The ultimate ambition of venture capitalist (VC) investors is to rope a unicorn – a privately held start-up company that can be nurtured into a success worth at least $1 billion. 

Many industries have become infatuated with these elusive creatures, and over the last year or two this has come to include the insurance sector. Participants in the US and Europe have begun investing in insurance technology companies – dubbed insurtech. 

Asia’s larger life insurance players are also starting to get in on the act. Perhaps the most prominent example Japan’s Sumitomo Life spending $90 million on about 25% of newcomer Singapore Life on July 1.

For notoriously conservative insurance firms, insurtech companies look like risky plays, but there’s a logic to such investments. The insurers typically rely on reams of demographic and actuarial data to create policies that they typically sell via direct sales teams. They then invest most of this money in stodgy but predictable bonds. 

But bond yields across the world are dropping as interest rates remain low or look likely to retreat. In addition, insurtechs are trying to use technologies such as artificial intelligence and blockchain to distribute insurance products in a simpler, cheaper and more accessible fashion.

By investing into insurtech companies, insurers believe they can help remedy these problems. The firms are, at least initially, small and relatively cheap to buy into, but successful ones may see their values surge multiple times. 

Jake Robson

“On the one hand insurers that are active VC investors have the same approach as traditional VC houses and are looking for strong financial returns from their investments,” said Jake Robson, a Singapore-based partner at international law firm Morrison & Foerster. “Out of 100 investments they make, maybe 10 will give a reasonable financial return and only one will give a stellar return.”

The investments also help traditional insurers see how insurtech companies operate – and gives them an option to co-opt it. That’s a key incentive.  

“If the insurer is looking at early-stage investments purely as a means of generating a return and therefore competing with traditional VC houses, this approach would not make sense." Robson told AsianInvestor.

"Insurers will also usually look to nurturing the early-stage company with a view to a potential strategic buyout at a later stage, when the company’s product has been fully market tested."

Of course, obtaining such valuable tech firms is far easier said than done. But the prospect is enticing insurers. 

INCREASING INVESTMENTS

Investing in insurtech marks a relatively new approach for life insurers, in Asia and around the world. Many of the companies are big and bureaucratic, and they struggle to move quickly to create and embed new technology. Traditionally they meet their technology needs by partnering or hiring established tech companies for specific projects in a joint venture, or perhaps developing technology in-house. Executing them can take a long time. 

The advent of small, nimble insurtech companies caught the insurers flatfooted. And, conscious they may become vulnerable to rivals, many traditional insurers have over the past year or two began investing into some of these fledgling firms. 

Alan Dobbins, Conning

To do so, the insurers have had to be adaptable. Financial regulators take a dim view of firms ploughing policyholders' money into highly risky investments, so insurers have had to set up internal venture capital arms to invest on their behalf.

“Insurance companies have become increasingly involved and setting up their own venture capital units within the firm. Some already have a dozen or so companies in their portfolio,” Alan Dobbins, director for insurance research at US investment manager Conning, told AsianInvestor. “It is a good way for the insurance companies to acquire some skills and capabilities that would be expensive to develop in-house."

Insurance companies will typically opt to invest $10 million or less to gain a 10% stake in an insurtech start-up in the early stages of financing, usually alongside likeminded VC specialists. 

Willis Towers Watson, an investment consultancy, insurance brokerage and risk adviser, has been publishing insurtech briefings since 2012. Its latest quarterly briefing showed that insurers made 36 investments into private tech in the second quarter of 2019, a record high.

This article is adapted from the cover story of AsianInvestor's Autumn 2019 edition.