Insurtechs: Does the hype reflect reality?


They came to turn the industry around. But how is this disruption in the insurance business coming along? It seems analysts and investors are starting to lose patience.

In the world of insurtechs, there are two distinct kinds of companies. On the one hand, there are the small startups that rarely make headlines and whose capitalization is rather manageable. And then there's the other side, companies that attract media attention with their big-time funding alone. These "digital insurers" or "neo-insurers" see themselves at the forefront of industry disruption. The expectations placed in them are accordingly high. After all, they have promised to make insurance easier than ever.

Disillusionment among investors

All industry insiders know the names of those insurtechs with lots of appeal. Lemonade, Oscar Health, or Hippo in the US, all of which serve as blueprints for Luko and Element in Europe. What they have in common is that they have all been active for years – and have yet to pick up any significant traction. A look at all the companies' annual reports shows mainly one thing: a negative underwriting result and red numbers, which are ultimately only offset by the sometimes ample capital resources.

Take France's Luko, which recently acquired this country's Coya: In December 2020, the insurtech secured 50 million euros in funding, but could only point to 100,000 customers. And that's in one of the largest insurance markets in Europe.

Against the backdrop of the increasingly unclear progress of the global economy, investors seem to be losing patience with insurtechs.

This is indicated on the one hand by the stock market valuations of those insurtechs that are already publicly traded. Lemonade lost 78 percent of its stock market value last year. Hippo lost 77 percent of its value. Health insurer Oscar Health suffered a 79 percent drop in value within a few months of its initial listing.

EIt is also becoming more difficult for insurtechs to raise capital at all. In their report, "State of Fintech," consulting firm CB Insights calculates that funding for the insurtech sector declined by 58 percent in the first quarter of 2022 compared with the fourth quarter of 2021. Total volume in the first quarter was $2.2 billion for 143 investments. There were just as many investments in the fourth quarter of 2021, but with a volume of $5.3 billion.

Digitization bypassing the customer?

Looking at the US, it is fair to ask why insurtechs are not succeeding in reaching larger customer groups, especially in segments that are in high demand there (motor vehicles) or where there is an undersupply (all home-related industries). This leads to the suspicion that these companies' streamlined, digitized offers may simply ignore the needs of customers. This would confirm the theories coming from other countries (see our article "Digitilization: Keeping the needs of the insured in mind"). In any case, this is not out of the question, as the "neo-insurers" offer attractive products purely in terms of conditions.

Consequences for insurers
 
The current situation in the insurtech sector gives credence to the skeptics who have doubted from the outset that it would be possible for newcomers to the insurance industry to take significant business away from the traditional providers. The choice of an insurer is not only based on favorable rates or digital tools, but is also a deeply rational decision that is also based on trust. And this is where insurers with a long history obviously still have an advantage.

On the other hand, the situation must not encourage the industry to fall back into complacency. Digitization projects and increased efficiency remain necessary from the point of view of cost discipline alone. And among insurtechs, there are still numerous companies working on technologies that can make processes more efficient, lay the groundwork for automation and dark processing, or make AI projects possible in the first place.

These rather discreet companies undoubtedly remain interesting as partners, but it is now important to be careful when choosing them.

Interested in talking with us about the digitization of insurance? Then please contact our expert, Karsten Schmitt, Head of Business Development.

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