Don’t Forget the Pipes! Why Insurtech Infrastructure is Poised to be Huge!

Steve Sloane, Partner at Menlo Ventures @badtothesloane

Insurtech has been hot — — with Alignment Health and HIPPO predicted to go public in the coming months, at least seven venture-backed insurers will have gone public since the second half of 2020. In an industry long dominated by stodgy incumbents, this rush of new blood has been invigorating. However, at the same time, many questions remain about these companies’ business models and long-term viability. Within the five marquee insurance IPOs (Clover (NASDAQ: CLOV), Root Inc (NASDAQ: ROOT), Lemonade Inc (NYSE: LMND), Metromile (NASDAQ: MILE), and Oscar Health Inc (NYSE: OSCR), only Lemonade and Metromile are currently trading above their IPO price. While these full-stack insurance companies have attracted venture capital and mind-share, key-enabling technologies in the industry are poised to explode over the next couple of years.

We’ve divided the Insurtech industry into two buckets, disrupters, and enablers. Disruptors are full-stack companies such as Lemonade that are competing directly with incumbent carriers like Geico. Enablers are the critical pieces of software and infrastructure that power the industry, from pricing risk to billing. These enablers include Verisk ($30B market cap) for property risk analytics, Guidewire ($9B) for pricing property and casualty insurance, and Vertafore and Applied, which are AMS (Agency management Systems) that allow brokers to manage their client base. These incumbents have long benefited from powerful data network effects and brand recognition. However, the following factors are driving the rapid adoption of the next generation of enabling technologies (mapped below):

1. Pressure from disruptors: As new carriers like Root grow, raise mountains of capital, and create exciting consumer brands, incumbent insurers feel new competitive pressures. After all, Geico, State Farm, and Allstate were all founded in the 1920s and 1930s! The encroachment of upstarts onto their profitable business models creates pressure for adopting new technologies in ways that were not as acute in the past.
2. Proliferation and digitization of data: Previously, industry data was siloed and often proprietary to a specific carrier. Real-estate data often sat in PDFs, health data in bespoke on-premise EMRs, and cyber-policies behind a firewall. As software proliferates in these industries and consumer data explodes, there are more signals for more intelligent infrastructure to leverage.
3. The complexity of benefits and policies: In the benefits space, brokers have successfully sold core medical, vision, and dental insurance for decades. However, today as companies layer on telemedicine, mental health, and other benefits, the existing workflows with pen and paper increasingly break down. Collaboration software like Threeflow becomes necessary to deliver a cohesive experience between brokers, carriers, and clients. Similarly, the pandemic has revealed how many cascading risks exist in the insurance ecosystem, and insurers will need to sharpen their pencils to tailor future policies better.
4. Growth in risks: The world is a scary place. Whether it’s catastrophic climate disasters or cyber breaches, there are more critical risks these days to insure. The growing number and complexity of risks demand modern tools with more diverse data-sets to give insurers a fighting chance against the next-generation of disasters.

While these forces will create disruptive technologies that may take share from incumbents, we will also see the rise of enabling technologies in growing verticals, such as CyberCube in the cyber insurance space. Enablers will benefit by providing critical services for both new disruptors and incumbents who are racing to invest for the future.

At Menlo Ventures, we’ve already made multiple investments in the sector and look forward to doubling down with visionary founders building in the space — — if that describes you, please reach out!