For every Lemonade and Root that launches with great fanfare, attracts hundreds of millions of dollars in venture funding and publicizes every facet of its growth, there are many InsurTechs that disappear and die without any announcement at all. Andrew Johnston predicts those doomed startups will increase in number over the coming months as they confront some stark realities.
“Most InsurTechs are simply not generating enough revenue, let alone net profit to stay afloat,” Johnston, global head of InsurTech at Willis Re, told Carrier Management via email.
But this isn’t necessarily bad news. Johnston explained that the Darwinian reality of the startup world, where few succeed and many more shut down, is the way things are supposed to work. Considering the fast-moving startup culture is relatively new to the property/casualty industry, that reality may not be so obvious at first.
“It might make for difficult reading, but this is a very natural evolutionary step for startup businesses that are competing for market share in an already very competitive market,” Johnston said. “Most InsurTechs that have raised capital are still propped up by this capital, which is not a sustainable business model.”
Stark Realities
InsurTechs have been launching with increasing succession over the last five years, attempting to disrupt or at least penetrate both back- and front-end segments of insurance. But many of these startups—those that fail to find merger partners, or reach profitability, or grow to such a scale (see Lemonade and Root, among others) that would allow for an initial public offering to raise more money—must shut down. Keeping that in mind, Johnston wants the insurance industry to talk about “dead” or “dying” InsurTechs far more than they do now. He said it is worth noting that “no one is talking about” the fact that a number of InsurTechs have reached the point of financial unsustainability.
“We are almost purely focused on the big capital raises, the big valuations and the art of the possible, which is sending a very one-sided message to both our industry but also to hopeful InsurTech entrepreneurs,” he said. “We should be very honest in saying that to make it in our industry as an InsurTech you need a combination of lots of things—and fantastic technology alone is not enough. Talking about those who have not made it is an appropriate and healthy discussion to have.”
Johnston has tried to start a discussion about it. He estimates in the recent Willis Towers Watson Quarterly InsurTech Briefing released in January 2020 that approximately 184 funded InsurTechs might have closed their doors over the past three years. Addressing a series of follow-up questions from Carrier Management, Johnston said that roughly 20-25 percent of InsurTechs that were able to raise any capital at all have “ceased trading” and shut down.
Unknown Defunct InsurTechs
In terms of tracking the precise number of InsurTechs that have closed, Johnston believes the number may be far higher than 184 because tracking a company is possible only after it raises money, and many don’t raise investment funds. Still, InsurTech investments keep climbing. He noted in his report that while many InsurTechs are expiring, global funding commitments to the sector hit $6.37 billion in 2019, with $2 billion coming in for 75 projects during the 2019 fourth quarter alone. (Johnston offered “no comment” when asked to share names of deceased InsurTechs.) CB Insights similarly tracked $1.8 billion in Q4 2019 investments for InsurTech startups, noting a big jump over the previous quarter.
Nate Pacer, co-founder and chief research officer of the analyst firm Venture Scanner, has also tracked a large number of InsurTechs that have shut down.
Based on an analysis of more than 1,500 InsurTech companies, he said (without naming specific names) that Venture Scanner found 80 percent of known startups remain active in the combined InsurTech categories, and 20 percent have become inactive or shut down.
That breakdown is generally the same or similar through InsurTech categories including insurance comparison (79 percent to 21 percent), insurance infrastructure (81 percent to 19 percent), commercial insurance (85 percent to 15 percent) and auto insurance (83 percent to 17 percent). One exception: Pacer’s Venture Scanner data found 88 percent of life, home and property/casualty insurance InsurTechs are active versus 12 percent that are not. P2P Insurance, or peer-to-peer insurance, is another outlier, with 61 percent of startups in this subsector listed as active and 39 percent as inactive or closed.
Caution and a Bright Side
Insurers seeking to tap into InsurTech innovations can learn plenty from the closing of startups that weren’t making the cut, Johnston said.
“If we can crudely assume that better businesses are more likely to survive, then ‘less noise’ (read ‘fewer InsurTechs) makes choosing the right partner an easier thing to do,” Johnston noted. “The sheer volume of InsurTech businesses at the moment is a pretty big distraction for a lot of firms.”
Johnston said that the demise of InsurTechs could help insurers theoretically win back market share, “but we aren’t really seeing InsurTechs taking much market share from the larger incumbents—not now at least.”
For InsurTechs themselves, Johnston cautions that there is no real answer to give in terms of helping them reduce the risks of shutting down.
“It is as much about luck, operating expenses and internal politics/personnel as it is anything else,” he said.
Still, he pointed out that entrepreneurs wanting to grow or InsurTech startups must do their homework before anything else.
“If you want to serve the incumbents, find out what issues they need solved, and how they can be solved within the parameters of the law and regulation,” Johnston said. “If you are looking to serve the policyholder, find out what they want, and make sure the issue is scalable. And then the same rules apply again about making sure everything you decide to do meets the right regulatory rulings.”
Another thing to consider: Entrepreneurs should mull a business model that solves an existing problem, rather than launching something that dazzles above practicality.
“A sound business model that is actually likely to solve an existing problem is the right place to start,” Johnston said. “So often we see technology [in] business launch just in order to spotlight the technology itself. It hardly ever works.”
Johnston said that InsurTech startups should also get to know the insurance industry well, something not as obvious as it might sound.
“Take advice from people in the industry—make sure that the business is as well versed in [insurance/reinsurance] as it is in technology. Look for the right industry partnerships with businesses that are strategically aligned.”
Most of all, Johnston urges InsurTech startups—both ones that have been around and those still to come—to realize that the insurance industry is a community, and humility works well with this in mind.
“We all work together and have done so for centuries. The industry does not function properly if it is only serving a few winners, so make solutions that can work for the masses and understand the community dynamics,” Johnston said. “Be humble about what you are trying to do. A lot of InsurTech firms pitch something like they are the first person to have thought of this idea, or the only people in the world that can do something. This is never the case.”