Blog: Why incumbent insurers must buy out insurtech start-ups

Paul Cuatrecasas
20 Sep 2017

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Until recently, start-ups focused on driving efficiencies in the insurance business or distributing insurance through new channels
Now some, like Gryphon, are no longer deterred by regulatory and capital requirements and want to become full-stack insurers
Insurers should acquire these competitors to mitigte the threat, bring in new technology and talent, and lead the industry change

Instead of just driving efficiencies, some start-ups now have the ambition to become full-stack insurers, warns Paul Cuatrecasas, CEO of investment bank Aquaa Partners, urging incumbents to buy out these potential competitors.

Insurtech is booming. According to CB Insights, insurance startups raised $1.7bn (£1.3bn) in 2016, the highest total ever. And it’s not slowing. The second quarter of 2017 saw an extraordinary 248% increase in insurtech funding, according to Willis Towers Watson.

Unsurprisingly, most of the big insurers have started partnering. Chubb partnered with Coverhound; Liberty Mutual with Next Insurance, and Munich Re with Slice. More than half of global insurers estimate about 20% of their turnover is threatened, according to PWC, and 55% say innovation must be part of their long-term strategy.

So far, so good. Insurers have acted fast to assess how technologies can squeeze new efficiencies. They’ve leveraged digital and mobile to expand their reach; examined Blockchain to see how it can be used to establish audit trails; and looked to Big Data and the Internet of Things to collect and analyse richer data.

But, there is a new threat emerging.

To date, many start-ups have focused on driving efficiencies in the insurance business – or distributing insurance through new channels, like mobile. But an increasing number are now looking to become fully regulated insurers in their own right.

Insurance start-up Gryphon, for example, recently raised £180m. Although we know little about the company, we do know it’s looking to become a full insurer in its own right – a path that many startups have decided against, deterred by the regulatory and capital requirements.

Gryphon believes there is space for a digital-first insurer that meets the demanding needs of today’s consumers. Its CEO Daniel Pender recently told the Financial Times that “insurance companies today are hamstrung by their existing technology. We have no legacy systems. We will underwrite and carry the risk ourselves. You don’t often see people doing that. We aren’t a distribution play, we are a full insurer.”

Gryphon will likely be the first of many. We saw a similar trend in fintech where companies that initially focused on digitalising financial processes went on to become banks themselves, such as Atom Bank. The Telegraph recently reported that Atom managed to sign up 5000 customers in one day. To put this in context, 13 of Britain’s 44 building societies have fewer than 20,000 customers.

So how should established insurers react? This is no time to hide. Changing consumer expectations are disrupting the industry, and the threat from these new players should not be understated. The impact that Atom Bank has had on financial services shows us that. Instead, insurance executives must recognise that there is an opportunity here too, a chance to take advantage of market turbulence and come out stronger than competitors and the upstarts.

How? Insurance companies should acquire these new competitors. On one hand, this mitigates the threat; brings in new technology and talent; and injects a dose of innovation into the new parent company. On the other, it puts the buyer a step ahead of their competition. Rather than being threatened with disruption, they can use this new technology to lead the industry change themselves.

Some companies have started to do this. For example, Travelers recently acquired Simply Business, and Aviva’s CEO Mark Wilson says he wants to turn the company “into a fintech”. But too many insurers still haven’t yet left the starting blocks.

As more insurers start to think about technology, they must recognise that it isn’t only about driving efficiencies and reaching new customers. There is something deeper at work here too – and insurers need to make sure they’re prepared.

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