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05 Dec 17 03:35

The pace of expansion in technology-led investments over recent years has echoes of the 1990s dot-com bubble. Then, the volume and value of investments in the US internet and software sector ramped up sharply in the late 1990s, only to unwind abruptly as the bubble burst and many tech companies folded. The characteristics of the InsurTech investment cycle are different, but some analysts fear the rapid rise in investment is bidding up valuations in private placements, and that investors may be glossing over ambitious revenue targets, and mediocre or non-existent earnings growth.[1] In our Swiss Re Institute expertise publication Technology and insurance: themes and challenges, we try to answer this question.

The nature of innovation means that many InsurTech start-ups will fail. Inevitably, some of the current technology-led innovation in the insurance sector is being fuelled more by hype than performance. Much of InsurTech is at a stage where early proof-of-concept stories have triggered significant publicity, but for some projects commercial viability is still unproven.[2] Some new initiatives may under-appreciate the complexity of insurance. For example, start-ups seeking to engage customers more with insurance may fail to realise that many consumers want low-touch not high-touch interaction with their insurer. Many start-ups will likely fail. In the 1990s, failure rates were especially high among start-ups with less than 20 employees, and some insurers may be currently investing in similarly small ventures.[3]

Network effects nonetheless mean that the chances of success of tech start-ups are higher now than previously. The network effects associated with new technology have grown significantly over recent years, and that may increase the survival chances of young high-tech engineering companies .[4] The internet user base has expanded tenfold since the dot-com era, driven by better delivery infrastructure and more advanced technology (smartphones, sensors etc). This has led to the growth of platforms for which an additional user increases the value to all users (eg, connected sharing economy platforms, connected cars). Such positive feedback effects often take time to build which may partly explain why previous technology-led innovations have been slow to take off, and why things may be different this time round. For example, auto telematics has a long history in insurance, but has only recently started gaining traction, perhaps because of the expansion of connected car production.[5]

Further, the small number of InsurTech IPOs suggests start-ups are keen to build long-lasting, successful relationships with their investing insurers. Moreover, at the height of the dot-com era, start-ups were often focused on progressing speedily to an IPO. This time round, there have been very few IPOs or buyouts by established firms, suggesting that start-ups are keen to build long-lasting relationships with their investing insurers, conscious of the sector expertise the latter bring.[6] And, for those InsurTech firms that have publicly listed, equity markets are demanding proof of a clear path to profitability, which should help guard against pure speculative investing. An analysis of InsurTech start-ups that have listed in recent years shows that some are already profitable on a net income basis and command high valuations, while analysts expect others to turn profitable at least on an EBITDA basis in the coming year on the back of strong revenue growth.

Ultimately there are reasons to be hopeful that InsurTech will prove a positive development for the insurance sector. Insurers’ interactions in with these young engineering companies can help to stimulate innovation, identify priorities and complement existing technology strategies. Read more in the Swiss Re Institute expertise paper (Authors: Darren Pain and Jonathan Anchen).

[1] For concerns raised by venture capital firms, see D, Weil, "Amid falling valuations, VC industry is bruised but not broken", Institutionalinvestor.com, 28 March 2016,
[2  Two out of every three InsurTech deals in 2016 took place at the early-stage (Seed/Series A). See Trends in Insurance Tech, CB Insights, 11 April 2017. Seed funding supports the initial market research and development work while Series A funding provides additional funds to optimize product and user base. Beyond the development stage, additional financing is often raised to establish the business. For further explanations see: "Series A, B, C Funding: What It All Means and How It Works" Investopedia, 20 October 2015, ...
[3] Between 30-50% of high-tech establishments failed during the 11 year period (1990-2000). Establishments with fewer than 20 people had a higher chance of failing. For more on rates of start-up mortality, see J. Zhang, High-Tech Start-Ups and Industry Dynamics in Silicon Valley, Public Policy Institute Of California, 2003.
[4] A network effect arises when the use of a product or service results in an increase in its value for other network participants.
[5] Gartner expects production of new cars with data connectivity, either through built-in communications or by tether to a mobile device, to grow from 12.4 million in 2016 and to 61 million in 2020. See Gartner Says Connected Car Production to Grow Rapidly Over Next Five Years, Gartner, 29 September 2016, ...
[6] See "The Largest Venture Capital-Backed Insurance Tech Exits", Cbinsights.com, 30 November 2016, https://www.cbinsights.com/blog/insurance-tech-vc-exits/.


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