The Rise of Corporate VC in Insurtech – Corey Davis
Insurance Technology or InsureTech is the new “it” sector of start-up land. The narrative around InsureTech goes something like this: Insurance is a $4+ Trillion, capital “T”, market opportunity whose “incumbents” have yet to offer a compelling digital tool for their insureds. And so it begins.
This dearth of innovation in the insurance industry has brought an abundance of capital to the sector. This is evidenced by both the number of deals and volume of money being thrown at the problem. In 2010, there were just 15 deals with a total value of $44 million. Fast forward 5 years and the number of deals have jumped by a factor of 10 while the dollars invested have swelled to almost $3 billion. According to CB Insights, there were over 80 InsureTech deals in the first half of the year totaling over $1 billion. While this volume may have slowed from 2014 highs (which had a handful of large transactions), the number of deals continues to climb.
Insurance incumbents have not stood idly by as traditional VCs looked for ways to encroach on their territory. A number of the larger, well-known companies set up their own corporate venture capital (“CVC”) arms years ago. However, only recently have some of the carriers focused specifically on making “strategic” investments. The large French insurer AXA launched AXA Strategic Ventures in February of last year with €200 million “dedicated to emerging strategic innovations relevant to insurance, asset management, financial technology and healthcare service industries.” Aviva launched Aviva Ventures last December committing £20 million per year over five years to “assist Aviva in identifying new commercial opportunities; the development of innovative business models and new digital insurance services and products which make insurance easier for customers”. Just last week, XL Catlin stated that “new technologies are…altering distribution channels and buying trends. How the market responds is going to determine the future survival” of the industry. Lastly, two of the largest players in the (re)insurance market, Munich Re and Swiss Re, launched accelerators to address the innovation dilemma.
Ever since Fred Wilson went on his now (in)famous rant(?) about corporate venture capital, there has been a healthy debate as to whether or not CVCs are good for entrepreneurs. For those of you who like to parse words, Fred did say that while corporations “are good at investing in their business…they are not good at making investments.” For further clarity, he added that corporations “investing in companies makes no sense.” Taking a somewhat less confrontational stance, several VC/PE investors at a financial services conference I attended several weeks ago, suggested CVC’s may be “tourists” – i.e. not in it for the long term. This is similar to the incumbents’ argument about hedge funds providing (re)insurance capacity.
So who’s right? The answer is that it depends. The startup world could effectively be broken down into two groups: (i) disruptors, and (ii) those focused on solving an existing problem. For the disruptors like an Oscar you may not want a CVC as a partner for fear that you are nothing more than outsourced R&D. On the other hand, for start-ups trying to solve a problem like improving distribution for incumbents such as Trōv or PolicyGenius do, CVCs may be the answer. They not only provide valuable industry expertise, but also provide a platform to test the technology and potentially create an instant revenue stream.
CVCs benefit from having access to a huge war chest, especially relative to the capital sought by start-up firms. As a result, their staying power lasts as long as there is a mandate from the corner office to innovate. While “professional” investors may not be tourists, their investing themes change – just ask anyone in the alternative lending space looking for capital.
For the cash strapped entrepreneur, CVCs should not be summarily dismissed. They provide competition to institutional money and an unparalleled level of operating expertise. In the final analysis, the answer doesn’t have to be a simple yes or no. Depending on the need (expertise/testing ground/etc.) there is a middle ground. Instead of issuing equity and potential board seats, start-ups could issue warrants, thus, keeping the CVC out of the cap table. As with most things in life, there are pluses and minuses.