Because all of the cool industries had already been taken. Just kidding. Insurance is fascinating–behaviorally, financially, policy-wise. As human beings, it’s natural to believe bad things will never happen to us. That people have, through the mechanism of insurance, pooled money together to spread the cost of loss is really amazing. When the complexity of what happens to the money between the time it is collected and paid out, and the industry’s complex regulatory framework, are considered, things get very interesting.
"Our financial success depends on our ability to foresee how the companies we underwrite will impact the larger insurance ecosystem"
ManchesterStory also invests in FinTech, and what we call Connected Health; segments which have significant adjacencies with insurance. What really makes InsureTech attractive, however, is that it sits inside the much more massive insurance industry—$4.5 trillion in global annual premiums–that is controlled overwhelmingly by long-term incumbents. Venture capitalists (VCs) dream about the kind of opportunity which exists here.
InsureTech investing is booming. Do you worry about a bubble?
There are constantly things to worry about, but for now, a bubble is not one of them. In our view, the classic definition of a market bubble—a broad surge in market asset prices unwarranted by the fundamentals—is not a very useful concept. We don’t invest in markets. We invest in discrete teams of entrepreneurs who we determine can fix a significant problem, or pain point, for which customers will pay. We employ a highly-disciplined investment process that keeps us much more focused on opportunity size, team capabilities, and product strength rather than on the overhyped companies in the space. Like the venture capital (VC) industry as a whole, ManchesterStory only invests in a fraction of the potentials. If we stick to our knitting when money is piling in and asset prices become inflated, our process should lead us to be a bit more selective.
It seems most InsureTech start-ups are focused on selling product or services to insurance industry incumbents rather than replacing them. Is the industry really being transformed or just changing at the margin?
This is an important question because the return hurdles of our limited partners—many of which are in the insurance industry—are quite high. Our financial success depends on our ability to foresee how the companies we underwrite will impact the larger insurance ecosystem. You are correct that, with very few exceptions, InsureTech startups thus far have attacked specific industry pain points that can be addressed with digital technology in a very capital-light way. And, most of them rely on traditional insurance companies—with greater scalability, large balance sheets, and significant appetite—to buy their products, either through direct payments or by sharing a portion of the premium income.
After Zenefit’s stumble, it became quite popular for skeptics to say insurers will remain insulated from disruptive innovation due to the significant capital needed and regulatory demands inherent to the business. Additionally, naysayers tend to assume that innovations targeted to benefit industry incumbents are by definition small or marginal. In our view, both of these assertions are just plain wrong. Insurance companies are but part of the insurance value chain. Every InsureTech startup that takes one piece of that chain and executes faster, smarter, or cheaper, is disrupting someone’s current business. Consider, for example, Groundspeed Analytics (in which we are invested). Groundspeed uses machine learning and artificial intelligence (AI) to help commercial property and casualty (P&C) insurance companies and brokerages gain insight from the information locked in loss runs, policy forms, and exposure documents. Their initial focus is arguably quite narrow, but the company addresses $7 billion in annual industry spend.
The bigger miss though, is the critics’ failure to understand how disruptive innovation works. Some terrific research by the Christensen Institute shows that disruptive innovations build over time as technology enables new entrants to provide goods and services that are less expensive and more accessible, and eventually replace or disrupt well-established competitors.
The personal computer (PC) didn’t replace minicomputers overnight. In fact, PCs were clearly inferior from a pure computing standpoint, but still managed to give access to individuals and small businesses that had never used computers before. We see a number of InsureTech startups that have a real shot to trigger growth for the insurance industry. Along the way, disruptions will build, even among traditional insurers.
What are you seeing that is interesting?
The list is long, but one theme we find very interesting involves business models leveraging digital technology, AI, and Big Data to enable consumers to buy insurance in completely different ways. A simple example is bundling insurance into the purchase (or more likely lease) price of a car, but the same principle applies to far more complex insurance needs. Other promising areas include enhancing the user experience, gaining greater insight into specific customer risks or needs, and moving from insuring against loss to preventing losses outright.
Any final thoughts?
While we invest across the U.S., we are proud to live and work in one of the nation’s great insurance centers and home to the Global Insurance Accelerator, Des Moines, Iowa. If your travels bring you to Iowa we would be pleased share our thoughts on InsureTech in person.