Straight talking from the Editor’s keyboard, as Alastair look at the recent record-breaking insurtech funding announcements and wonders if we are entering crypto bubble territory.
LESSONS FROM HISTORY
Let’s start back in 1999. No, not the classic Prince album, but the year when the dot.com mania and NASDAQ investments began to look a tad overvalued. From about 1994 onwards the buzz about the internet, or the `Information Superhighway’ as it was known back then, was building to an Everest-like peak. Almost every company was rushing to build their own website, the USA, Canada, Europe and many other countries were finally getting home broadband that worked – albeit with a strange screeching noise as it connected – and retailers suddenly decided that selling almost everything online was the future.
If we look at just one company from that era, Boo.com the Swedish fashion e-tailer, we can see some parallels with today. Some £80m was raised before launch, Boo employed hundreds of staff, rented offices on Carnaby Street in London and spent big on PR. But it closed rapidly after launch as sales were fairly low, partly because the UK had such dreadful internet connection speeds, which meant the Boo.com site didn’t really work properly. Plus, and this is the important factor, people were sceptical about putting credit card or bank details into a website checkout, they weren’t sure the sizing of clothes would be correct and they worried about the cost of sending stuff back, arguing for refunds etc. In short, they stuck with what they knew, which was High Street retail.
The core lesson is one of not understanding human nature and failing to match consumer expectations on technology working seamlessly together at every step of the way.
That’s why Pets.com, Clickmango, The Globe.com, Ask Jeeves and many more ultimately failed. They were great ideas, often well marketed too. But the timing was too soon. Now however, we live in a digital world, so the timing as regards insurtech is perfect, some might say long overdue, given that many consumers have abandoned cash, do their own banking, manage their entire lives via apps etc.
THE INSURTECH FUTURE IS PURE GOLD, RIGHT?
If you follow the Willis Towers Watson reports on insurtech investment you see a rapid acceleration over the last year or so. Some recent big name funding rounds include wefox at $650m, Bought By Many’s $350m, Beam Dental’s $80m Series E and Corvus securing $100m. As you can see from the graphic 2020 was a record year for big ticket deals, despite the pandemic.
2021 has proved to be a year of optimism, as WTW notes;
“Specifically, total funding grew by 180% when compared with Q1 2020 after a precipitous drop in funding as fears surrounding the COVID-19 pandemic reached its pinnacle. Compared to Q4 2020, total funding grew by 22% as investment activity steadily bounced back. Notably, this quarter saw a record number of mega-rounds. Eight companies represented over US$1.13 billion in funding, or 44% of total funding raised.”
It doesn’t take an Elon Musk level of genius to realise that growth rates of 180% are unsustainable. At some point the gravy train is going to slow down, or perhaps shunt into a siding. When that happens some tough questions are going to be asked about when the big profits are going to start rolling in. I’m not saying money is being poured into loss-making businesses, or old school dot.com operations that haven’t even launched. But the transition from disruptive insurtech start-up to highly profitable household brand name like Amazon, Apple or Nestle isn’t an easy pathway, it can be rocky at times.
Fact is, not all insurtechs are going to survive beyond 2030, a few are bound to fail or be bought up by rivals and then closed down. That’s just capitalism, buy out your competition, or bury it. Investors and insurtech champions all need to understand and accept that some brands are going to fail. The question is will a large failure cause an exodus of investment capital, as it did with the Dot.com bubble of 1999-2000?
THE LEMONADE RIDDLE; WHAT MAKES IT TRULY UNIQUE?
If you take a look at Lemonade’s latest results you see that it lost $49m in the opening quarter of 2021, partly due to the Texas freeze event. When Lemonade launched on the stock exchange its value doubled in a day, everyone went a bit giddy. Reading statements like `transforming insurance from a necessary evil to a social good’ can attract Joe Public investment, since the feelgood factor, the cool outsider vibe, is always a great way to win over fanbois – and fangirls.
But Lemonade posted a $49m loss in the opening quarter of 2021, blaming the Texas freeze event. That’s insurance people; unexpected stuff happens and it can wipe out a year’s profit just like that, especially when your customer base expect rapid settlement of claims, with no questions asked about potential fake claims, because yeah…micro-aggressions are bad/racist/misogynist/LBGTQist/Transphobic etc.
That brings me to a $64,000 question; what makes Lemonade different, apart from the speed of settlement? Anyone in insurance can utilise AI to assess and settle claims in 90 seconds, especially low value home, motor, theft, damage, gadget etc. The big question is can you still make money at the end of the financial year and do you have enough capital reseves to meet various regional, or national government regulator requirements? In the same way people trust Amazon to deliver stuff, on time, cheap as chips, people in the future will expect insurance brands to deliver on their promises.
Lemonade has set the bar high when it comes to the social good aspect of its brand. In essence, that means it has to settle faster, and sometimes more generously, than some of its rivals. That’s a hard tightrope to walk when the next catastrophe event comes your way, which it will.
INSURANCE IS A BUSINESS CONTRACT, NOT A SOCIAL ONE
Insurance began in the hurly-burly of London’s 17th century shipping offices and warehouses, as merchants and captains alike all realised one major sinking could ruin them completely and the next port of call was Newgate debtors prison.
So cargo/ship insurance and other sundry risks were all assessed and insured as we moved into the late 18th century industrial revolution. Those early brokers and underwriters were not trying to change the world, correct people’s wrongthinking or act as a charity for disorganised individuals who chose to lash most of their cash on gin, whores, gaming tables or cockfights in old London town. They developed a solution because the government wouldn’t underwrite ALL risks, which is quite a contrast to today’s expectations by the electorate.
The insurtechs that succeed long term will most likely be the ones who offer products that many people feel they actually need. Like healthcare insurance that by-passes the shambolic NHS, or PAYG car cover that lets you use the NCD & data history you built up on a company vehicle, for you own vehicle – because that’s fair, right?
Or you can develop an insurance scheme that replaces the 2K deposit that renters have to come up with to jump through the affordability hoops set by regulators (Inzmo). An insurance that replaces putting your house on the line to swing a loan to develop your business (Purbeck). In short, see the problem, fix the problem. Then people will buy it.
The worst thing insurtechs can do right now is promise to change insurance forever,’ or some other magic beans spin. Insurance doesn’t need to change its core nature, which is to act as a safety net when the worst happens. Bigging up the tech is the quickest route to disappointed customers. What you have to do is justify your insurtech brand’s existence by delivering that experience better, faster and with more trust than your rivals.
There are also new growth areas, all around the world, which require innovation and rapid product development. OK, the Wokerati cancelled your coal, oil or petrol/diesel car insurance market, but there are drones, crop insurance, battery production and distribution infrastructure, co-living apartments and more out there.