The question of what makes a start-up or InsurTech successful is not an easy one to answer – there are always several factors, and often the uncontrollable variables of luck and timing. Nevertheless, it is worth evaluating which controllable factors are of particular importance. For this analysis we combine observations both from the industry and learnings from Munich Re’s own projects and partnerships.
What is Success?
The first question that needs to be answered is what success actually means – which can lead to vastly different answers depending on the stakeholder and even amongst founders. Undoubtedly, every InsurTech would aim to be profitable and to achieve high valuations. However, other goals can be equally important, and thus impact what is ultimately deemed as “success” for a new company.
To keep the analysis simple, we focus on the aspects of profitability and valuations for this article, although having an inherent core purpose and a clear idea of what should ultimately be achieved is often the first step in setting a company up for success.
We are now at a point where sufficient InsurTechs have entered the market to spot patterns that lead to success. For example, there are some common characteristics that successful founders share, and certain key aspects required to build a profitable and sustainable insurance business model. The points following summarise these general observations:
- Founders should ideally be in it for the long haul. Regulatory complexities and lack of insurance understanding is hugely detrimental in this market; time needs to be taken in order to truly grasp the industry dynamics, nuances and historical context. Persistency appears to be the key in the insurance business, and has been aptly described as a “get rich slowly” business1.
- A truly differentiated risk offering should be based on solving existing issues in the industry, within the parameters of relevant laws and regulations, as long as the issues are In other words, practicality should be the focus here – cutting-edge technology in itself will not be sufficient if the value of usage does not outweigh the cost of disruption.
- On the topic of technology, it should ideally be aligned with the existing insurance ecosystem or stackable around the existing
- The importance of data cannot be underestimated. Incumbent insurers have vast amounts of captured information via policy and claims data to help them design and validate new products. Furthermore, an accurate understanding of risks is imperative for pricing. Partnering with organisations which have large databases helps avoid high initial costs in aspects such as marketing, pricing model development, and customer
- Distribution channel diversity is also crucial; too much reliance on one sales channel (e.g., aggregator, direct) can have a detrimental effect on sales
- The insurance industry has a strong community dynamic; this should be recognised and utilised as there is much to be learnt from other industry experts even if they are not similarly well-versed in digitalisation and new technologies which have been dominating dialogue in the InsurTech
Learning from Failures
Since 2010, over 2,000 InsurTechs globally have been created. Along the way, there have been some casualties, with almost a quarter of these InsurTechs “failing”. Willis Towers Watson uses the criteria below for identifying failed InsurTechs:2
- Having not raised any capital in over 24 months
- Having raised less than $10 million overall
- Having not exited via M&A or IPO
There are a few key learnings from these InsurTech failures which are worth highlighting, many of which are also applicable to non-Insurance start-ups – it appears that the specificities of the Insurance industry only exacerbate common reasons for start-up failures, rather than create new ones. An example is timing – the industry moves at a slower pace than others (c.f. banking) and therefore has longer development- and sales cycles. A few further examples include:
- Slow movement on funding is detrimental as traction can be difficult to build at a later point. Funding, as for the majority of start-ups, is crucial – not only as a means to expand company resources and increase stability, but also to obtain industry prestige. As such, those who fail to gain early momentum on funding often find themselves struggling to stay afloat a few years down the
- Lack of value chain expertise is unsustainable and is often a need which is neglected in the early stages of a start-up. Start-up founders are often great visionaries, with innovative ideas and conviction which can inspire others. However, this does not necessarily translate into a high level of focus on the specialities of the insurance value chain, which is particularly important in the industry3. As a result, many InsurTechs find themselves in a tricky position when they fail to invest sufficiently into building out a team of experts in areas that are table stakes, such as underwriting, pricing, wordings, and claims.
- Team dynamics and collaboration efficacy can make or break a This is a lesser talked about criteria, yet an incompetent or uncooperative team makes up over 20% of the top reasons why start-ups fail4.
Ultimately, building up a successful InsurTech is no easy feat – even beyond the commonly cited regulatory hurdles and slow industry movement, each aspect of the insurance value chain has its particular challenges and potential for improvement. Nevertheless, it is an industry that necessitates change, and InsurTechs have already done a lot to improve (at the very least) the customer experience to a less complicated one.
The real challenge for an InsurTech is to ensure it does not forget to address the less glamorous aspects of building a sustainable InsurTech and ensuring the team consists of experts from all aspects of the value chain (underwriting, claims, monitoring) and capitalising effectively on new technologies whilst at the same time avoiding overreliance. In spite of the named difficulties, there are a lot of benefits to operating as an InsurTech; remaining highly agile to adjust for market and consumer demand changes at speed is one which can really provide a consistent edge over incumbent insurers.
CB Insights, “The Top 12 Reasons Start-ups Fail”: https://www.cbinsights.com/research/startup-failure-reasons-top/ [accessed 28 March 2022]
Willis Towers Watson, “Quarterly InsurTech Briefing, Q2 2021”: https://www.datocms-assets.com/24091/1627554491-wtw- quarterly-insurtech-briefing-q2-20212.pdf [accessed 28 March 2022]
Oxbow Partners, “In Memoriam: Why InsurTech Start-ups Fail And How Insurers Can Help”: https://oxbowpartners.com/blog/memoriam-insurtech-startups-fail-insurers-can-help/ [accessed 28 November 2021]
Munich Re Company (for itself and on behalf of each company within its group of companies) (collectively „Munich Re“) reserves all rights to the content of this document. This document is provided exclusively for the use of the directors and employees of the organisation to which it was originally delivered. Copies may be made by that organisation for its own internal purposes, but no part of this document may be made available to any third party without Munich Re’s prior written consent. Munich Re will accept no liability to any third party to whom this document is disclosed whether in compliance with the proceeding sentence or otherwise. This document does not constitute any form of legal, accounting, taxation, regulatory or actuarial advice. Without prejudice to the generality of the proceeding sentence this document does not constitute an opinion of reserving levels or accounting treatment. The recipient acknowledges that in preparing this document Munich Re may have based analysis on data provided by the recipient and/or from third party sources. This data may have been subjected to mathematical and/or empirical analysis and modelling. Munich Re accepts no responsibility for the accuracy or completeness of any such data. In addition, the recipient acknowledges that any form of mathematical and/or empirical analysis and modelling (including that used in the preparation of this document) may produce results which differ from actual events or losses. Where this document includes a recommendation or an assessment of risk, the recipient acknowledges that such recommendation or assessment of risk is an expression of Munich Re’s opinion only and not a statement of fact. Munich Re will not be liable, in any event, for any special, indirect or consequential loss or damage of any kind arising from any use of the information contained in this document. Any decision to rely upon any such recommendation or assessment will be solely at the risk of the recipient, for Munich Re accepts no liability.
Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München
80802 München Germany
1 Adrian Jones, Partner of HSCM Ventures, in an interview in WTW’s “Quarterly InsurTech Briefing, Q2 2021”.
2 Willis Towers Watson, “Quarterly InsurTech Briefing, Q2 2021” (July 2021).
3 Oxbow Partners, “In Memoriam: Why InsurTech Start-ups Fail and How Insurers Can Help” (May 2017).
4 Figure from CB Insights Report: “The Top 12 Reasons Start-ups Fail” (August 2021).