Asset owners are increasingly keen to buy into insurance technology companies, seeing them as both worthwhile investments and potentially offering them a leg-up in a business increasingly being affected by new technology.
But building new technology-based insurance companies is not simple, while it is expensive.
“A life insurer would ordinarily require $50 million to $60 million funding to get off the ground, which is a very high entry barrier," said Robson.
The financial hurdle means that while some start-ups may want to become wholly digital life disrupters, it’s more likely they will be acquired by existing players before they can do so.
Sumitomo Life also notably chose to sit out a few founds of funding before investing into Singapore Life. It’s becoming an increasingly common tactic among life insurers; only committing funds when a start up starts to show tangible potential. It may cost more to buy into later rounds of funding, as Sumitomo Life’s investment demonstrates, but it gives the insurer investors more certainty.
“If the insurance companies can come in at a later stage, they can see where the direction is going. That gives them a bit more control over whether the revolutionary potential and business model is in place,” said Conning’s Dobbins.
Ping An’s Global Voyager Fund also prefers to invest in later series of capital raises, according to Jonathan Larsen, chief innovation officer of Ping An Group and chairman and CEO of the fund.
"We don’t often invest in very early stage companies, instead focusing primarily on Series C-ish businesses. The reason for this is that we feel that slightly later stage businesses are more likely to have the institutional heft to interact productively with Ping An Group," he told AsianInvestor.
Larsen noted that the fund typically invests between $15 million to $50 million, but that it doesn’t typically take managerial control.
The focus on later-stage investments is also evident in Willis Towers Watson’s data. It noted that investors in general made more individual insurtech investments in the second quarter of 2018 than this year (71 versus 69, respectively), but the combined value of the latter was 273% higher than the former, primarily because companies made more later-stage investments.
“Traditional insurers sometimes see insurtech companies as disruptors which could threaten their market dominance and they look to try to compete with these companies by attempting to develop their own technologies and processes in-house,” said Jake Robson, a Singapore-based partner at international law firm Morrison & Foerster. “This approach rarely succeeds however, as insurers do not usually have the requisite technical expertise or IT infrastructure to do this.”
He noted that the other approach of life insurers is to use VC investments to access “the technological innovations of early stage companies”.
But the wait-and-see process doesn’t work for all insurers – particularly local or regional companies that lack the deep pockets. The upshot is that these companies either need to start taking riskier bets, at the outset of the creation of some new insurtech companies, or they may find themselves unable to compete at all as the cost of investments become too high.
This risks leaving some regional and local insurance companies in limbo; unable to pay the larger tickets for later stage fund-raising but lacking the capital and internal investment capabilities to spread seed capital across an array of start-ups that have a higher risk of failing.
“A small or even mid-sized domestic insurer will not usually be able to adapt to VC investment as it will not have the requisite resources or ring-fenced division. At the moment, only the large multi-nationals are looking to focus on VC investments,” Robson said.
Experts believe there will be two likely sets of successful insurer investors into insurtech over the coming five to 10 years.
Big multinational insurers will be some of the most likely victors. The likes of Allianz, Swiss Re, Munich Re and Axis have deep pockets and are already spending a lot of money and time to build their tech capabilities, and they look likely to snap up additional insurtech companies that can improve the efficiency of their existing businesses.
There are relatively few insurers in Asia with the scale to match such efforts. The most likely candidates include AIA, Prudential, FWD and Sumitomo Life. FWD, Sumitomo Life and Prudential declined to comment on AsianInvestor questions for this story, while AIA did not respond to requests for comment.
Other insurance groups lacking such scale may instead look to mirror what some banks have done in setting up purely digital banks, and look to create digital insurance providers, to disrupt the market on top of their existing, traditional business. They may do so either by acquiring companies that have such tech, or potentially by creating their own digital insurance company with cutting-edge technology. Either approach may well require VC investments into insurtech start-ups.
There is a sizeable potential for such developments to take place in Asia. The region’s life insurance industry is growing fast and looks set to keep doing so, particularly in large markets like China, India and Indonesia. International insurers in particular may struggle to build extensive physical operations within them, so establishing digital services makes a lot of sense.
One way of getting a leg up on this is to buy a company that is already developing the tech to do so. As a result, there remains an enormous amount of potential for insurtech unicorns to emerge in the region.
As peers around the world are seeing gains from taking chances on insurtech investments, insurance companies around Asia should be careful to keep up. While many of these budding companies will fail, those that succeed promise to offer enormous rewards, both in terms of investments and competitive advantage.
Those make for particularly compelling factors for Asia’s life insurers to try and rope in a unicorn or two.
This article was adapted from the cover story of AsianInvestor's Autumn 2019 edition.