The Insurtech Bubble
Daniel Schreiber has lived every lawyer’s dream. After qualification in Israel, he practised corporate and commercial law in private practice, moved into the tech industry and became a unicorn tech billionaire. His insurtech start-up, Lemonade, is a poster child for tech-led insurance disruption. Headquartered in Israel and New York, Lemonade uses a sophisticated tech platform to provide simplified and bot-driven renters’ and home and contents insurance in the US, France, and the Netherlands. Like the insurtech sector generally, it has experienced exponential growth in recent years, through successful funding rounds backed by Wall Street stalwarts and Hollywood celebrities like Ashton Kutcher. This culminated in a 2020 IPO where the shares more than doubled on opening day.
Despite these and similar insurtech success stories, most European insurance policyholders are seeing relatively little evidence of digital disruption on the ground. There is no European insurance disruptor that can rival the success of Revolut in challenging the banking/payments industry incumbents. Why is this?
Since 2016, venture capital investors in the US and Europe have funnelled billions into the sector. According to data from insurance broker Gallagher Re, more than $40bn has been invested in insurtech start-ups globally over the past five years. Clearly a lack of historic investment has not significantly hampered disruptors, so other factors must be at play.
The Funding Slump
The consolidation trend that is affecting the insurtech market, like the wider fintech market, is probably not helping matters in the short term. We are currently seeing sliding valuations and a harsher funding climate for financial services disruptors generally. According to figures published by Gallagher Re, annual funding to insurtechs halved between 2021 ($15.8 billion) and 2022 ($7.98 billion). Investors have tightened their belts to new funding requests in the face of high inflation and interest rates and the looming threat of a recession in some markets. Many may be hoping that the increasing pace of consolidation among existing fintech and insurtech players offers them an opportunity to take money off the table through an M&A exit. But there are risks for investors here. By way of example, when Lemonade first agreed to buy US insurer Metromile in November 2021, the deal value was almost $500 million. However, by the time the deal closed, it was worth only $145 million to the Metromile shareholders. The acquisition was entirely funded in Lemonade stock, which by then, had substantially declined in price.
Alongside macroeconomic and funding factors, European insurtech has and will continue to face regulatory obstacles. In recent years, European regulators have become increasingly focused on the insurtech sector. Sadly, regulators seem to have concentrated on mitigating the risks to customers rather than on adapting prudential and conduct requirements to encourage greater innovation and disruption.
The European Insurance and Occupational Pensions Authority (EIOPA) in 2021 established a Digital Transformation Strategy and contributed in 2022, to the EU’s Digital Finance Package. Its work in this respect contains no commitment to adapt current regulatory rules to permit for digital end-to-end workflows – a very basic step that is essential to permit policyholders and insurers to derive maximum benefit from the digital transition. Equally, EIOPA’s work on artificial intelligence (AI) has concentrated not on adapting existing prudential and conduct rules to facilitate the use cases of AI, but rather on imposing additional layers of governance obligations on insurers who propose to use AI – all without mandating the creation of any sandbox or similar regimes to permit insurers to trial test AI in a facilitative environment.
At the domestic level, the Central Bank of Ireland has been no more forward thinking. It conducted a review in 2021 on the use of telematics in the Irish motor insurance industry and prescribed guidance on how the use of telematic data should be presented to customers. However, its focus was once again on customer protection rather than on facilitating innovation. Ireland has at least one significant insurtech disruptor, digital add-on insurer Companjon , but it does not yet target the Irish market, so the potential benefits of disruption are not reaching the Irish consumer.
A challenge for European insurtechs is defining the range of services that they can provide within regulated entities, since for most, the real value of their activities lies in their innovative tech platforms and related IP. European insurance underwriters are required under the Solvency II Directive to limit their activities to the business of insurance and operations arising directly therefrom, to the exclusion of all other commercial business. In practice, it is not so easy to identify what commercial activities are directly linked to insurance and this is not an area where there is much useful regulatory guidance. Some start-ups therefore play it safe and house their tech and IP in an unregulated sister subsidiary with intra-group licensing and service arrangements, while others house the tech and IP within the regulated entity.
In the insurtech context, EIOPA has stated ‘[Solvency II] provides some flexibility to InsurTech companies as far as the activities are directly related to core business. However, a practical implementation of this provision can vary in different Member States and hence…[there may be a]…need for possible legislative change’. If EIOPA does recommend legislative change in this area, we can expect the process to be long and involved. This will not help Europe’s reputation as a hub for nimble and agile start-ups.
What do European insurtech start-ups need?
More funding is needed, obviously. But as mentioned above, lack of funding doesn’t appear to have been a limiting factor for the development of insurtechs until very recent years. Talent is a limiting factor for insurtech start-ups as it is for all tech firms. See a recording of our recent conference “Talent, Funding and the Future”. Regulation is also a key limiting factor, and one that is rarely well understood in tech circles, since many fintech and insurtech entrepreneurs have little background in or understanding of the subject. More therefore needs to be done, both from the regulatory and the industry side, to bridge the current gap between the fast-moving, process-lean climate of start-up tech firms and the expectations of regulators, so that more of the benefits of digital innovation can ultimately reach consumers of financial services.
For more information and expert advice, contact a member of our Fintech team
The content of this article is provided for information purposes only and does not constitute legal or other advice.