Can European insurtechs live up to the hype?

  August 30, 2023  Despite recent disturbances, the stability of the European insurance sector has persisted. The industry bounced back swiftly from a temporary decline in profits due to COVID-19, and the future looks promising. We anticipate that premiums will increase by roughly 3 percent per year and profits will rise by 8 percent by the year 2025.

This comparative fiscal stability is advantageous. However, with regards to embracing digital advancements, does the insurance sector display flexibility or opposition? The previous ten years have observedVarious trending technologies with multiple aspects.Surface within the sector. Certain transformations, like the embrace of online platforms for claims notifications The adoption of direct and digital distribution channels has remained persistently low at 18 percent within the European property and casualty (P&C) insurance market while certain other changes have picked up pace due to the effects of the pandemic. (For further details on the study discussed in this article, refer to the section titled “About the research.”)

About the research

For quite some time, insurtech companies have been considered a key force for ushering in significant digital changes across the insurance sector. Concurrently, established insurance firms and intermediaries are contemplating if insurtechs will indeed stimulate their digital overhaul, or if they will serve as a different kind of influence altogether. competitive threat It’s the moment to evaluate the ways in which European insurtech companies are generating value and to anticipate their future developments in the context of their primary business focus and market presence.

Insurtechs currently offer a value proposition that revolves around harnessing technology to enhance the insurance industry’s efficiency and customer service. They employ innovative approaches to streamline underwriting processes, customize policies, and simplify claims handling. These ventures leverage data analytics, artificial intelligence, and other cutting-edge technologies to offer tailored solutions, competitive pricing, and a more convenient, user-friendly experience for insurance consumers. Through these advancements, insurtechs aim to differentiate themselves within the market and attract customers by providing a more modern, efficient, and customer-centric approach to insurance.

Insurtech companies have mastered the art of leveraging digital technology by designing straightforward and user-friendly experiences and offerings for their customers. These companies maintain a significant level of clarity and quickness in handling claims and providing customer support. This level of dedication to the consumer, transparency, and efficiency often appears to be an insurmountable challenge for established traditional insurance providers to mirror.

Insurtech companies are undoubtedly revolutionizing the insurance sector. However, existing insurance firms and intermediaries might see these newcomers as either facilitators or competitors, which largely hinges on whether the insurtech operates on a business-to-consumer (B2C), business-to-business (B2B), or business-to-business-to-consumer (B2B2C) model.

B2C insurtechs are challengers

B2C insurtechs  compete directly Incumbent insurance companies subsidize insurance rates for individual clients. Yet, these newer insurance technology companies usually have a more limited range of customers and products compared to established firms, which restricts their ability to shake up the industry. In 2021, consumer-facing insurtech companies made up just 10 percent of the direct property and casualty insurance market, representing about 4 billion euros in yearly premium payments. Of this amount, managing general agents (MGAs) secured around 75 percent, while direct-to-consumer insurance tech firms took in the remaining share.

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B2B insurtechs are enablers

Business-to-business insurtech companies serve as modern tools for established insurance firms, enhancing their operational processes with digital features and skills. They might provide solutions for digital claims management or anti-fraud measures utilizing sophisticated data analysis and easy-to-use applications. These B2B insurtech entities can operate as expert consultants, independent claims handlers, or providers offering comprehensive solutions and services. There is significant expansion potential in this approach since it can generate beneficial outcomes for clients, traditional insurance companies, and the insurtech companies themselves.

B2B2C insurtech companies act as both facilitators and competitors in the market.

Insurtech companies operating on a B2B2C model are unlocking opportunities in related sectors by embedding insurance offerings at the point of transaction with businesses like automobile showrooms, travel firms, technology vendors, retailers, and financial institutions. They enlarge their reach to a broader audience of end-users via collaborations with these B2B entities. Although this market is in its infancy, prospects appear bright. For instance, based on what we’ve seen, there is substantial earning potential in providing extended-warranty insurance plans, especially for certain types of businesses.

Forecasting the prospective trajectory of European insurance technology companies and estimating the possible worth involved.

The direction in which the insurtech sector is heading is largely influenced by the influx of investments. McKinsey’s studies reveal that European insurtech companies currently receive about 20 percent of the global insurtech investment, a proportion that has been consistent for the last five years. In 2021, these European firms experienced an unprecedented level of investment, surpassing €3 billion. Despite a decrease in the total number of transactions, the value of investments increased at every funding stage, with a notable rise in the proportion of investments at later stages compared to past years. By the end of that year, the combined valuation of the European insurtech entities was roughly €40 billion.

The industry has managed to recover from the initial setbacks caused by the COVID-19 pandemic, but now it is facing a fresh array of difficulties.The present state of the overall economyThe current landscape features increasing interest rates, the highest inflation seen in many years, and continuous geopolitical instability. In various sectors, technology firms are failing to hit their earnings goals and the anticipations of investors—a situation that started in the stock markets in 2021 and extended to the venture capital space. Companies in the insurance technology field have also been affected by this trend of overvalued assets. For instance, direct-to-consumer insurance tech businesses that operate models similar to balance sheets, particularly those with either high loss ratios or a lack of clear and sustainable key economic factors, have struggled to live up to the lofty standards established by their peers in the tech industry that operate under models akin to software as a service.

This pattern has resulted in a marked reduction in market values for tech firms and insurance technology startups. During the initial six months of 2022, the Nasdaq dropped by 30%, and certain insurtech companies are seeing their valuations plummet by as much as 95% from their peak levels in 2021, although such drastic declines are not as common. The situation in Europe is somewhat less severe compared to the US.

The amounts of money being invested are diminishing, particularly in the areas of advanced-stage funding and initial public offerings. Investment by venture capitalists in the United States dropped from $94 billion in the last quarter of 2021 to $36 billion in the last quarter of 2022. In Europe, the decrease was from €29 billion to €13 billion during the same period. However, there continues to be some investment transactions occurring in Europe, with investors seeking out fresh opportunities, albeit with more discernment.

The future prospects for European insurance technology companies look promising. Should these insurtechs experience a similar journey in value capture seen by financial technology companies, which currently represent about 20 percent of the valuation of conventional banks, it’s possible they could create an estimated 200 billion euros in value by 2030—a fivefold increase from their present market value. To reach this swift expansion, they’d need to secure around 5 billion euros in yearly investments. This amount far exceeds the funding they received in 2021, which was about 3 billion euros, and also greater than the funding levels of roughly 2 billion euros in 2022.

Critical enablers for value capture

To fully realize the potential benefits, leaders from both emerging insurtech companies and established insurance firms must engage stakeholders throughout the entire industry network and initiate comprehensive initiatives to enhance their outcomes. This is especially crucial in the growth stage, where insurtechs face the highest risk of failure.

Efforts should not only concentrate on securing investment and acquiring new clients, which are of prime importance, but should also place emphasis on the growth of the following key facilitators:

Active partnership and cooperation between established insurance companies and insurance technology startups.By forming a mutually beneficial partnership, established companies can take advantage of rapid digital advancements, while insurance technology startups receive funding, expertise, and growth opportunities.

Nurturing environments and interconnected systems.Insurtech companies should concentrate on developing their pool of skilled individuals, establishing connections with prospective business-to-business partners, and growing their customer base to lay down a solid groundwork for their onward journey. strategic opportunities

A type of regulation aimed at benefiting consumers that encourages the development of new ideas and products.Suitable regulatory structures can facilitate the growth of scalable business models for insurtech companies both locally and globally, while maintaining stability and safeguarding consumers.

European insurtechs have tremendous growth potential. But first, they will first need to secure their runway with improved costs and liquidity and increase the resilience of their business models. In a volatile and uncertain environment, the winners will be those that successfully navigate the headwinds and deliver superior quality that can become a lasting source of competitive advantage for years to come.

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