2018 Predictions

2017 has been an interesting year for InsurTech. I would define it as the year that InsurTech took another step from adolescence towards adulthood. I define "adolescence" as the time that the youth exhibits exploration, rebellious and self-definition behavior. The players in the industry are still figuring out the rules of the game, they are defining the frameworks and the majority do not know what to do with it all.

My dear friends Shefi and Avi from Coverager gathered the following information on investors and investment in the global insurance industry. For additional information and segmentation by continents. Checkout Shefi's article.

The investments' volume is stabilizing similar to the trend that we witnessed in FinTech (a CBInsight graph should be here.) An interesting fact is the amounts that the investors put into the more established companies such as Lemonade and DataRobot and the brand new startups. Why is it interesting? Very simple, SoftBank invested $120M series C in Lemonade and New Enterprise Associates invested $67M series C in DataRobot. Both investors understand the cost of doing business in the insurance industry and each investor has an investment strategy. Take a look at SoftBank's portfolio here. Lemonade needs the capital in order to grow as an insurance carrier to new territory leveraging its scalable core system, and DataRobot needs to expand its enterprise sales force.

The insurance companies and the reinsurance companies took several steps forward as well to embrace the change and opportunity that the newcomers bring. One indicator was the number of participants at Jay Weintraub's ITC2017 conference. 3,800 attended the conference, double the number of the ITC2016 conference. Another indicator is the increasing number of venture arms. In 2015, the European insurers had the lead with AXA, Allianz, and Aviva who created a venture arm and XL Catlin as the only US-based insurer with a venture arm. In 2016, additional US insurers founded their venture arm Nationwide $100M, Liberty Mutual $150M and Intact (Canada) $200. In 2017, Northwestern Mutual launched its venture arm and many others got the spotlight, for example, RGAx, Aflac ventures, and BlueCross ventures. Others increased the size, scope, and talent of their innovation team e.g. AIG.

The 2017 buzzwords and trends

We can't ignore the buzz words and trends that shaped 2017 tech world. I think that we can all agree that AI, blockchain, bitcoin, ICO, and bots were the 2017-Q3 Q4 buzzwords that eclipsed the Q1-Q2 buzzwords predictive analytics, big data, and customer engagement. Bear in mind that in many insurance companies the phrases "digital transformation", "agile", "mobile first" etc are work in progress and the mid-size agencies, who are a major player in the distribution channel, are not digitized as they should.

Not everything is Distribution or new insurance products. The SaaS, the DaaS and the smart compare engines that have done well. We can't go without mentioning CrapeData, DataRobot, PolicyGenius, and BoldPenguin.

2018 Predictions

1. CYBER INSURANCE      

There are new and exciting hardcore technologies coming out from innovation centers and from the Cyber powerhouse Israel. The space is not defined enough for an underwriting, pricing and the standards that can provide significant recovery through the claims process. In 2018, we are going to see new insurance products that can address the combined risk of system and human. We are at the start of cyber insurance.    

2. THE FALL OF BLOCKCHAIN

No, blockchain will not fall -- the excitement will wind down. The engine that drives the research and searches for revenue-driving applications will continue. We going to witness additional institutes (research and consortium) that will help the carriers to improve on internal processes.      

3. SMART CITIES

In 2018 we are going to the chatter around Smart Cities. Why? Because Singapore, Dubai, Amsterdam, Barcelona and other cities are exploring the concept.

A smart city is an urban area that uses different types of electronic data collection sensors to supply information which is used to manage assets and resources efficiently. --Wikipedia

Insurance will benefit from smart cities in the future. Safer urban areas, better risk management, and easier CAT assessments. In the meanwhile, it is important to observe the IoT operation that will power the Smart City and the cyber security + cyber insurance that it may require.  

4. ARE BOTS STILL A THING?

No, unless you don't have one.

5. API

Application Programming Interface (API) is THE 2018 prediction for me. Carriers know that the marginal cost of adding another "digital agent" can cost them millions if they don't have a modern API management system. Insurance companies want to work and receive business from the new InsurTech startups who registered as agents in all 50 states and with the agents who digitized their own business.

6. Agents

The core entrepreneurs of the insurance industry. The agents will have two paths to take (i) evolve to an InsurTech agency (ii) buy InsurTech services to make their agency more productive and more efficient. In 2018, the agents will be the buying force of InsurTech products.

7. Venture Life Cycle 

In 2018, InsurTech startups are going to enter new stages of a venture's life cycle. Scale - startups are going to invest their series A and B and scale their operation, customer base and revenue. Acquisition - for market segment, technology and talent. Dissolve - because they had the wrong product, the wrong team, the wrong business model, or that their competitors were better.  

Talk with Aaron Schiff CEO of Matic Insurance - January 9th 2018

We are going to start 2018 strong! I am happy to announce that January 2018 speaker is Aaron Schiff, co-founder and CEO of Matic Insurance, the industry leader in online delivery of homeowners insurance inside the mortgage process.

Matic revolutionizes the way homeowners obtain insurance during the mortgage process. A first of it’s kind technology that integrates directly with mortgage lenders and insurance carriers to automatically provide multiple insurance options - within 30 seconds and a simple click of a button. Best of all, by integrating with lenders Matic disrupts traditional distribution saving millions in customer acquisition costs.

Carbon Five | 525 Colorado Avenue | Santa Monica, CA 90401

Tuesday, January 9, 2018 from 6:00 PM to 9:00 PM (PST)

Geospatial Insights - LA InsurTech Talk

Thomas (Tommy) Ashman, co-founder of Slingshot Aerospace, joined me for a fireside chat on Geospatial Insights and the insurance.

The audience enjoyed learning about Tommy's background and personal journey into entrepreneurship. Starting from his air force service to meeting his co-founder, Melanie. 

Another journey that we talked about was the journey of building the company and the product. Many startups start in one direction and then pivot the product to find a market fit. Slingshot started with a mission to help vineyard owners to produce better wine. A mission that resonates with many readers. 

Slingshot was part of the TechStars LA inaugural class. We touched lightly on the fundraising effort and didn't go into details because at the time of the chat they were close to close a large seed.

Investors Talk with Colleen Poynton - LA InsurTech May Meetup

The InsurTech LA May event covered investments and raising capital in the InsurTech space. We had the pleasure of having two speakers who shared their knowledge and experience with the Los Angeles InsurTech community. Colleen Poynton is a VP at Core Innovation Capital and is based here in LA. To those who are not familiar with Core Innovation Capital - they focus mainly on financial services, and Insurtech falls right into that category. Core Innovation Capital primarily invests in series A companies which are companies with a million dollars in revenue looking to raise six to eight million dollars, and do a lead check for two, or four billion. As Colleen shared, Core Innovation Capital is very active: they lead rounds, take board seats and support their portfolio companies.

Two important investments for Core Innovation in the insurance space are: CoverHound, a digital brokerage, that started out with auto and then extended to other lines including renters, commercial and recently cyber risk. In the last two categories, CoverHound launched their own product, as an MGA. The other investment, an early stage investment, is in a company that takes an innovative approach to life insurance and annuities.

Our second speaker, Christine Carrillo, is the CEO and co-founder of Impact Health. Christine is a software engineer and has been in healthcare for about sixteen years. Christine and her co-founder, Helen Lee, started the company nineteen months ago; it is a new company. Impact Health is a hyper growth company, which means that they figured out a way to acquire new customers at a very fast pace. And more importantly, a market fit in the health insurance space. Impact Health is simplifying the buying process of health insurance by using data, human and machine learning. Christine tells, “Helen and I started Impact Health as a side project while running another firm. We were like the MacGyver of health insurance and had done it for five years. We had 25 employees and we were doing very well but we did not have a plan to run a high growth start up. A friend of ours asked us if we could figure out this--health insurance. We figured out that it is hard to figure it out on your own”. After five months of passionate, and nearly obsessed, work Christine decided that to generate revenue they would be a broker and obtain licenses for the states, the federal and the exchanges. By being brokers and selling all types of health insurance plans, they diffuse bias and can follow the data. Impact Health just reached $6.2 million annual recurring revenue, right to May 2017, they raised $6.3 million and are about to close 'series A' this week.

Q: What is the effort of raising capital to an Insurtech startup?

Christine: I am not raising capital as an Insurtech company, nor as a Fintech company. There are investors that will peg us as “additional health company”, there are investors that will peg us as Insurtech, or Fintech, company, and then there are investors that will look at us as a market place. We had an easier time with series A because of the market place. It is not common, and I am well aware of that. There is an awful amount of excitement around Fintech and insurance in general and obviously, what’s going on now with government and political aspects that we see in the media makes for more opportunity, as there is more chaos in our life, and more uncertainty around health insurance no matter where on the spectrum you are. Whether you get your insurance from your employer or on your own. On the insurance side, also, the public demonize them and it creates chaos for them; they are not sure what’s going on either.

Colleen: broadly speaking, Insurtech has seen a lot of interest and momentum in the past 18-24 months. I would say that relative to other sectors and sub-sectors that we look at as part of the financial services. There is a pretty high velocity of new companies that are entering the space and getting funded. We look at credit, savings and investments and infrastructure products. Insurtech as a vertical is at the hockey stick curve which is where a lot of capital is getting it. We have seen this in other sectors. This is where we want many companies to be formed. We saw this phenomenon with payment in 2010-2012 and it happened in landing in 2012-2014. And now, and in the past year or two, it is with Insurtech. From our perspective, the volume of deals allows the best ideas to naturally rise to the top. Then we are capable of comparing a lot of business models and a lot of founding teams’ profiles. The downside is that there has been a lot of froffiness and many deals with evaluations that are completely decoupled from reality. In general, Christine’s matrix for series A is outstanding. In insurance, we see rounds that are a full step ahead from where they are in terms of traction. That means, they are a seed company and they raise an A evaluation, or they raise A series with B, or even C traction. These guys have yet to pile-up their capital stack, or their carrier or distribution partnerships, let alone proof of market fit. There are always buzzy deals that made done. We are going to see that a lot of the companies that got funded in the past two years will fail. I think that they will realize that customer acquisition is a lot harder than they originally thought. You can build a sleeker application funnel and a better streamline underwriting process, but at the end of the day, insurance is sold not bought. So, you need to create some sort of connection with the customer and a real channel hook to get them. A lot of the guys got into this space with a pure technology perspective and overlooked some of the more traditional dynamics around insurance.  A lot will get burned because of that.

Q: We saw that in Q1 the investments dropped. Do you think it is a trend that the numbers are still strong if we ignore Zhong An and Hi Oscar?

Colleen: Yeah, that’s the thing. You have a few really big, sexy, high profile Insurtech deals that got done. I don’t want to speculate. We can take a look at the lending club. If there is a hiccup with one of the high profile companies, it freaks out the market. People get squeamish all the way down in the capital value chain. If you have a consumer lending startup, you are in a bad position because the market freaked out after Lending club, Prosper and OnDeck. If there is a public burnout of a company that raised hundreds of millions of dollars, that will ripple.

Q: Who are the investors in the space?

Colleen: The carriers are active for example XL and AmFm. Many carriers started a venture arm and are super active. Besides, a lot of the Fintech funds naturally migrated towards insurance. Because there are many similarities and efforts that run in parallel. Also, the generalists like Canaan, Foundation and more.

Q: Who are the Impact Health investors?

Christine: Our current investors are Birchmere ventures and Wavemaker, who are the bigger ones. We had several seed stages and raised capital from Charles Hudson, Precursor, and LaunchCapital.

Q: Are you raising more funds?

Christine: Yes, I am about to close series A with $10-15M. The recurring annual revenue is at $6.2M.

Q: How do you find the work with other investors and how do you differentiate yourself?

Colleen: I find it very collaborative, which may sound weird to people from the outside. People tend to be very open. There are deals that turn out to be highly competitive and then people throw elbows, but that’s maybe once a year. In general, I find that there are circles of people that I trust and they trust me, and we share what we are looking at, our thoughts and our notes. At the end of the day, the insurance fund space is very small so it is natural that you seek out colleagues to work with and collaborate.

In terms of how we differentiate ourselves, core innovation is a focus fund. In the case that we find a company that we like, we immediately demonstrate to them that we can add value. It can even be that we are not ready to invest in them at that moment, but maybe in a year or two. We show value by introducing them to talent, to business development and even introducing them to other investors.

Q: What will make you invest or walk away from investment?

Colleen: Many factors need to be aligned before we invest. Obviously, the team is the most important factor. We need to feel that the founding team is incredibly impressive and passionate. Also, that they are individuals that we wish to work with for a long time. Remember, this team, if successful, will be part of our portfolio for the next seven to eight years. We need to have a good relationship with the team so we can be proud to work for them. After that, it is a sharp cut. We need to see a clear product vision, an appetite to truly build an asset. It is very rare to find a CEO who is passionate, has a solid product vision, manages to take a product to market and then manages to zoom out and say “here is the roadmap” and realistically how we get to a billion-dollar evaluation. We find many amazing people that work in the 30,000 feet height with great product vision but they are not structured enough to execute. Or, we find people that are highly detail oriented, highly product centric that can’t get out from it and miss the forest from the trees.

Q: What is the expected return?

Colleen: We underwrite all investments with expectations of 10x.

Q: Can we expect 10x from Insurtech companies, is it too soon?

Colleen: Oh yes, for sure. It depends on when you invest. When looking at one of the big insurance exists - Esurance, it was in the billion-dollar neighborhood. If their investors made 10x, it depends on where they were in the capital stack.

Q: We see insurers venture arms getting into the market. Are they trying to micromanage the startups?

Colleen: It is tricky. We usually advise that companies consider several conditions before they take strategic money. For example, it depends on the stage. If you are an early stage, you don’t want to bring 'strategic money' for a high percentage of the cap table too soon, because the strategic can excerpt a large amount of control. And if you have only one strategic, that can actually be negative because you would like to go out and partner in the market. Let’s take Impact Health as an example. If I was Impact health and I had raised money from one strategic health insurance company, it would change how other insurers would work with me. Other insurers would start wondering if there is a preferred beneficial structure towards the carrier that gave me $5M. Maybe. When companies become more mature and start to think about an exit, that’s maybe a good time to have an enhanced relationship with a specific carrier. We usually advise companies not to take capital too soon from strategics.

Q: What is the common size of the founder team and how much equity is left after series A?

Colleen: The most common size is two or three founders. It is rare to see a solo founder. It certainly happens, but it’s very rare. When you have a round with four, or five founders that have equal shares, for us, it looks messy. Because at the end of the day, someone needs to be the CEO and make the decisions. As much as they think that everything is cool, and they are all equal, at the end of the day, when shit gets rough, ownership matters. I think that when the founders team is big, the CEO needs a clear ownership. Regarding series A - it is common to see that a company gives 20-25 percent equity towards series A.
Now, remember that it is contingent upon what happened before that. So, a company that raised $1 million in convertible notes on a $5 million cap is going to face a very different dilution compared to a company that raised $7M with a $20M cap. We have seen everything. It truly depends on the capital before series A. That is the ballpark, and you don’t want the founding team to come out of series A with less than 25-30 percent.

Q: To what do you attribute the quick success of Impact Health with customers?

Christine: Walking into any meeting, you could see our customer growth chart. It is a double edged sword. You could hear their thoughts, “Is this just luck?”, “Is it going to go down as fast as it went up?” which are valid questions. Until I had the opportunity to talk through and explain brick by brick, scar by scar, what it took to build it, people would not get the validity of our growth. To anything that you are doing, my recommendation is obsessing. For us, our obsession is customers, so we need to understand every aspect of a customer’s pain point. The more we dug into that, and optimized based on that, we had to continue answering the question “How do we keep the promise we made to the customer?” Our investors told us, “just get customers, just build something that shows that someone wants your product.” Our experience that getting a customer no matter how, doesn’t work for us, especially not in the long term. Getting customers and selling them insurance is very interesting. Now, we are building our customer intelligence mode and now we are engaging the customers better. We have more data about the customer than the health insurance companies and the insights that we derive are a differentiator. The end result is that we have a better understanding on how to engage with customers and how to acquire them.

Q: What are the KPIs that you track?

Christine: As a CEO, it is important to identify the goal of the company and then drive back to find the KPIs that will help you reach it. Growth is one. We would like to acquire a large piece of the market in the next several years, so this is an important indicator. As a CEO, it is important to me that we will address our customers as people and not as dollars. So, other indicators that we look at are engagement and satisfaction. I send a daily report to my board with the total new monthly recurring revenue, new annual recurring revenue, new customers, total customers, churn rate, monthly ads spent and how much cash is in the bank. We are a matrix driving company.

Q: What are the KPIs that an entrepreneur includes in her pitch?

Colleen: Many of the KPIs that Christine just mentioned. The entrepreneur should start with the goal and then break it down to the matrix that supports it. We are more concerned that they are venturing the right thing versus this complete comprehensive dump of lots and lots of matrices. The most common matrix that are shared among everyone are: the annual burn rate and cash in bank. Another basic matrix is customer acquisition cost (CAC) to lifetime value (LTV). And embedded in LTV, there are sub matrices - churn and contribution economics. Depending on the businesses, there are going to be matrices that are crucial for that space. For example, for some businesses, it is important to understand conversion rates in a funnel, or understanding virality factors in a network. Those will be idiosyncratic.

Q: When should the founding team reach out to a VC?

Colleen: I think that the CEO should reach out six months before he needs the money. It will help to build a rapport. The CEO should introduce himself, have a coffee, introduce the business and the most effective thing is to say, “Hey, these are our milestones and goals and six months from now, I plan to go to the market to raise series A. By then, I plan to do X, Y and Z.” If six months later, we meet and he showed me that he accomplished X, Y and Z, that is a good footing to start a fundraising conversation. It is a better strategy than starting to knock on doors when you have three weeks of cash. Start the conversation earlier than you think you should.

Christine: I participated in many fund raising talks, and I coach on the matter for Techstars companies. The main thing is building a relationship with who you wish to have as an investment partner. It is really important to search who will be a good investment partner for you. There are many fancy names out there and many people think that an investment firm will give you money because that’s what they do. You really need to understand what they are investing in, what sector, what type of companies they have done and what kind of check size do they give. You need to look into the partners that are in there and ask what did they invest in, what do they like, and what type of founder do they click with? All of these are very important and it is very hard to narrow it down to a list. You should not go after 500 VC, you should target and build a relationship with 30 and work it from there to see if there is a fit. When you’re fundraising, you can’t do anything else, you should only be fundraising.