The rising interest in insurance technology investments signals a new era for the industry. Ernst and Young1, CB Insights2 and related firms have been covering this trend over the past year. It’s evident that our slow moving industry is embracing innovation and, with it, an influx of new technologies, providers and investment capital. Investments flowing to a particular sector not only reflect perceived opportunity today but the potential for growth and value creation for years to come.
As Silicon Valley retreats from other market segments and inflated valuations amongst “unicorns,” the insurance tech market is expanding in interest and opportunity. The primary driver of interest is the market itself: its size, impact and need for deep transformation. Here are just a few eye-popping stats:
Insurance is a $3.7 trillion dollar industry.
Nearly 10% of the Fortune 500 is made up of insurance companies who have an average age existence of 95 years.
The US P&C insurance market has only been growing at a rate of 2-3% per year for the past five years.
Less than 5% of Millennials are interested in working in insurance but nearly 50% of the currently employed 2.3M insurance-related workers will retire within 10 years.5
Here at Spex, we’re now being approached by a growing number of investors looking closely at the overall market, the property claims environment and our business specifically. There are three consistent themes driving investor interest in our area of the market:
- Insurance remains a “pen and paper” industry. There are core workflows still relying on inefficient analog tools such as graph paper and digital cameras.
- Insurance is one of the worst performing industries for customer engagement. Policyholders generally think of insurance as a “tax on their income” instead of a value-add service.
- Insurance is the ultimate “big data” market. Its fundamental business model is based on risk analysis, a data science exercise.
Insurance remains a “pen and paper” industry
Claims and underwriting inspections are one area in the industry where “caveman” instruments still prevail. At Spex, we believe more strongly in critical core infrastructure, such as the transition from analog to digital inspections, as opposed to advanced tools for limited situations (e.g. drones for steep roofs.) The transition from pen and paper to mobile devices is pragmatic and immediate. SaaS cloud-based mobile workforce solutions have been dominant in most industries for several years now and have expanded more recently to related markets such as construction. For example, PlanGrid raised near $60 million in capital from Sequoia and other investors in 2015 and Eagleview Technologies, a dominant measurement technology for roofers and general contractors, sold for an undisclosed sum north of $650 million last July. SaaS and cloud based platforms like Spex enable incremental adoption more quickly and with lower upfront investments than traditional on-premise solutions. They are also beginning to demonstrate an ability to improve key industry metrics such as claim cycle time and inflated Loss Adjustment Expenses (LAE.)
Insurance is one of the worst performing industries for customer engagement
Ernst and Young is one of several large firms to recently highlight the flawed customer engagement model of the insurance industry. Insurance companies engage lightly with their customers because they barely know them. With occasional exceptions, the market is a fundamentally B2B driven one. Carriers principally interact with “members” via brokers and service providers (e.g. insurance adjustment firms) to sell their products, support them and renew customers. Many policyholders can only vaguely recall the name of their home insurance provider. When they do interact with them, on a claim filing for example, the experience is frequently poor. And, homeowners who have a bad claims experience are less than 15% likely to renew with their carrier. Policyholders increasingly seek the same level of transparency, real-time customers service and efficiency they receive from retailers and their other monthly expenditures.
Insurance is the ultimate “big data” market
How many industries are more reliant on data than insurance? Every company involved with the industry is craving more data–from service providers wanting to know the location of their inspectors to manufacturers seeking to understand when and where their materials are replaced. The insurance actuarial process IS a predictive modeling exercise, intended to measure risk to cost. For example, carriers have tied alarm systems to theft reduction to reduced premiums for years. The same logic could apply to sensory and IoT devices such as sump pump notifications or garage controls. “Pen and paper” driven workflows inherently fail to provide the datasets that could better inform these businesses that rely on data. Technologies ranging from mobile tablets to sensory devices produce volumes of data at a scale this data driven industry has never seen.
One of the most valuable aspects of the increasing flow of insurance tech capital is it enables early stage ventures to expand their sales organizations and have more success selling to insurance carriers. While the insurance market has several important players, the carriers have the largest impact on the industry and the adoption of new technology and solutions. Today, carriers are inherently conservative when it comes to working with start-up companies. The more capital and stability an early stage business demonstrates, the more likely it will be taken seriously in sales pursuits with carriers. And, the faster carriers adopt new technologies to improve customer engagement and data collection, the more appreciated they will by their customers. And, the more customers pay attention to their monthly “insurance tax,” the more likely they are to buy new insurance products and renew their old ones. Around and around the cycle goes…starting with a an acceleration of investment dollars flowing into new technology solutions.
CEO of Spex