Time to grow up

In many ways, insurtechs are late to the innovation party that fintechs have been enjoying for several years now.

Struggling to shake off its ‘necessary evil’ self-image, the insurance segment of the finance industry has, until recently, been characterised by minimal product innovation, paper-heavy processes and a less-than-stimulating customer experience.

Then, along came the insurtechs, putting the user front and centre and building the industry a new reputation as a form of guardian angel – helping to prevent disaster happening, but there to support when it does. With their focus on convenience, advice and reach, among the many gifts they brought to the industry were embedded insurance that’s built in at point of purchase; solutions that intuitively offered insurance, even before consumers were conscious they might need it; and a prevention-is-better-than-cure approach, particularly to life and property cover, using data insights to encourage customers to live healthier lives, and promoting connected devices that monitor and protect their assets.

AI and machine learning to make the most of wider data sources, robotic process automation to streamline claims management and payments, and superfast onboarding, were all core technologies used to deliver them.

As a result, many insurtechs have seen spectacular and rapid growth, with more than 20 unicorns foaled globally over the past six years, including the UK’s ManyPets, Germany’s wefox, Clearcover in the States, and PolicyBazaar in India. And, as the market has matured, merger and Aptitude Software’s

Christophe Kasolowsky

tells us why insurtechs must focus as much effort on financial management as they do on product innovation – or risk stunting their ambitions

acquisition (M&A) activity has soared, driven not only by legacy institutions buying the competition, but also larger insurtech players themselves now flush for cash and hungry to build full-stack businesses. Lemonade, the AI-driven home and pet insurer in the US acquiring equally innovative Metromile in the auto insurance market late last year, was a case in point. Meanwhile, venture capital (VC) has been burning a hole in investors’ pockets, with insurtech rounds reaching record highs throughout 2021.

But insurtechs’ game-changing contributions will be short-lived and their ambitions – be it to attract VCs, launch initial public offerings (IPOs) or achieve a successful M&A and a golden ticket for their founders – will be thwarted if they don’t match their product and service innovation with sound regulatory and financial management, observes Christophe Kasolowsky from financial management solutions provider Aptitude Software.

“The problem insurtechs have is that, the majority of the time, they will have started with a back office or finance function consisting of one person and a spreadsheet,” he says. “They might have been a little bit more adventurous and gone for an off-the-shelf Cloud solution, like Xero, but as they go beyond a certain scale, their boards, and particularly their non-executive directors, who are personally accountable for ensuring the organisation reports the numbers accurately and for making sure they comply with regulations, will want more detailed answers.

“Fast-growing organisations often reach that pivot point sooner than they think, and directors start getting nervous and want to dot the Is and cross all the Ts when it comes to fulfilling their fiduciary duties relating to finance and regulatory reporting. Some insurtechs aren’t ready for that and it becomes a scramble to then go and solve it.”

This failure to get their housekeeping right can, ironically, significantly dent their innovation potential.

“It’s almost like a brick wall, where their agility and innovative mindset are stopped in their tracks and they have to do things in a fairly boring, mundane, sequential way,” says Kasolowsky. “And sometimes that can be a really difficult pill to swallow, because it will constrain how organisations do business going forward, and they will probably take a bit less risk.

“They might have to stop and think ‘let’s make sure we really understand what these numbers are telling us and make sure the actuaries get on top of that and do the stress testing before we go and acquire this tranche of customers’, whereas when they started out, they just had to get on and do.”

There is much talk of proportionality in regulatory reporting and

various sandboxes have been initiated by financial authorities around the world to determine if and how reporting frameworks like Solvency II and the new IFRS 17 are an impediment to insurtech growth. But Kasolowsky believes requirements will only increase as this junior sector comes of age and attracts more attention. Having a close handle on their financial data and the means of accurately reporting it to key stakeholders – from their boards to regulators and potential investors – is therefore essential to any ambitious insurtech that’s serious about its future. Aptitude offers proprietary finance management software solutions that help insurers ensure continuous compliance and transform their finance function. Its tools are designed for CFOs to effectively handle business monitoring and forecasting, accounting and revenue management, and financial and regulatory compliance. Its IFRS 17 Comply solution, for example, is helping insurtech wefox, one of the largest in Europe, to rapidly comply with IFRS 17 and support an aggressive growth strategy as it looks to launch new products and expand into new geographic markets. In March, Aptitude launched Fynapse, an automated finance and accounting platform designed to give extreme performance, scalability, and data transparency. It drives continuous compliance while giving CFOs instant access to high-quality data, in real time, and at a lower total cost of ownership.

So, what shapes the specific financial management solutions insurtechs need? With radically different business models to their legacy counterparts, and innovation cultures, they tend to be more focussed on niche markets and rely more on outsourcing for key functions like underwriting, policy administration and, in some cases, actuarial activities. They are often founded on the principles of high-automation/low-cost and high agility, using technologies including artificial intelligence, bionic underwriting, real-time satellite data and machine learning (ML) and artificial intelligence (AI) for public records sourcing, to streamline and optimise their services.

The problem insurtechs have is that, the majority of the time, they will have started with a back office or finance function consisting of one person and a spreadsheet

Crucially – and what often puts the pressure on their finance function – is insurtechs’ tendency and desire to scale fast. Attracting ongoing funding to support their ambitions means meeting due diligence and financial and regulatory reporting requirements. Their CFOs also need to make sure they are in the right shape for initial public offerings, mergers and acquisitions and formulating exit strategies, all of which might come sooner than anticipated. For these reasons, accurate, detailed and timely financial data is critical for forecasting, risk modelling, driving business development decisions and monitoring revenue flows, says Kasolowsky.

“In short, insurtechs face all the traditional challenges of insurers, but also some quite unique ones.

“Insurance is an enormously competitive market and the first problem insurtechs have is that they’re up against really big, well-established organisations, which have the balance sheet, the customer reach and the ability to operate in a way that a small startup insurtech would struggle with, in terms of the amount of risk they can take and the kind of markets they can go into.

“Of course, the reason insurtechs exist is that they also do a lot of things a lot better than traditional insurers, which are reliant on some pretty old-fashioned technologies, especially around customer acquisition and claims,” Kasolowsky adds.

However, those established players are typically further along the maturation process, and insurtechs have no choice but to also come of age if they want to fulfil their true potential.

“Insurtechs are continuously having to fight for their existence, not least because big banking and insurance players have a very simple strategy when somebody gets a little bit too close to them, which is to buy them and take them out,” says Kasolowsky.

While such an outcome might well be the startups’ long-term strategy, they need to be in full control of the financial and business roadmap in order to execute on it at the time of their own choosing.

The question of scale

One clear advantage insurtechs have over the leviathans is that they’re not having to unpick the IT spaghetti that tends to build up over decades of growth, and they are certainly not weighed down by manual processing. But, while incumbents’ back-office systems are notoriously clunky, at least they have them and the experienced staff to run them. And, in the area of regulation particularly, insurtechs often find they are running to catch up.

“New starters don’t get the economies of scale the big players do for things like regulation,” says Kasolowsky. “Big insurers have a relatively easy, cheaper way of getting to that level, in terms of cost and time requirement, and actually trying to work out what they’ve got to do.

“But there’s no technological shortcut for that. There are differing degrees to which they have to apply IFRS 17, for example, but, in the end, regulation is there for a purpose They’re able to do the obvious things a lot of insurers want to do, but they’re too big and are in a completely different place.

“The most exciting part, but also the thing that is going to cause insurtechs even more problems because they might get closer to the big insurers, is the fact they’re growing so fast. Couple that with the fact that innovative organisations have startup-type attitudes, but suddenly they’re getting so big and people start asking questions about whether they can deal with that scale, given everything that comes with it.”

If they want to inspire confidence among investors, he argues, their accounting and actuarial functions must be watertight, with processes enabling centralised control, scalability and speed to market, supporting their moves into new regions and customer segments. That will, by default, enhance their preparedness for the likely increase in regulatory oversight, whatever the region, as well as the impacts of market-wide

The right technology choices will also afford them the planning time and the data to formulate a long-term business strategy.

“Every insurtech should be really focussed on getting ahead and figuring out how to put themselves in the right place, rather than, in a state of panic, in the worst-case scenario, starting to professionalise all this and realising they’ve done the wrong sort of business and have to retrench,” adds Kasolowsky.

“I’ve seen this time and time and again in the fintech industry, where organisations have lost their licences and end up having to go into, let’s say, subprime in Latin America as their only option, rather than staying in the highly regulated European continent. And, of course, their investors are very unhappy about that.

“That’s where having a system to do what some insurtechs might consider to be the boring stuff, is critical to enabling the exciting things, the innovations and new customer propositions.

and, whether an insurtech or anything else, that’s what they’ve got to deal with.”

Nevertheless, he believes insurtechs can surmount this with the right approach.

“While a lot of the things I've highlighted are drags on progress, insurtechs’ abilities to drive innovation, and the fact they don't have to fight with legacy all the time, are really important in an insurance industry needing to catch up more than other areas of financial services. What’s unique about insurtechs is that they have very different cultures and business models, which help them drive innovation to always stay ahead of the game.

“Insurers’ operations are often still relatively vertically integrated. Insurtechs don't potentially need all that baggage, like IT functions and claims processing outfits, which can be automated and outsourced. drivers like environmental, social and governance considerations. Strategic business insights and cost optimisation, says Kasolowsky, are vital to these, with granular financial data for forecasting, and analytics and AI to aid decision-making. Ready-made financial management solutions, he believes, are their answer.

“The organisations that can stay nimble by choosing the right technology solutions, will be the winners, because it is still all about technology. It’s not about coming up with complex processes and hiring 100 people into finance,” he says. “As founders that have never had to think about auditors and regulators before, it’s about how they lean into what’s out there, technology-wise, which allows them to automate, and about making finance a better function to meet the objectives of stakeholders.”

Insurtechs are continuously having to fight for their existence, not least because big banking and insurance players have a very simple strategy when somebody gets a little bit too close to them, which is to buy them and take them out

“First, they need a finance transformation roadmap, and the business case that sits behind that is really critical, because that allows them to make sure they understand, well in advance, what they’re solving for. And they should subject themselves, in that business case, to some very clear, measurable key performance indicators (KPIs) that allow them to chart their success, because it’s no good to say they need a finance function and finance systems, and whack them in, if they’re not in a position to get the best out of them.

“The second priority is to have a target operating model (TOM), which isn’t just about the tech, but starts with defining the organisation and the finance function, then the policy framework they’ll adhere to (accounting standards, regulation and what that means for statutory reporting standards and regulatory returns, based on operating jurisdiction), the control framework (financial controls and how they’re going to make sure their accounts are timely and accurate) and their performance management framework. These will help answer questions around what good looks like, how much of their revenues any investment can cost, and how long it should take to produce results, etc. Get these things right and their directors will be able to sign on the dotted line and say ‘I know these numbers are correct because we’ve got a robust control framework in place’.

“Then, they can look at the enabling factors, which are all about the technology they’re going to choose, what kind of data model they’ll use and how that will integrate with the data they already have.

“Lastly, and just as importantly, is what kind of people they’ll have operating it. They can't just go and buy tech and hope it works, because it won’t.”

Kasolowsky says this robust technology package selection process enables them to choose technology that will work in the context of their whole operating model, not just helping them deal with issues today, but making them scalable for the future.

“The final pillar for getting this right is an implementation plan for their finance transformation,” he adds, “one that takes them through to the end and ensures they can implement their TOM, with interim transition states that allow them to look forward and say ‘in six months’ time, here’s what we will have put in place and this is the part of the business case we will have delivered upon’. Each of these transition states needs to add value. None can be value-destroying, or result in the organisation going backwards. Each must also be sustainable so that, if the business were to stop its transformation, not only would they have delivered value, but they could also live with it. No transition phase should ever do harm, either, or make things worse.”

His advice to insurtechs on choosing the right financial technology support is that it needs to be agile, not a one-size-fits-all.

“It needs to be easily integrated with their back- and front end, and be customisable in a straightforward way. In financial services, and particularly in insurtech, the needs of the finance function are quite diverse, not least because accounting standards come down to the interpretation a particular business follows. So, at Aptitude, we develop our best-of-breed solutions on the principles of user-centricity and harnessing the latest technological solutions. That means the ability to leverage the computing power and speed of Cloud technologies that is just not available otherwise.

“We’re seeing an acceleration in the ability to deliver information much faster, enabling organisations to get access to the data they need, in a much more self-service way, to really unlock what finance is going to go and do.”

MANAGING THE HOCKEY STICK CURVE

Rapid scaling puts huge pressure on the finance function at the heart of an ambitiously successful insurtech. Both Convex and wefox employed Aptitude solutions to help them achieve IFRS 17 compliance and navigate future growth.

Based in London and Bermuda, speciality insurer and reinsurer Convex, founded in 2015, specialises in complex risk and cites its ‘legacy-free balance sheet’ as a key selling point.

With an impressive $1.7billion of initial committed capital, it’s subsequently almost doubled its backing to $3.4billion. The company’s offering includes marine, casualty, crisis management, energy, political risk, security risk, equine and livestock and aerospace cover.

Group chairman and CEO Stephen Catlin – who previously led the Catlin Underwriting Agencies Syndicate at Lloyd’s for almost 30 years, before selling to XL in 2015 for £2.8billion – said he expects the group to reach not less than $3billion of gross written premium during 2022. Illustrating the ability of insurtechs to superscale, superfast, he observed it had taken 30 years to reach twice that figure with his previous business.

In July 2021, Berlin-based wefox raised $650million in the largest ever funding round for an insurtech anywhere in the world, putting its value at an estimated $3billion.

Co-founded by Julian Teicke, Fabian Wesemann and Dario Fazlic in 2014 as FinanceFox, a mobile app through which users could manage their existing insurance policies, the startup attracted an undisclosed amount of seed capital from angel investors in 2015. But it swiftly upped the ante, securing $28million through angel and VC backing a year later, paving the way for it to rebrand as wefox, a digital insurer choosing to work through a broker network, and acquiring One Insurance along the way.

In 2019, it was back for more – securing $128million, this time from Mubadala Ventures, Salesforce Ventures (which had co-led investment in 2016), H14, Goldman Sachs, and CreditEase Fintech Investment Fund.

Last year’s record-breaking Series C round will enable wefox to expand across Europe and into the US and Asia, where it will encounter different regulatory regimes, and move beyond property and casualty and motor insurance, into life and health.