Venture capital funding in Insurtech | KPMG | UK

Venture capital funding in Insurtech

Venture capital funding in Insurtech

Venture capital investors across the globe are excited to seize the potential in Insurtech which attracted more than $1.7 billion in investment last year. But, insurers need to modify their age-old legacy IT systems and processes, with Insurtech technologies critical to help achieve a positive transformation.

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Venture capital (VC) investors across the globe are excited to seize the potential in Insurtech. Many insurance organisations need to modify their age-old operating models of legacy IT system and processes, with Insurtech technologies critical and poised to help achieve a positive transformation.

A developing subsector with a strong future

Interest in Insurtech has increased dramatically in 2015, with Insurtech startups attracting more than $1.7 billion worldwide in 2016. Investment has continued at pace for 2017 and accelerated growth is predicted for the coming years.

To date, the majority of Insurtech VC funding has remained small - focused mainly on seed and Series A investments. However, as many of the early entrants in the field are now seeking later-stage funding and larger than average deal size—perhaps even some megadeals—may be on the horizon. There is also a growing trend towards investment in Insurtech artificial intelligence and the internet of things.

Breadth over depth – for now

Many Insurtech companies’ solutions target individual components of the insurance value chain. However, investor interest and activity is evident across all insurance types, with current high-activity areas including health and life insurance, P2P solutions, chatbots, risk management for small businesses, insurance comparison tools, self-service claims, and more. Digital challenger insurers, such as Lemonade and Trov, have also drawn interest for their innovative delivery models. Trends elsewhere indicate that the market may soon deepen, with Insurtech solutions using high growth areas such as artificial intelligence and Internet of Things.

Corporate investment continuing to increase

Corporate VC activity plays an increasingly important role in the developing Insurtech market. In a recent KPMG survey of insurance industry executives, 62 percent indicated their company either had or was planning to create a venture capital fund to invest in Insurtech.

Partnerships with Insurtech companies are increasing in popularity as many redefine their business models to align with customer needs, seek strategic partner deals and invest in, or buy, companies that provide key technologies. However, corporate investors and buyers need to remain conscious of how each investment and purchase fits into its broader corporate strategy, goals, and company direction. Such alignment will become critical to success, especially as larger insurers begin to drive global M&A activity and deal competition rises.

Insurtech-focused accelerators, designed to encourage start-up growth and innovation are also important elements in the subsector’s growth. In fact, 36 percent of insurers from around the globe are involved in an innovation hub or lab, and some are already using these hubs as a way to enhance, transform, and eventually replace, their current operating models. Tellingly, major insurers have also begun working together on innovation labs and digital garages, prioritising technology innovation over competition.

Clear variation in different geographical areas

Insurtech is expected to remain a hot global investment area in 2017 with the majority of investments centered in the US. But, this is beginning to change as insurers increase global investment and M&A activity to diversify their geographical risks and earnings profile. While current political uncertainty in the US has slowed investment in a number of areas, including the largely healthcare-focused US Insurtech market, activity is expected to rebound.

Early stage Insurtechs attracting seed and Series A deals dominate, though recent activity in Israel has created a number of emerging Insurtechs looking to gain access to global markets. In Asia, India is gaining attention as a testing ground for Insurtech products due to the country’s large population, tech savvy consumer base, and skilled and relatively inexpensive labour pool.

Activity patterns may shift in the next few years as different regions attempt to become financial capitals in a post-Trump, post-Brexit landscape. Regulators are currently working to promote local fintech and Insurtech activity through efforts such as the creation of regulatory sandboxes.

A bright future for Insurtech

Despite the challenges associated with legacy IT systems and transformation projects, the viability and adaptability of new and emerging technologies may provide the key to success in transforming the legacy insurance business model. With that said, more and more corporate VC investors at insurance companies are carefully evaluating the strategic-fit of their Insurtech investments, to ensure alignment with their broader corporate growth strategies and operating transformation goals.

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