Insurtech puts a premium on technology

Move over, fintech – there's a new portmanteau in town, and the word on many investors' lips is insurtech, a sub-sector formerly best-described as insurance-related technology.

According to statistics cited by corporate finance house Clearwater International, non-public financing in the insurtech space experienced a drastic increase in 2015, with aggregate value growing by around 400% year-on-year. Furthermore, at a recent event hosted by unquote" sister brand Mergermarket – the Global Insurance M&A, Strategy and Innovation Forum – a panel of industry executives highlighted how investment in the segment grew from "a couple of hundred million dollars" in 2012 to "a couple of billion" today.

Yet, with fintech as a whole having enjoyed extensive investment over a much more prolonged period, it begs the question as to why the insurance sector has taken far longer to experience the same level of disruption.

"There's an inherent conservatism in the insurance sector," says James Barraclough, international head of financial services at Clearwater. "It's a great sector because there's either a professional or statutory requirement to have insurance in many cases. This allows many providers in that space to be quite traditional, because they don't have to fight quite as hard as other industries. But beyond the price comparison market, which has already seen a massive change, the rest of the industry is now starting to adapt."

Insurance is often won or lost on pricing risk properly, and those new to the industry have much less data, so they find themselves at a disadvantage compared to the incumbents" – Malcolm Ferguson, Octopus Ventures

Malcolm Ferguson, an early-stage investor at Octopus Ventures, argues there are additional reasons the insurtech segment has lagged behind other fintech sub-sectors in terms of adapting to the digital age. "Regulation is tricky, which – coupled with capital requirements – means that without strong backing it is hard to build a business in the space," he says. "Additionally, insurance is often won or lost on pricing risk properly, and those new to the industry have much less data, so they find themselves at a disadvantage compared to the incumbents. The other main factor is trust; even if an insurance policy is worse and more expensive, people still buy the brand name. While that is starting to change, it is something that has held back a lot of startups in the space."

The eventual emergence of the segment also owes much to the recent success of big data companies. Such assets have proven popular among private equity and VC investors in recent years. In February 2014, GTCR acquired UK-based Callcredit Information Group from Vitruvian Partners in a deal valued at more than £480m. More recently, private-equity-backed French-American startup Talend listed on Nasdaq with a market-cap of $760m in August 2016; and, in March 2017, Albion Ventures took part in a $3.3m round for banking- and insurance-focused data firm Quantexa. On the fundraising front, French private equity house Serena Capital this year announced the €80m first close of Data Ventures, a vehicle specifically dedicated to big data investments.

The data gathering, storage and analytics industry has attracted a growing market of corporate clients in industries as diverse as digital advertising, consumer finance, healthcare and even fund management itself. Octopus's Ferguson and Clearwater's Barraclough agree data innovation is now playing a significant role in both the timing and scale of opportunities presenting themselves in the insurance market.

"Insurance is realising it can harness technology to manage risk more effectively," says Barraclough. "There are a plethora of different consumers out there with unique requirements and risk profiles. Technology is allowing insurers to price that on an almost individual basis far more effectively. The growth of big data and increased sophistication of analytics is feeding into that on a massive scale."

Assessing the emerging investment landscape
The first wave of investment in insurtech was for policy price comparison platforms, says Octopus's Ferguson, where there remains considerable activity. Indeed, Octopus itself recently led a £7.5m series-A funding round for Bought By Many, a subscription-based aggregation platform for niche consumer insurance in fields such as pet insurance for rare breeds and travel insurance for people with medical conditions.

A more high-profile success story in the aggregation segment is UK company uSwitch, which offers price comparison services for insurance policies, in addition to utilities and telecommunications. The business received £2m in funding from E-Capital Investment in September 2000, subsequently became a portfolio company of LDC and Forward Private Equity, and was eventually acquired by Zoopla Property Group in a deal worth up to £190m in April 2015.

Elsewhere in Europe, Oakley Capital scored a 15x multiple on the sale of its investment in German price comparison platform Verivox to trade buyer ProSiebenSat.1 in 2015 after five years at the helm. Other deals include 3TS Capital Partners' sale of Poland-based Rankomat to Bauer Media following a five-year tenure in 2015, and Oakley's acquisition of a majority stake in Facile.it in September 2014.

Ferguson points to the lower barriers to entry in the aggregation space, which have facilitated more straightforward expansion strategies. However, he adds that once investors "dive deeper into the value chain", many factors including regulation become more complex and the challenges faced by innovators become more acute.

There has been investment in companies that enable better pricing of risk, for example producers of telematics boxes for use in cars, enabling insurers to price lower for good drivers and higher for bad drivers" – Malcolm Ferguson, Octopus Ventures

"More recently, there has also been innovation in new categories of insurance, such as on-demand car insurance by the hour, or rental insurance for Airbnb," says Ferguson. "These are new categories that have emerged where there is no data advantage there for incumbents. Additionally, there has been investment in companies that enable better pricing of risk, for example producers of telematics boxes for use in cars, enabling insurers to price lower for good drivers and higher for bad drivers."

One such telematics-related company is UK-based MyPolicy, which Inflexion Private Equity acquired in a £40m management buyout in January 2017. The business sources insurance policies and manages the installation of smart boxes to monitor and analyse driving behaviour. Meanwhile in the same month, LocalGlobe led a £1.5m funding round for Cuvva, which provides subscription-based car insurance aimed at customers who use vehicles infrequently or borrow them from friends and family.

The final key area that Ferguson highlights as being attractive to investors is technology infrastructure: "A lot of the incumbents have built on technology and infrastructure that is decades old. That is quite a big challenge to innovation in terms of introducing cutting-edge technology into the industry."

Threatened incumbents
A recent survey of insurance CEOs carried out by PwC, published in June 2016, showed nine out of 10 feared losing business to tech companies. It stands to reason that, as with other big industries where incumbents have faced threats to their business models from widescale disruption, insurance groups have responded by investing in the sector themselves. Indeed, according to research conducted by venture data firm CB Insights, the global number of tech deals made by insurers reached 100 in 2016, a year-on-year increase of 49% and up 257% compared to 2014.

"It is a really good thing that incumbents are afraid of losing business to new startups," says Octopus's Ferguson. "It drives a sense of urgency in a sector that is quite sleepy. We have seen a number of insurers and reinsurers taking steps to try and drive innovation within their businesses."

The presence of trade investors, and thus increased competition for assets, is coinciding with increasing valuations. In January 2016, legal firm King & Wood Mallesons said the number of insurers looking to bolt on telematics companies had resulted in growing entry multiples. Similarly, in the online brokerage space, Aquiline Capital Partners sold online insurance broker Simply Business to listed US trade buyer The Travelers Companies in March 2017 for an enterprise value of $490m, equivalent to 50x the company's 2016 EBITDA, according to the Financial Times.

Yet Clearwater's Barraclough argues frothy pricing is not merely a product of competition from trade buyers. "Trade investing is not necessarily inflating multiples. These are investments with massive growth potential and are highly disruptive. That type of business automatically drives high-pricing multiples." Barraclough's Clearwater colleague Robert Herscovici, a financial services analyst, says: "Investors are focusing on the potential for growth and realisations in the future. So you could be talking about multiples of 30x EBITDA and over, which is not unreasonable given the small scale of some of the investments and high growth potential."

Trade investing is not necessarily inflating multiples. These are investments with massive growth potential and are highly disruptive. That type of business automatically drives high-pricing multiples" – James Barraclough, Clearwater International

It is also the case that the complex nature of the insurance market in itself creates higher barriers to entry, meaning large investments at an early stage are more likely. Octopus's Ferguson explains: "When you are evaluating the size of opportunities and the difficulty of the problem in question, insurance is special in that the industry is particularly large and complex. It is one of the few occasions where you are more willing to pay a premium, considering the size of the upside if you are successful in tackling the problem. And the premium valuations in the sector are driven as much by the scale of that opportunity as scarcity."

The involvement of trade investors at an earlier stage is also often an opportunity for cooperation with VCs and private equity firms, rather than a bidding rivalry. In March, international accelerator programme Startupbootcamp announced its London-based insurtech operation had developed a collaboration with Zurich Insurance Group. The multi-line insurer joined Startupbootcamp's roster of partners including Route 66, Exponential Ventures and a number of European banks and insurance brands. Similarly, Munich Re, which Octopus invested alongside on the aforementioned Bought By Many deal, has launched Digital Partner, a group launched to partner with and invest in tech companies within the insurance space.

Octopus's Ferguson argues the expertise offered by corporate investors and their willingness to invest alongside institutional fund managers far outweighs any concerns that their involvement might lead to inflated valuations. He says: "For venture backers such as ourselves, having these businesses involved in the process provides an incredibly useful way to obtain industry validation before making an investment. Although we strive to become as expert as possible, you cannot compete with people who have spent 40 years in that industry when evaluating risks that a startup might come up against. And typically what happens is you will have an investment alongside a commercial agreement, meaning you are instantly creating value on day one."

London calling?
As with many emerging tech scenes, it is to be expected that the startup community in the insurance space will lead to the development of clusters in geographies already densely populated with traditional incumbents. According to a 2014 report by the Association of British Insurers, the UK's insurance industry employs around 315,000 people, manages investments of £1.8tn and accounts for 24% of EU premium income, making it the largest insurance sector in Europe and the third largest in the world.

It follows that the UK might expect to lead the way in the insurtech space. However, in the immediate aftermath of the UK's vote to leave the EU, numerous insurance industry professionals told the Financial Times the capital's role as Europe's lynchpin would come under pressure. Additionally, in a recent blog post, Murray Raisbeck, UK head of insurance technology at KPMG, expressed concerns about London's continued ability to attract the top tech talent while Brexit uncertainty persists.

Yet Barraclough claims that London remains well placed to emerge as one of Europe's key insurtech clusters. "Insurtech has its place in every geography," he says. "It is not something that is purely UK-driven, but the UK insurance market is so liquid, and when you consider the global inflows into it, there is always going to be an element of disruptors flocking towards that. Brexit is not going to fundamentally change that overnight. There is so much embedded history, skillset, volume and liquidity here that it would be virtually impossible for someone to overtake the City [as Europe's insurance capital] in the short term."

Whether the UK will emerge as the continent's key insurtech cluster remains to be seen. Across Europe, venture and private equity backers are now beginning to grasp the potential for value generation within the space. Though entry multiples are undoubtedly high compared to typical private equity targets and the scale of innovation required is vast, the exits already seen in the space indicate insurance-related technology companies could be the next big play in the wider fintech space.

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