In small but growing numbers, property/casualty and other insurers are launching in-house insurer accelerators or venture capital funds. Carriers must be clear on their ultimate goal and risk tolerance with these tools for innovation before they choose either path, Novarica said in a new report.
“Insurers who plan to make speculative technology investments need to be very clear about their goals and their tolerance for risk,” the research and consulting firm said in its report: “Insurer Accelerators and VC Funds: Buying Innovation.”
A number of prominent property/casualty insurers already have venture groups, including Chubb, Hartford Steam Boiler and XL Group. Their individual investments cover areas such as clinical trial insurance software, mobile apps, analytics, cyber security, digital health, data and analytics, and social media.
Others such as Hartford Ventures, zero in on operational and product innovations, prevention technologies and safety technologies that could help update underwriting approaches.
Venture funds are also becoming an important part of the life/health insurance realm, with launches at Aetna, American Family, Mass Mutual, Transamerica, AXA, BlueCross BlueSheld and more.
On the accelerator side, as Novarica noted, some examples include the State Farm/Robert Bosch Venture Capital GmbH Plug and Play Internet of Things Accelerator. There’s also The Global Insurance Accelerator in Iowa, an alliance between business leaders and local insurers designed to provide seed investment, mentoring, working facilities and a chance to present before more than 300 insurance leaders in exchange for equity.
Novarica said that insurers choosing either option must determine if they want access to innovation or to realize investment returns before launching venture funds for speculative technology accelerator investments.
If they seek investment returns, then insurers must know that venture capital investments have a small rate of success, Novarica said.
“Most VCs are happy with 9 failures for every 1 breakout success,” Novarica said. “Few insurers can tolerate this level of failure … [and] competition for companies with high breakout potential is extremely intense.”
That reality works better in the context of insurers seeking to develop new innovations and capabilities, Novarica noted in its report.
“Insurers who are looking to develop new capabilities actually have an advantage over [venture capital firms] in that few traditional VC firms are looking for portfolio companies that will be modestly successful, Novarica said, adding that in this scenario, “a strategic acquisition at a reasonable multiple is fine.”
With either choice, Novarica warns that insurers who choose to launch a venture capital arm should make sure it is separate from the core company.
“Compensation levels, expectations, and risk profiles of the VC unit will likely be very different from those in the core organization,” Novarica noted.