Insurtech Trends: Growth in the US and Europe

The Thriving U.S. Insurtech Landscape

The insurance technology market within the United States is currently experiencing significant growth, a trend that has been ongoing for several years. As an illustration, TechCrunch documented a surge in funding activities among domestic insurtech marketplaces in early 2020.

These companies have subsequently secured hundreds of millions of dollars in additional funding.

Public Offerings and Market Validation

Following a period of development, several U.S.-based neoinsurance companies, such as Root and Metromile, have successfully launched initial public offerings (IPOs). Hippo is actively pursuing a similar path.

The Exchange provides insights into startups, markets, and financial matters.

Access it daily on Extra Crunch or subscribe to The Exchange newsletter each Saturday.

From the standpoint of venture capital investments, startup expansion, and successful exits, insurtech is demonstrating its viability within the U.S. Despite this, sustained growth remains a primary focus in insurance technology, with substantial profits often proving elusive.

Expanding the View: The European Market

Recent investment activity, particularly the substantial funding round secured by Wefox, prompted further investigation. A $650 million insurtech round would be noteworthy regardless of geographic location.

However, the fact that a European insurance technology startup attracted this level of investment led to questions regarding the availability of capital for EU-based insurtech companies compared to their U.S. counterparts.

A Global Opportunity

Considering the recent significant funding round raised by Embroker, a business-focused neoinsurance provider in the United States, it appears that disrupting the large and traditional insurance sector is a compelling venture. It is reasonable to assume this same principle would hold true in Europe.

Gathering European Perspectives

To gain a deeper understanding, consultations were held with a number of venture capitalists operating in Europe. Input was gathered from representatives of Accel, Astorya.vc, and Insurtech Gateway to assess the current situation on the ground.

Furthermore, data on the largest recent funding rounds within the EU insurance technology market was compiled to provide context for the discussion.

Let's proceed with the analysis!

Insurtech Exits: A Current Overview

For venture capitalists and startup founders, a successful exit represents the culmination of their efforts and the realization of financial returns. Recently, the insurtech sector has witnessed a notable increase in Initial Public Offerings (IPOs) as a common exit strategy.

As startups mature, they inevitably transition towards engaging with public market investors. Prior to going public, companies often attract investment from crossover funds. This shift requires a new approach to investor relations, as the focus moves from venture capital to the broader public markets.

The Challenges of Dual Understanding

During a recent earnings discussion, Alex Timm, CEO of Root, shared insights with The Exchange. He highlighted a key challenge: tech-focused public investors may lack a comprehensive understanding of the intricacies of the insurance business. Conversely, traditional insurance investors may not fully appreciate the technological underpinnings of companies like Root.

However, a public listing doesn't necessarily equate to perpetual misunderstanding. Dan Preston, CEO of Metromile, emphasized that while the core operational demands of a public company are similar to those of a private one – such as maintaining a long-term vision – the ongoing interaction with analysts and investors post-IPO can be invaluable.

The Value of Public Market Feedback

Preston explained that the regular feedback received from analysts and investors provides a continuous pulse on market perception of the company. This insight can be instrumental in refining business strategies and improving overall performance.

Future Outlook for Insurtech Exits

Despite recent volatility in the share prices of U.S.-based public insurtech companies, there are strong indications that a viable exit market will persist for insurance technology unicorns. Considering this, let's now turn our attention to the European insurtech landscape.

Key Takeaways

• Exits are crucial for both investors and founders in the insurtech space.
• The transition to public markets presents unique challenges in investor communication.
• Analyst and investor feedback can be a valuable asset for public companies.
• A reasonable exit market is anticipated for future insurance technology unicorns.

Insurtech Beyond Wefox: A Landscape of Unicorns

Recent investment activity within the European insurtech sector demonstrates a period of significant growth and robust funding.

For instance, earlier this month, EU-Startups highlighted a €286 million Series D funding round secured by Bought By Many, a company specializing in pet insurance.

The publication indicated that this round, spearheaded by EQT Growth, resulted in a company valuation exceeding €1.6 billion.

Looking back to the beginning of the second quarter, Alan, a French insurtech company, successfully raised $220 million in funding.

Following this financing, TechCrunch reported that the health insurance and healthcare superapp provider achieved a valuation of $1.67 billion. Coatue led the investment, with participation from Dragoneer, Exor, Index Ventures, Ribbit Capital, and Temasek.

In March, Zego, a London-based, technology-driven commercial motor insurance unicorn, secured $150 million in funding.

This capital injection valued the company at $1.1 billion, with DST Global leading the round alongside General Catalyst.

To further illustrate the trend, French home insurance startup Luko completed a $60 million Series B funding round last December.

Analysis of these substantial investments suggests a highly dynamic and flourishing European insurtech market.

European Insurtech: A Rising Market

The question arises: does the European insurtech sector currently exhibit the same level of investor enthusiasm as its counterpart in the United States? While perhaps not yet reaching those heights, indications suggest a significant warming trend.

Florian Graillot, based in Paris and associated with Astorya.vc – a venture capital firm specializing in European insurtech – asserts that the current environment is exceptionally vibrant. His firm’s published data further supports this assessment, demonstrating an accelerating pace of activity.

Astorya.vc’s data reveals that, as of mid-June this year, approximately 47 insurtech transactions have taken place within the EU, totaling €1.62 billion in investment.

This represents a substantial increase compared to the €600 million invested last year, although the number of deals has also risen. The total investment volume in EU-based insurtech companies appears to be at a record high.

Extrapolating from current trends, it is anticipated that the overall deal volume on the continent will also achieve a new record this year.

While not mirroring the intensity of the U.S. market, the European insurtech landscape is demonstrably gaining momentum – a conclusion supported by our analysis.

Luca Bocchio of Accel concurs with this perspective, communicating to The Exchange via email that the EU’s insurtech sector is “undoubtedly gaining traction,” with considerable further innovation expected.

He highlights that the consumer insurtech segment remains in its nascent stages, having only realized “a small portion of its potential” within a market comparable in size to the banking industry.

Key Observations

• Investment Growth: EU insurtech funding has more than doubled year-over-year.
• Deal Volume: The number of transactions is also increasing, indicating broader market activity.
• Market Potential: The consumer insurtech space is seen as largely untapped.

The European market presents a significant opportunity for innovation and investment in the insurtech space, with continued growth anticipated in the coming years.

Understanding the Investment Landscape

Is the substantial funding observed in the insurtech sector attributable to the industry's inherent demand for capital? To a significant extent, it is.

Stephen Brittain, a founding director at Insurtech Gateway, explained to The Exchange this week that establishing an insurtech startup remains a costly endeavor. He addressed our inquiry about capital needs and large funding rounds, stating that considerable investment is essential for businesses focused on insurance provision – companies such as Lemonade in the United States serve as a prime illustration.

He further noted, with a touch of irony, that a lesser capital outlay is sufficient for scaling a neoinsurance venture if a strategy of acquiring numerous inexpensive, yet unprofitable, customers is adopted.

The inherent conflict between expanding an insurance portfolio and cultivating a profitable insurance portfolio will perpetually be a central theme in discussions surrounding insurtech.

“A significant dichotomy exists between a growth-oriented approach and a risk management perspective. When risk is easily comprehensible, rapid implementation is paramount. However, in more intricate areas, such as cyber risk, for instance, the risk itself is often poorly defined, necessitating that informed investors prioritize risk assessment before establishing distribution channels,” Brittain stated, a process that inherently requires substantial funding and investment.

Concerning future trends, The Exchange questioned Graillot regarding whether recent valuation decreases among certain U.S. insurtech unicorns are influencing current deal activity. The investor countered our assumption.

“The anticipation of an Initial Public Offering (IPO) is actually fueling these large funding rounds, although the viability of comparing the EU IPO market to that of the U.S. remains an open question,” he clarified.

It will be noteworthy to observe whether European insurtech unicorns ultimately choose to list on U.S. stock exchanges. This is a development we will continue to monitor in the coming years.

Expense and Infrastructure Requirements

Regardless of location, substantial funding rounds are frequently essential for full-stack insurtech companies. This necessity stems from the need to meet stringent regulatory demands.

This explains, for example, why Acheel, a pre-launch generalist online insurer, secured €29 million ($34.5 million) in March of last year. The capital is intended for “launching operations and obtaining license approval,” as the equity will serve as a risk buffer for securing authorization to sell insurance in France, as reported by Nordic9.

A significant portion of the raised funds isn't allocated to typical operating expenses, as understood in other industries, according to Brittain. Instead, these funds are utilized to establish a risk pool, enabling the insurtech to directly underwrite its own insurance products.

Full-Stack vs. MGA Models

Currently, the market hasn’t definitively favored either full-stack companies possessing their own licenses or those functioning solely as distributors. The capital requirements for the latter are primarily linked to marketing expenditures rather than regulatory compliance.

These distributors are known as MGAs – managing general agents – who operate as brokers, retaining a portion of the premium for their services.

Graillot clarified that among the top five most funded startups, there’s a diverse mix. This includes a B2C MGA (Bought By Many), a full-stack company from its inception (Alan), and an MGA that transitioned to a full-stack model (Zego). Further down the ranking, the landscape remains varied with MGAs like Clark, Luko, and Getsafe alongside full-stack entities such as Ottonova and Element.

The reason for this diversity is straightforward: “The European market is exceptionally large – approximately €1.3 trillion in gross written premium annually – allowing space for numerous substantial players with differing operational structures.”

Founder Backgrounds and Market Opportunity

Beyond varied business models, the expansive total addressable market also accommodates diverse founder profiles. Bocchio, who led Luko’s Series A round at Accel, didn’t prioritize domain expertise as a prerequisite.

“We were impressed by the ambition of “[CEO] Raphaël [Vullierme] and [CTO] Benoît [Bourdel],” and their willingness to tackle and reshape a large industry with significant entry barriers. Despite lacking prior experience in the insurance sector, they possessed a clear vision for industry transformation, had established a solid business foundation, and developed innovative, proprietary technology.”

The Anticipated Influence of Artificial Intelligence

Industry insiders concur that technological advancements will significantly contribute to the evolution of the insurance sector. Graillot highlighted Shift Technology, a company that, as reported by Ingrid Lunden, secured $220 million in funding and achieved a unicorn valuation through its focus on combating insurance fraud with AI.

Accel’s involvement in this funding round is viewed by Bocchio as an indicator of growing investment and progress throughout the B2B insurance value chain.

It was a shared opinion between both Bocchio and Graillot that the effects of AI are currently more noticeable within the B2B segment, though further developments are anticipated.

Bocchio stated that we are only witnessing the initial stages of AI’s potential across the entire insurance policy lifecycle, encompassing areas like underwriting and claims handling.

Brittain also suggested forthcoming transformations, inviting a follow-up inquiry on the same topic in the subsequent year.

He forecasts that the next wave of AI-powered businesses will enable instantaneous risk assessment, pricing strategies, and claims settlements within the next few years.

This projected advancement is expected to stimulate further substantial funding rounds and potentially lead to initial public offerings (IPOs) of European insurtech companies in the near future.