pawn placed circular

Analysis

2018 InsurTech investment trends and insights

Part of the FinTech investment series: InsurTech by the numbers

Even though startup activity in insurance has slowed, InsurTech will continue to play a major role in shaping the future of the industry. How can insurers adapt to these changing times and better leverage InsurTech to speed up innovation and digital transformation?


InsurTech entering its second wave

Investors channel capital into proven entities

The insurance industry has reached an inflection point: Rather than spreading their money across a large number of new InsurTechs just getting off the ground, many investors have started channeling more capital into proven entities, often in late-stage and follow-on funding rounds.

InsurTech startup activity came to a veritable standstill in the first half of 2018. This downward trend began last year, with 2017 seeing the launch of only 88 InsurTechs—half the number recorded in 2015 and 2016.

Startup momentum took longer to peter out for InsurTech, perhaps because insurance activity peaked later than in other financial services industries. The number of new InsurTechs kept rising in both 2015 and 2016, at a time when startup activity in the other financial sectors had already started dropping from its high point.

However, the dramatic decline in startup activity doesn't mean the InsurTech gold rush of the past decade is coming to an end. On the contrary, money continues to pour in, with InsurTech investment of $869 million in the first half of 2018 on track to at least equal the $1.82 billion in funds raised last year, which was the industry's second-highest level of financing.

Fueling digital evolution

InsurTechs are looking to carve their own niche in the emerging digital insurance marketplace by catering to evolving customer needs and rising expectations. Many incumbents are often helping to finance experiments by InsurTechs—which would at first appear to be competitors—in part to likely learn about the digital marketplace and perhaps complement their own more traditional business models.

Yet a majority of InsurTechs aren't seeking to compete with, let alone displace, incumbents. Instead, most are being launched to help solve legacy insurer problems across the organization, from general operations inefficiencies to enhancing underwriting, distribution, and claims functions. Insurers can leverage InsurTechs to speed up innovation and the digital evolution, integrating the newcomers' next-generation technical capabilities and entrepreneurial culture to become the digital insurers of the future.

InsurTechs could ultimately accelerate the transition of incumbents to become more customer-centric, data-driven, and multi-platform-based. InsurTech innovation can help stitch together capabilities across the insurance value chain so carriers are better able to meet the needs of consumers, agents, and brokers.

By collaborating with InsurTechs, we think traditional insurers may be able to more quickly and efficiently innovate in their approaches and operations to take advantage of four strategic options made possible through digital transformation:

  • Delivering ahead of customer expectations
  • Accessing new markets and segments
  • Shifting from purely underwriting risk to providing more comprehensive well-being (in terms of physical and financial security)
  • Reimagining the operating model to generate higher profitability

InsurTech startups: The importance of strong financial reporting

InsurTech startups: The importance of strong financial reporting

Only a few years ago, InsurTech occupied a small corner of the FinTech sector. But while most InsurTech companies are currently small compared with established giants in the insurance sector, they’re growing quickly, and interest in InsurTech investment today is strong. Such rapid growth often brings financial and operating challenges, and it’s important for companies to address them in order to sustain their success over the long term. This article explores a number of key accounting and financial reporting considerations for startups as they mature:

  • Accounting. Getting the accounting right is important for giving a fair picture of the company’s financial condition, and it will likely lay the groundwork for raising debt or equity capital in the future, a process that requires conforming financial statements. InsurTech startups are most likely to encounter issues in three areas: Revenue recognition, company valuation, and accounting for internal-use capitalized software.
  • Tax operations. In addition to tax compliance considerations, companies also contend with several operational tax considerations. Key areas of focus include: Tax return filings; strategic tax planning; impact of tax reform passed in 2017; federal and state credits and incentives; research and development credits; international tax structuring; transaction planning; indirect taxes, such as sales and use tax and value-added tax (VAT); and compensation, benefits, and equity planning.
  • Information security. InsurTechs may not be aware of the extensive work necessary to meet these standards, could be behind on the compliance maturity curve, and may need to do more work to catch up. InsurTech companies will need to continually sharpen their focus on data security and compliance, particularly as they expand their business across borders.

The InsurTech sector has rising levels of capital investment, an open pathway to initial public offerings (IPOs), and a robust climate for mergers & acquisitions (M&A) dealmaking—all of which suggest a strong future for the sector. For InsurTechs considering a possible IPO, it’s important to prepare carefully for the transition to public ownership. Even if an IPO isn’t currently on the horizon, choosing to act as a public company may yield tangible financial value. Preparing for public ownership may produce the benefits of an effective and efficient finance function, improved decision-making support, value-driving internal controls, and risk mitigation. It can also be beneficial in the quality of earnings analysis performed as part of M&A financial due diligence procedures performed by a potential buyer.

Download the full article to learn more about accounting, tax, and information security considerations for InsurTechs or get in touch with a member of our InsurTech or Insurance Audit and Assurance leadership team today.

Want to take a closer look at fintech activity? Explore our interactive tool.

Fullwidth SCC. Do not delete! This box/component contains JavaScript that is needed on this page. This message will not be visible when page is activated.