How do you evaluate an InsurTech initiative? We posed this question to ten InsurTech influencers to see what they are looking for when judging the true potential of a startup.
I will consider the fundamentals of business model. My framework to evaluate an insurtech initiative is based on four axes:
1. Profitability: Impact on the level of profitability of the insurance portfolio, for example acting on the loss ratio level or on the cost level,
2. Proximity: Contribution for creating an improved relationship that is based on numerous touchpoints during the customer journey,
3. Persistence: Increase of the renewal rate, and thus of stabilization of the insurance portfolio,
4. Productivity: Impact on the top-line, in terms of new client acquisition, cross-selling or additional fee collection for services
It needs to be relevant to your business (or innovatively adjacent) and help drive towards your desired goal in the most simple form. It also must have significant enough opportunity to scale over a defined period of time.
In addition to this, there are a number of other key things that should be looked at including the team involved, any early success or failures, culture (and its ability to fit into the existing – or not be totally alien at least) and finally vision. How big do they think this can be and why – not necessarily to see how big it’s going to be – but to understand the thought and disruption mindset they have when it comes to changing an industry, stooped in tradition & legacy.
As an investor in an InsurTech or FinTech startup, you need to believe in the story of what value the startup tries to create and provide. Then, of course, you need to believe how likely the team behind the startup is to succeed against all the odds. The questions that run constantly in your mind centre around evaluating how passionate, experienced and well the team is executing to have a fighting chance to succeed.
For the B2C business models presented to me, I always look at how easy it is for me to understand their proposition, how easy their benefit proposition is understood by potential customers and how hooked they will be as customers. If we pass the initial phase, then I start the due diligence process of the startup business case.
At the end of the day, maybe the most important factor for a successful investment is all about the question of timing. Is the time ready for the great proposition that the InsurTech startup has to offer? Regardless of how good the InsurTech solution may be, if it’s just too much ahead of its time then it will be hard for a startup to survive the period it takes to be well received by customers. That is, of course, not a good proposition for a VC investor.
The empirical insights from behavioral economics are clear: Every tech initiative must go beyond transactional value. It's simply not enough to do something faster or cheaper. Also it's not enough to build a business model on better UX. This advantages will not last. Insurance is a "trusted good". Social preferences are an important driver and relational values crucial. Most initiatives fail because there is no social value. Just tech. Tech is hygiene. Important but not decisive.
A succesful initiative is capable to manage actively behavior of clients. This means not only to manage values and preferences but habits and (social) norms too. If you can shape this customer characteristics you are building up identity. This is the strongest and most relevant form of satisfaction. This is evidence based - we at FehrAdvice & Partners AG did a lot of projects and have tons of data from experiments with customers.
It takes several elements. Is the leadership business savvy and are they satisfying a current need that is not being met? How will their technology specifically make the underlying business model a success? Do the founders understand enough about the industry and are they well enough networked to make an impact. Is there vison, passion and patience in the founding team.
Insurance is an established, old school industry. Most incumbents will take time change, unless of course, change is thrust upon them.
- How effectively are they solving a key customer pain-point,
- How gritty is the team who is driving the initiative,
- Their achievements up to that point.
I think a few factors are key:
1. A strong start up team with deeply rooted team chemistry,
2. A business model that puts the customer at the core, and has customer centered design touch points across the customer journey. Legacy insurance suffers from poor customer experience and engagement and hence loyalty, which is key to customer lifetime value,
3. Is the initiative a profitable and scalable business proposition? Focus on companies that have potential to scale their revenues in a reasonable amount of time despite the industry's relative immaturity,
4. Have a good complete business plan. Demonstrate the ability to understand the unique risks within the industry and a good reason as to why you are innovating in this way, and show how it fits with the current maturity of the industry.
We consider two main dimensions: business maturity and market success. Business maturity is based on funding levels, the quality of the management team, and the general level of sophistication of the business. Market success is rated based on the maturity of the capabilities or offering, the stage of development, and whether there are live implementations with insurers.
Industry incumbents and venture investors are actively monitoring new trends and innovations. Organizations should have a team of analyst to keep management up-to-date on the latest developments and new market entrants. Once potential use cases are identified, make sure they address specific business challenges/opportunities. Incumbent insurers may want to evaluate whether to partner with startups or build pilots themselves to test in the market. One strategy might be to focus startups on specific sets of problems, especially those that otherwise might not be addressed in the short term. In this scenario, incumbents might consider startup programs such as incubators, mechanisms to fund companies, and strategic acquisitions.
We are working with both insurance / MGA startups and technology startups. In evaluating them, we look at the status of development:
- do they have a real solution or is it still an idea in development,
- architecture and technology – is it a cloud and SaaS based solution,
- ease and willingness to integrate to demonstrate initial value through use cases,
- understanding on where they add value to insurance;
- and a roadmap of new development.
While initial clients is great … there are many solutions that may not have that initial client but have real value and innovative thinking that should be embraced. There are so many great InsurTech initiatives … bringing innovative ideas and ultimately value to customers and insurers, but we are trying to select unique solutions along the value chain that when working together with Majesco bring unique value to our customers as a collaborative ecosystem.
About the authors
Matteo Carbone is a #50insurtech influencer, Insurance Thought Leader | Connected Insurance Observatory
Nigel Walsh is a #50insurtech influencer, Partner at Deloitte and mentor at Startupbootcamp FinTech
Spiros Margaris is a #50insurtech influencer, Founder of Margaris Advisory and Venture Capitalist (VC); globally ranked as No. 1 Fintech & No. 2 InsurTech Influencer by Onalytica
Andreas Staub is a #50insurtech influencer, Managing Partner at FehrAdvice & Partners AG
Steve Tunstall is a #50insurtech influencer and CEO & Co-Founder at Inzsure | Author, article writer and global thought leader in risk, insurance, Insurtech & blockchain | Ranked 11th by Rise on Fintech Asia, 16th Instech Power 100
Danielle Guzman is a #50insurtech influencer and Global Solutions Marketing Leader at Mercer
Mark Breading is a #50insurtech influencer, Partner at Strategy Meets Action and Insurance Strategic Advisor & Industry Analyst
Mike Quindazzi is a #50insurtech influencer and Business Development Leader and Management Consultant at PwC
Denise Garth is a #50insurtech influencer, Senior Vice President at Majesco and acknowledged strategic thinker, international speaker and writer on key issues facing insurance