In 2017, we published our first piece on Insurtech, and opportunities for newcomers to differentiate themselves. We subsequently invested in Root Insurance in car insurance, Spruce in title insurance, and Archipelago Analytics in large value property insurance. Fast forward six years, and the insurance landscape has changed drastically, and Insurtech is in a slump.
Rewinding the tape, the first wave of Insurtech, as we described in that piece, was around changing consumer behavior. Prices were dropping and competition for end customers was fierce. That’s no longer the case as the insurance industry grapples with the challenges of inflation and rising interest rates, resulting in carrier losses, quickly escalating policy costs, and carriers exiting markets. Said differently, end customers are now, more than ever, challenged with finding the right policy at an affordable price. At the same time, the first wave of Insurtech darlings in Root, Lemonade, and Hippo have all under-performed in the public markets. The combined forces have resulted in a VC pull-back. Despite these headwinds, we continue to be enthusiastic about opportunities in this market.
The opportunity for brokers
We think the current climate is particularly favorable for brokers and agents. As end customers struggle to navigate this more difficult insurance climate, they will be encouraged to rely on these trusted advisors. If you are a California homeowner struggling to find a carrier that provides coverage in your area, a slick mobile purchasing experience may be less important. What could make a difference for you is an experienced agent that understands your home, the risks, and an extensive network of carriers is much more valuable.
Agents and brokers are not without their challenges, though. Because carriers are rapidly increasing prices and exiting markets, agents and brokers must work harder to service their customers and find new or affordable solutions. Similarly, the explosion of accessing coverage via the E&S markets can mean incremental workflows. Look simply to the increases in E&S underwriting, or consolidation of the wholesale markets as signs of where things are going.
Our perspective is that automation through software is the only solution for agents and brokers to keep up with this changing landscape. Otherwise they will be left behind, or have their cost structures explode. Our portfolio company Archipelago Analytics is a canonical example of this, working with the likes of Gallagher and Alliant to help them service the largest real estate owners in the world. Likewise, players like Semsee, Covu, and Layr attack the cost associated with SMB business these agents need to support. Quandri builds simple bots that automate the most repetitive tasks, eliminating the human drudgery of dealing with so many systems, and Adapt Insurance, Herald API, and Coverforce eases your ability to connect those systems via APIs.
The opportunity for carriers
It has been a hard period to manage an insurance carrier. First COVID completely distorted any historical underwriting trends. Immediately thereafter, inflation escalated losses, and then the increase in interest rates moved the capital markets. The net result is that the reinsurance market saw its first year-over-year decline in over a decade.
In the long run, carriers will improve their performance by adjusting within specific markets, changing the mix of their book, and simply increasing prices. But these changes will take years and involved engagement with state-based (and often irrational) regulators. It is hard to turn a cargo ship.
Carriers have two major costs: losses and loss-adjustment-expense (LAE). We think LAE is an increasing area of scrutiny, and opportunity, as carriers can create almost immediate financial performance through reducing this cost. Much like in the broker segment, we think software will lead the opportunity for automation and risk reduction.
There is a next-generation wave of claims management and automation solutions like Five Sigma and Roots Automation that have us excited. One obvious opportunity that players like Sprout.ai, Assured Claims, and EvolutionIQ are exploring is using AI to automate low-value claims while simultaneously reducing fraud.
Don’t forget about generative AI
No conversation today is complete without discussing generative AI and the introduction of LLMs, and we think Insurtech is no exception. The pace of technology in this field is incredibly exciting and the applications are widespread but may be most substantive within vertical markets. We do not claim to have all the ideas but are categorically enthusiastic and engaging with a widespread set of entrepreneurs.
We could imagine an agency or broker of the future delivering an unparalleled customer experience through generative AI. Whole categories of insurance like Life and SMB are today sold, not bought, meaning end customers need to be educated and supported in their decision making. Customer experience varies widely based on agent quality, and good agents are expensive (and therefore not scalable). But imagine interfacing with a ChatGPT-like experience that can ingest important business documents and engage in a dialogue on prescribed insurance needs. We suspect this kind of automation might offer a superior customer experience to the one people today have with a low-level agency representative at the intake stage.
Likewise, on the carrier side, there are cumbersome tasks that plague underwriters and claims agents. An underwriter may have to do extensive research or review critical documents as part of a large policy, much of which could get automated away or summarized by the new generation of LLMs. And a claims agent might have to review hundreds of pages of medical documents as part of a bodily injury or healthcare claim, but we have seen fantastic examples of how LLMs can capture the salient pieces of information in a fraction of time.
We look at these changes and markets and are as enthusiastic about the next five years of Insurtech, as we have been about the past five years. While many investors pull back from these markets, we’d love to talk if you’re building in this area and collaborate on solving your capital needs.