Unicorn hunting

Unicorn hunting – why to invest in early stage insurtech

Why are investors piling into insurtech’s across the globe?

There are six simple reasons;

  1. Insurance is a large and rapidly augmenting market,
  2. There are popular, expensive and urgent problems to solve,
  3. Insurtechs are developing defensible and proprietary solutions,
  4. There are unique founders entering the market,
  5. Low-cost distribution pathways
  6. There are also barrier-busting pathways to safely pilot ideas with consumers.

All of these factors create the ideal settings for 10x product improvements and successful insurtechs are achieving >10x growth in a few years. Investors are seeing incredible returns with valuations jumping in multiples between early-stage capital rounds, and initial public offerings (IPOs) achieving record subscriptions.

So far in 2021

Global Insurtech funding has reached record figures

The first half of 2021 has already exceeded the full year of 2020 in terms of funding in the sector. Insurtechs have raised US$7.4B with a major driver being the growth of so-called mega-round ($100M plus in funding), of which there were 15.

Early and mid-stage deal activity remains strong, particularly compared to 12 months ago when the coronavirus pandemic was in full swing in the northern hemisphere.

There have been three notable IPOs that have investors chomping at the bit for more.

In March, US-based homeowner insurance provider, Hippo went public via a merger with a $5B special purpose acquisition company (SPAC) and Oscar Health raised $1.4B in their IPO valuing the company at over $9.5B.  Last month, Bright Health raised $924M in its IPO which valued the company at $11.23B.

And there is likely more to come with Kin merging with a $1.03B SPAC to close later this year.

In June and July, we’ve also seen an unprecedented level of earlier stage activity and funding with more than $1B announced in the last five weeks alone including;

  • Wefox in Germany raising $650M Series C at a $3b post-money valuation. (less than 18 months earlier it was valued at $1.65B).
  • Akur8, closed a Series B funding round of $30M led by an undisclosed investor, bringing its total funding to $42M.
  • Tractable, raised $60M for a Series D round that values the company at $1B
  • London-based hyperexponential (“hx”) closing an $18M funding round led by growth capital fund Highland Europe.
  • Insurance tech startup Bolttech raising an incredible $180M in a funding round, led by private investment firm Activant Capital Group, which values it at more than $1B.
  • Lula, a Miami-based insurance infrastructure startup, raised $18M in a Series A round of funding.
  • YuLife raised $70M in its series B funding round and,
  • Ethos picked up $100M at a $2.7B+ valuation for a big data platform to improve life insurance accessibility.

Multiples in insurance are hot.

Insurance revenue is being treated similarly to software revenue, meaning investors are paying for growth, rather than margins. There is a massive opportunity in the industry for tech-enabled disruption.

But the flip side is that more competition for premiums could see customer acquisition costs (CAC) continue to rise in the more commoditised product lines such as home and motor. With insurtechs seeking low-cost distribution, we’re seeing distribution innovation, implicating non-insurance brands, for example, as a way to access consumers.

The other big learning from this recent cash bonanza is that the biggest winners in insurtech will undoubtedly be the early investors. Insurtech’s that have gone public recently have seen mixed results for their new shareholders. The exception being Lemonade.

  • Metromile: $7.32 per share, down 63% from its post-combination highs.
  • Hippo: $9.97 per share, down from 2021 high of $14.24 per share pre-merger
  • Bright Health: $12.40 per share, down 31% from its $18 per share IPO price.
  • Lemonade: $87.85 per share, up 300% from its IPO price of $29 per share (as of 27 June 2021)

In Australia, we are yet to see the likes of Lemonade, Bolttech or Wefox but it’s coming.

We have the opportunity to be a leader in the insurtech world due to an innovative and collaborative industry, coupled with a transparent regulatory environment. The findings from the Hayne Royal Commission were comprehensive, but at the heart of it was the consumer. This customer-led approach is being adopted by insurtechs and will help them win the hearts and minds of consumers both locally, and for those that choose to, globally.

The industry here is ripe for innovation and there are some incredible tech integrations happening around the world that will undoubtedly hit our shores in a tidal wave of change.

Where to invest

Here are seven new insurtech models that highlight innovation in the industry and its growth potential.

Usage-based Insurance

Usage-based insurance (UBI) has seen early adoption in motor insurance and can broadly be categorised into two buckets: pay as you drive (PAYD) and pay how you drive (PHYD). Better risks are rewarded with lower premiums, and PAYD recently has gained traction across the globe. Some exciting examples include By Miles in the UK and soon to launch in Australia is KOBA (you can invest in KOBA via its crowdfunding platform HERE ).

Digital platforms for B2B Credit Security

Digital platforms for B2B credit security to replace burdensome bank guarantees and traditional collateral-based instruments that embeds insurance for risk management.

In January, Insurtech Gateway UK led a $1.64m Pre-Seed Round for Bondaval  which does just that, offering next generation credit security in the form of a Microbond – the same as a big corporate or government bond, but much smaller, faster, flexible and accessible.

Community Loss-Pooling

A digital community insurance model that revolutionises our approach to managing risk through community loss-pooling, a lighter capital structure, material cost efficiencies and significant changes in customer behaviour.

In February, Insurtech Gateway UK led a $1.3m Pre-Seed Round for Eusoh, which offers a pet insurance community model.

Incentivised insurance

Insurance models that ingest data and provide incentives for positive changes in customer behaviour that reduces the risk to insurers and the cost to the insured are a win-win for all.

YuLife is a great example of digital, data driven incentivised health insurance. It is incentivizing people to lead healthier lifestyles, offering rewards and discounts from the UK’s well-known brands for completing daily wellness activities.

Embedded insurance for rental /share economy

Insurance models that dynamically change based on real-time data and episodic usage of assets.

Lula, is great example of this. The Miami-based insurance infrastructure startup provides the platform for digital rental platforms to offer insurance through instantaneous underwriting.

 

Gig economy protection

Collective Benefits are building a safety net for freelancers and the self-employed. They provide their members with access to an exclusive range of protections, benefits, and perks normally reserved for big company employees.

 

Parametric insurance

Parametric insurance for high risk, traditionally uninsurable risks is a way to bridge the under-insurance gap. They are insurance products that offer pre-specified payouts based upon an objective trigger.

Some exciting examples include Ibisa and Flood Flash

 

Risk Prediction & Mitigation tools

Predicting risk to price it is the foundation of insurance. Analytics tools can now collect vast arrays of data from new sources to better understand and predict the behaviour of insureds.

An emerging space for risk prediction and mitigation is in climate science. With the changing environment, historical data is less predictive, so new methods and data sources for forecasting climate risks

Cervest, a platform that quantifies climate risk and threats down to an asset level, raised a $30M Series A round in May.

 

At Gateway, we balance growth metrics with insurance metrics, to ensure portfolio insurtechs are investible AND insurable.