What will define the next wave of insurtech startups

With economic conditions driving changes in the insurtech startup ecosystem, Digital Insurance is taking stock of what was accomplished in the last several years of big funding and big ideas. This item presents the startup-side view; for the view from the carrier side, click here.

Early in the insurtech wave, insurtech was defined by policyholder-facing innovations, devised by twenty-something “whiz kids.” But the next wave is likely to be defined by back-end solutions from industry veterans who bring to the table their experiences working for carriers.

That’s become evident in the ventures incubated by organizations such as Insurtech NY, headed by co-founder and managing director David Gritz and Insurtech Hartford, founded by AXA XL’s head of global technology innovation, Stacey Brown.

The setting for insurtech innovation changed radically because of the pandemic lockdown in March 2020, turning Insurtech Hartford, begun in 2016 as a local community organization in Hartford, Conn., into a global and geographically dispersed enterprise, Brown says.

“You don’t really physically need to be located in a spot to do big business in a digital world, which is where most of the insurtech and innovation stuff is happening,” he explains. “It’s all in technology-driven and software-driven innovation.”

InsurtechNY runs its Accelerator program that invites startups to apply each July. These are narrowed to 30 finalists in August, and then to winners in October. The winners take part in a three-week program finishing with a demo day, and the program facilitates connections between the winning insurtech startups and carriers and brokers. Insurtech Hartford hosts pitch nights for startups and recently created sister communities in Insurtech Chicago and Insurtech Atlanta. It hosts a global annual Innovation Challenge for insurtech startups, whose winners become part of an incubator and accelerator program. Winners in recent years include Bees360, Hosta a.i., Otonomi, CoverHero and HiMarley.

Now, both founders are taking stock of where the sector started and where it’s heading as challenges have led to a slowdown in venture funding and insurers and funders alike look for new standout opportunities. They’re also observing how the new entrants have pushed innovation at carriers.

The rise of Lemonade in 2015 kicked off a new wave of insurtech innovation and competition, Gritz contends. Lemonade began with renters and homeowners insurance and has since expanded into other coverages. 

Meanwhile, “Assurant had a pretty strong rental insurance market share and a lot of their relationships were directly with the large building owners,” Gritz says. “They were coasting along, not really doing anything different. And what they ended up seeing is Lemonade could do simple forms to have policyholders get quotes and bound policies in a very simple process.” 

Assurant ended up developing a competing product, Gritz recalls. This was an example of how insurtech startups began pushing mainstream carriers to innovate. “Insurtechs are forcing the insurance carriers to get out of their shell, be more open minded, try things, be okay with failing and really build new better experiences for customers that otherwise they would have just been happy with what they’re doing and content,” he said. “The startups at a high level are doing that.”

In digital distribution of insurance, insurtechs pushed the industry to pay attention to customers, not just underwriting, according to Gritz. “Startups are showing carriers how to create a better user experience, and more importantly, how to build products that are actually what the consumer wants.”

While new technologies and innovations frequently continue to emerge in insurtech, the pace and volume of startups has slowed down in the past few years, turning into incremental progress, says Ellen Carney, a principal analyst at Forrester Research.

“[Startups] aren’t going anywhere. The gravy train is over for a while, because of interest rates, and there’s perhaps better investing opportunities,” she said. “We certainly haven’t seen the paybacks that people had expected, but it’s been a spur to a lot of insurance companies to get them to think differently. See the art of the possible. We’re going to see it, they’re just going to be much more disciplined about the investing.”

Incubator programs, like those operated by InsurtechNY and Insurtech Hartford, will continue to be valuable, according to Carney. “Worthy ideas are worth getting exposed and funded,” she says. “We get a good sense of the thinking: ‘Am I hearing something different than what’s out in the market? What’s their approach? How is it going to be different?’ Plus, think about how motivating it is for the people who have the ideas.”

In 2016 or earlier, carriers seeing the rise of insurtech and startups feared they might take over the industry, says Andrew Schwartz, primary analyst for insurtech at Celent. “That fear was not really justified for a number of what in retrospect are obvious reasons,” he said. “They don’t have the scale. They don’t have the market reach. They don’t have the insurance sophistication. Most insurtechs, but not all, are built to sell to insurance companies.”

Some of the innovations born out of insurtech startup efforts have become universal, or “table stakes” for any insurer to be taken seriously. These include telematics for usage-based auto insurance, drones for roof inspections, low-code and no-code programming, and IoT devices for home security and damage prevention, as Schwartz mentioned. Newer innovations that have emerged more recently or could eventually appear include using AI and language models for customer service, predictive analytics built on big data, and using 3D printing for vehicle parts (especially tires) in roadside assistance, as Schwartz and Carney cite.

APIs have been around a long time as a technology, but are starting to see new uses in insurance, according to Schwartz. “What’s different today, and it’s very different, very important in terms of technology, is extensive use of RESTful APIs, enabling the ability to integrate applications or exchange data messages to external data sources and external programs,” he explains.

The progression in how insurtech innovations are used has gone from front-end to back-end, away from disintermediation and toward partnership, with a greater focus on complete “ecosystems,” according to Stephanie Dalwin, an advisor at Aite-Novarica Group. 

“Even startup companies that were positioned as startup carriers – there aren’t that many of them — most of them are really MGAs,” she says. “Companies that were positioned to the end user as competitors to carriers really ended up being partners to insurance companies themselves.” 

New startups in insurance focused on reaching customers online, Dalwin observes. “There was all this messaging around disintermediation,” she said. “The focus has moved. We’ve realized as an industry, agents are actually very important and sometimes the consumer just wants to get on the phone and talk to one when they have questions. The messaging has shifted a lot from one of disintermediation to one of agent partnership and empowering agents.”

The cause for these evolutions could be the change in who the insurtech start-ups are, as younger founders focused on solving any issue gave way to technology executives from insurers who set out and created their own start-up ventures, Dalwin explains.

Some of these early companies were really focused on how you can buy a product directly online, or enhancing the customer service experience,” she says. “But as more veterans found companies, as partnerships get tighter between insurers and startups, we’re seeing more of a move to the back end. Also a move from higher transaction, higher volume lines, like personal lines, to more complex lines, like commercial, specialty and workers comp.”

That back end includes underwriting, Dalwin adds, especially in commercial lines, with an emphasis on handling of claims.

When it comes to the next wave of funding, private equity may be a better bet for insurtech start-ups, according to Brian Poppe, senior vice president of income and wealth planning at Mutual of Omaha (whose previous role at the carrier was in technology modernization). “You’re trying to get multiples on multiples as a VC firm,” he said. “Private equity can withstand a return of 10 to 15% for eight to 10 years. That looks a lot more like an insurance carrier return profile than a venture backed tech startup would.”