rates declining about 70% over the past 40 years.
Growth & Funding
Insurance was no different from many industries during the pandemic in that it highlighted a need to digitize. The need to embrace technology, most notably in automation, machine learning, and IoT, drives customer experience and cost reduction.
Compared to markets with similar dynamics, such as fintech, insurance remains underinvested, although that trend seems to be changing as the market has continued to hit record highs each of the last three years. Reinsurers are active through their own venture capital arms, mainly focused on climate resilience. Back in 2017, a KPMG survey of insurance industry executives showed that 62% of respondents indicated that their company either had or was planning to spin up a venture capital fund focused on insurtech. In 2021, there were over double the amount of funding rounds in insurtech than there were in 2018. Funding dollars doubled in 2021 from 2020 levels. Investment in insurance has been active in 2022.
Technology players are switching their strategy from competing directly with insurance companies to partnering with them. As was mentioned in the last section, this has led to an increase in venture arms for these insurance companies. Liberty Mutual, Nationwide, MassMutual, and many others have started their own venture arms and have been very active in the space. Embedded insurance solutions, which is a $3 trillion market, have led to an increasing number of strategic acquisitions across insurance. Berkshire Hathaway acquired Alleghany Corporation for $11.6 billion. The Carlyle Group has been an active acquirer, making 11 acquisitions (10 of which were insurance brokers), notably acquiring NSM Insurance Group for $1.8 billion in May 2022.
Emerging technology has moved away from being solely customer experience focused. IoT has driven innovation in distributed infrastructure and telematics, assisting insurance companies to identify risks and provide real-time services. Insurers are not the only ones benefiting from the technology. IoT devices have helped reduce auto claims, and also rates, by encouraging and rewarding safe driving habits. Artificial intelligence and machine learning have powered automation from first notice of loss to adjustment and settlement. Insurtechs are bringing in big data to improve underwriting processes.
Bowery Capital POV
The insurance market is predictably massive. According to Bain & Company, global insurance premiums could grow to be as high as $9-10 trillion by 2030 ($5.5 trillion in 2019). Insurance technology seems to be following a similar storyline to the one financial technology has been writing for over a decade now. New technology players are more efficient, able to work at a lower cost, and innovating at speeds that traditional players are not able to sustain. The early innovation in insurtech is still focused on consumers, focused first on a customer base demanding for better online experiences. We believe insurance is still an investable opportunity, though it may be crowded. As you can see in our report, we ranked it overall as a “yellow” vertical due to some concerns around competition, both at the early and late stages. There has been increased investment and attention on the sector over the last two or three years and while there is still plenty of room for further innovation, we could not give insurance the highest rating in the report but still see investable opportunities in the space.