The Startups

• Lori Chordas
• January 2017
• 

Blair Baldwin knew a good thing when he saw it. And what the former marketing and adtech executive saw was money--an unprecedented amount from venture capitalists and private investors pouring into insurance, largely fueled by the dire need for innovation across the industry.

Baldwin also saw opportunity, specifically the opportunity to create a mobile-friendly, somewhat out-of-the-box way to provide insurance to the 80% of millennials lacking coverage. Today, Baldwin is CEO of Quilt, a multiproduct platform aimed at younger consumers. The company sells renters insurance and life insurance products and plans to add product lines later this year. Baldwin and his three co-founders raised $3.25 million in seed funding from top-tier early stage investors such as NextView Ventures, Eniac Ventures and Founder Collective.

Quilt is one of a growing number of startups seeking to disrupt and enhance traditional practices in insurance. In 2015 investors deployed about $2.67 billion globally to insurance tech startups--a quantum leap from $859 million the prior year, according to CB Insights, a research firm that tracks venture capital and startups.

The allure of launching those ventures is easy to understand, said Pradip Patiath, a senior partner in McKinsey & Co.'s insurance practice. "People are finally noticing that the insurance value chain isn't as efficient and effective as possible using today's technologies," Patiath said. "The industry still has a fairly distributed and fragmented supply chain, relatively manual operations compared to other financial services sectors and distributed decision-making--all of which create a level of complexity that technology can solve."

Today, an ecosystem of more than 1,300 global startups--from technology-based brokers to policy-comparison platforms--are focused on the insurance industry, according to a Startupbootcamp InsurTech and PwC report.

"Only recently has protection as a category seen the level of product or distribution innovation that's been demonstrated in other sectors," Patiath said. "This latent opportunity is driving entrepreneurs to bring their solutions and technologies that are proven to work in other sectors into insurance."

Also, in many ways, the industry lends itself well to disruption and being able to "make a difference," he said. Technologies such as blockchain, big data, social networks and the internet of things are becoming increasingly relevant to the sector, and entrepreneurs and investors are looking to capitalize on those disruptors, Patiath said.

Reality or Hype?

One question commonly posed at conferences and across planning tables is: "Is insurtech hype or reality?"

Tanguy Catlin, a senior partner in McKinsey & Co.'s insurance practice, leans toward the latter.

Much like fintech startups disrupting the banking sector, the influx of startups is "real and happening now," Catlin said. "You have many corporations, insurers, private investors and others who are now collectively investing hundreds of millions of dollars in tech startups because there are more startups and they are much easier to launch than they were 15 years ago. At that time, if you wanted to create a startup, you needed to have a server. Now we have the cloud. You needed ways for websites to interact with each other. Now we have open application programming interface. You needed to get money. Now getting funding is very easy. Insurance startups are set to become a real game changer in the industry for anyone who chooses to embrace them."

Other industries have attracted their fair share of entrepreneurs. Now it's the insurance sector's turn.

"When you think about financial services innovation and what's happening in many major markets, including lending, loss management and payments, there's been quite a bit of value creation of companies--either that have since gone public or are still in the private markets--able to push technology and innovation into the space and change how things are done," said Matthew Wong, a senior research analyst at CB Insights. "But when people look at insurance, they aren't yet seeing a similar number of startups that have been able to change, across the entire value chain, how products are created, distributed and interacted with post-sale. That's driving more entrepreneurs to think about the insurance space."

No Boundaries

So far, many insurance technology startups have provided solutions aimed at health insurance, focused largely on "new digital or personal health record brokerages or health carriers like Oscar," Wong said.

Oscar, like many of its peers, was created after the launch of the Affordable Care Act. The health insurer, which uses technology and data to sell individual health insurance plans directly and through health insurance marketplaces, was the brainchild of three Harvard Business School classmates. Oscar currently boasts annual revenue at about $200 million, according to reports.

After the initial wave of insurance startups in health, interest has expanded into other sectors, including life insurance. Entrepreneurial ventures such as Ladder provide term life insurance online by allowing users to calculate coverage requirements, determine eligibility and purchase fully underwritten policies through web platforms.

Life.io, which integrates with new technologies such as health applications and wearables to capture life change events and reward policyholders for living healthier lifestyles, recently pivoted its focus from employers to life insurers and their insureds, said Jon Cooper, CEO and co-founder of the Philadelphia-based startup. "We realized we were pursuing the wrong strategy for us and wanted to refocus exclusively on life carriers to engage with some of the challenges they face, such as the dwindling number of pure policies in force and an all-time low brand recognition and affinity in the market."

Today, an increasing number of startups focused on the property/casualty space, including small commercial lines and auto, are starting to pop up. Cuvva, for instance, was the creation of Freddy Macnamara and James Billingham in 2014 as an iOS app that enables U.K. drivers to buy short-term car insurance within minutes from their smartphones. "The platform was built from the ground, rethinking the 'usual' customer journey to provide a more engaging, better converting and retaining experience," according to Tallt's 2016 Insurance Disruption Report.

Small-business insurance is also ripe for technology innovation, Wong said. Since October 2015, U.S. startups offering tech-enabled disruption of small-business insurance raised nearly $80 million, he said. Among those are Embroker--which in May 2016 raised $12.2 million in Series A funding, led by Canaan Partners, for an online business insurance-management platform and brokerage; and Next Insurance, which raised $13 million in seed funding in March 2016 and partnered with Hiscox to distribute small-business insurance online, according to CB Insights.

Peer-to-peer startups such as Lemonade, Inspeer, Guevara and Friendsurance also are disrupting the sector and aiming to make insurance cheaper for consumers. P2Ps work by pooling group members' premiums and paying claims from those pools. Germany-based Friendsurance's customers receive a cashback bonus at the end of each year if they remain claimless for retail products including home contents, legal expenses insurance and private liability.

Even pet insurance is gaining the attention of prospective entrepreneurs. In 2015 a former Allstate insurance agency owner, armed with $3.9 million from private investors, created Figo Pet Insurance to offer online quotes and use cloud technology to allow customers to file claims, including for exams and surgeries, and to manage records via a smartphone app or website.

"When thinking about creating an insurance startup, you have to look at where the money is made, where the margins are," Patiath said. "Within this, look for areas where it's relatively easier to disrupt, and that's where the opportunities are. Often, it's on the front end--distribution, customer acquisition, risk selection modeling."

But more recently there's also significant advancement on the back end, such as analytics around underwriting, claims and fraud, he said. "There is also a suite of technologies highly applicable for improving multichannel experience, call center management--such as matching the right agent with each customer in real time."

Finding Success

The desire to create an insurtech startup often stems from two basic motivators--the pursuit of investment returns and the fear of missing the next big thing, said Quilt's Baldwin.

"On the funding side, there's a lot of venture money available to high-caliber teams given the potential for outsized returns," he said. "On the incumbent side, traditional carriers and reinsurers are worried about the oncoming wave of innovation and disruption. They're more willing than ever to try new experiments, fund different business models and work with new teams."

That kind of collaboration is key to any startup's success, especially when insurers look to partner with ventures that align with their corporate strategies, Baldwin said. In Florida, where Quilt launched its first product, the company is working with Security First Insurance as a partner to handle traditional policies and work on developing new ones. "The No. 1 challenge we face--but also a great opportunity--is partnership, which means devoting time to picking the right partners, investing in and developing the partnership, and becoming aligned on mission and vision," he said.

Entrepreneurs also need "a true understanding" of the complicated insurance market, Patiath said. "Without it, you're likely to get burnt."

"We've seen quite a few different approaches to that, including companies whose key founders are from the tech industry and started their company before hiring heads of insurance companies to bring expertise onto the team," Wong said. "We're also seeing companies that have started from former industry folks--whether in a primary post or more ancillary role like consulting for the industry."

Quilt's website emphasizes the value of industry know-how and startup methodology among its founders and executives. The Meet the Team section of its site says, "Half of us are left-handed. Most of us have dogs. But we're all startup and insurance veterans who knew there was a better way to do things."

One of the biggest challenges entrepreneurs face is convincing others to join their journey, said Ted Devine, CEO of Insureon--a Chicago-based online small-business insurance agency that provides coverage for businesses from tech programmers to personal trainers. "When we founded Insureon, I wondered how I was ever going to convince people that we were going to create the next Esurance and to join a small startup with only one cubicle and a small fan that served as the company's air conditioning system," Devine said. "But we did, and we were able to attract some great talent and investors along the way."

One thing prospective entrepreneurs need to remember is that insurance isn't a monolithic industry, Patiath said. "Pick the right place to focus on and go after it. Don't assume that a broad-brush approach will work; rather, it's nuanced. Unlike in the past, startups appear to be taking industry subtleties into account. For example, Lemonade is focusing on a radically simplified customer experience for renters insurance in New York. There is a level of rifle shooting versus a shotgun approach in today's startups."

A high level of persistence is also needed, Patiath said. "This sector isn't like retail where if you create a better mousetrap, all of a sudden it might take off like wildfire. There are renewal cycles, customer education timelines, distribution complexities and regulatory nuances involved, so patience is a virtue, or more bluntly, a requirement."

Also, entrepreneurs need to work with the industry--not against it, Catlin warns. "If you intend to help insurers thrive, then you'll be embraced. But if you fight them, you're setting yourself up for a major letdown.

"When I look at companies like Guidewire who have become huge successes in the industry, what they did was create a stand-alone that can be used by all insurers regardless of the technology architecture, as opposed to those who fall into the trap of systemizing their offering for each carrier," he said.

Radical Change

Experts anticipate it won't be long before insurtech moves beyond a buzzword.

In many ways, it already has, Patiath said.

"This is the golden era for insurance tech startups," he said. "They will have an opportunity to revolutionize and reinvent the industry because of interest by both incumbents and the young guns who want to disrupt insurance."

The volume of private investment dollars going into insurance has more than doubled globally during the past three years, according to Gartner, an infotech, research and advisory company. Patiath said he expects this year will see even more entrepreneurs using technology to unleash new ways to engage with consumers, sell policies, process claims and reduce risks.

"There's a level of understanding, sophistication, humility and patience today that we didn't see during the dot.com era in the late '90s," he said. "I'm very optimistic that when we wake up 10 years from now, the industry will look very different, and we'll see more disruptive, interesting and engaging models for how protection products are bought and sold."

He also expects to see a number of insurers "break out of the pack" and become innovators the way Geico and Progressive did. "There may also be a new level of integration between insurance and the other financial services industries, along with more horizontally integrated, customer-centric solutions," Patiath said.

Still, the environment can be difficult for entrepreneurs. "Insurance isn't immune to the natural selection process of venture capital--many failures," Wong said. "Very few startups that take venture capital as a funnel make it to successful IPOs, mergers, acquisitions or later-stage funding."

Catlin cites three challenges for startups: keeping up with technology, integrating into the tech stack of carriers and understanding the regulatory environment. Also, "trying to solve too many, too large problems early on" can throw a startup off-kilter, he said.

"Failures aside, this year will be one of continued startup developments, especially in how consumers react to the host of digital startups entering the market distributing insurance across small commercial, renters, life and other lines," Wong said.

But will those investments soon oversaturate the sector?

"Insurance is a large industry, so there is plenty of room for many players across the board to be successful," said Rashmi Melgiri, co-founder of CoverWallet--a New York City-based startup created in 2015 as an online insurance management platform that provides small businesses with an intuitive online experience to help them deal with the difficulties of commercial insurance.

"Lemonade is an exciting example of that; look at what they're doing with the customer experience of buying renters insurance--they've really reimagined it," Melgiri said. "We expect to see more complete thinking like that, along with transformation on what the customer experience looks like from a buying perspective in insurance."

By Lori Chordas, senior associate editor, Best's Review: Lori.Chordas@ambest.com