Unmatched

Expertise

With umAI the company achieved:

Standardisation in claims management

Improved analysis of suspicious claims

54.4% reduction in claims processing time

1.5% reduction in unnecessary payouts

$2.1M in annual savings

UmAI’s team has extensive experience leading advanced AI projects. Their expertise lies in developing self-learning AI solutions to support decision-making and optimisation.

Using this knowledge, the team built umAI for claims management and continues to innovate and develop great solutions for its customers. umAI helps clients uncover diamonds in their data and transform their business challenges into actionable insights.

Interested to learn more? Contact us: Jacob Gurman-Schatz

Business and Sales Director

jacob.gs@umai.ai

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Around 400 to 500 global InsurTech MGAs are facing an inflection point where they may have to pivot their business models this year, sources have told this publication, as market dynamics combine to turn the screw on loss-making entities...

As investor appetite for InsurTechs continues to decline, and risk capacity partners reevaluate their tolerance to support InsurTech MGAs that remain unprofitable, sources agreed that many of these companies will have to consider changing fundamental aspects of their business model.

Some of the options InsurTech MGAs may be exploring, according to sources, include developing their technology as an off-theshelf solution for third parties, moving to a broking model or transforming into a fullstack insurer, all of which present their own challenges.

While investors and InsurTech experts acknowledged to this publication that there are many well-capitalised InsurTech MGAs demonstrating sustainable growth, they highlighted the existential questions for hundreds of other loss-making MGA operations.

Dr Andrew Johnston, global head of InsurTech at Gallagher Re, said: “There are lots of challenging dynamics in the (re) insurance industry at the same time that many of these InsurTech MGAs are looking to grow – and many of them have to grow to survive, let alone compete.”

He explained that balance sheet capacity for InsurTech MGAs is in theory still available from (re)insurers, but it now comes with a different level of scrutiny as (re)insurers also focus on their more core business propositions.

“For some (re)insurers, I think the idea of supporting certain InsurTechs is now seen as a nice to have in terms of the support that they can offer, and don’t necessarily represent (re) insurers’ primary, more traditional business objectives,” he added.

These dynamics across reinsurance are materialising at the same time as InsurTech funding volumes continue to fall.

Because of a more intensive spotlight on profitability, revenue, long-term equity valuations and strategic positioning of InsurTechs, sources noted that many MGAs in this space are now looking at fewer options for both investment and capacity partnerships than 12 months ago.

This has been compounded by effects of the recent intensive 1 January renewals, as primary risk carriers operating in a capital-constrained market reconsider their support for some InsurTech MGAs.

As one source said: “The era of risk partners being sympathetic to InsurTech MGAs indefinitely is coming to an end.”

A turning point

Gallagher Re’s most recent report on global InsurTech funding, for Q3 2022, explored how MGAs in this sphere have arrived at this position.

It acknowledged that the capital-light MGA model has been a growth sanctuary for many InsurTechs in recent years, enabling them to refine their underwriting, gain customers and develop a brand.

However, the report also stated that the reality for most InsurTech MGAs is that “they are not writing (net) profitable business, and in some cases charging up to 15% net fees for their services”.

The study also highlighted instances, up to 2019 at least, of quota shares which had been ceded into a single reinsurer that assumed 100% of the originated risk from InsurTech MGA.

Capacity partners have more generally been shouldering much of the load to support InsurTech MGAs, and in this context, Gallagher Re’s report stated that many InsurTechs “are going to have to start taking on risk if they have any hope of surviving in the long term”.

Johnston told this publication that as InsurTech MGAs approach capacity partners, the nature of responses has suddenly changed. He believes MGAs will simply be told “not at the moment”, or they will come under pressure from (re) insurers to take on risk to secure their support.

To date, many InsurTechs have made this leap in becoming balance sheet risk-takers, including Hippo, Buckle, Lemonade, Root, Openly, Beam, Next and Oscar.

MS&AD Ventures managing partner Jon Soberg

Option optimisation

While some sources said they expect an acceleration to some extent of MGA transitions into full-stack insurers this year, they also highlighted the requirements for this – notably recruiting talented underwriters and actuaries, as well as the transparency on business performance that comes with being a regulated insurance entity.

They also pointed to the different valuation multiples that, for now, favour the MGA model compared to regulated insurance entities.

Jon Soberg, managing partner of MS&AD Ventures, the venture capital firm set up by MS&AD Insurance Group, said: “I’m not sure if so many InsurTechs will want to go full stack, because their capital requirements will increase while their multiples come down, so that doesn’t fit with where the market is right now.”

Another option for InsurTech MGAs is to commercialise the technology they have built, but Ruth Foxe Blader, partner at Anthemis, one of the most active InsurTech investors on both sides of the Atlantic, said: “Although there are instances where InsurTechs have been able to do that successfully, it’s a tougher sell to the investors.

“That’s because if you’re a tech investor, you recognise the fact that building enterprise technology is different from building technology for the InsurTech’s own internal use. The work it takes to build an off-the-shelf technology solution for third parties is very different from the architecture of an InsurTech using internal technology.”

In terms of other options being pursued, Johnston said he had observed a handful of InsurTech MGAs moving away from a primary risk origination model and transitioning to a service provision model.

For other InsurTech MGAs more inclined towards simply cutting costs, improving efficiencies and margin and generally riding out the turbulence, investors said these companies would have to prove that they are adding value in the process of matching capital with risk selection, while demonstrating explicitly how they are progressing to long-term profitability.

Anthemis partner Ruth Foxe

Any InsurTechs on death row?

According to sources, InsurTech MGAs that have reached an inflection point do not necessarily share a set of characteristics or common business lines in which they operate.

It’s also unclear how many are at material risk of insolvency, but one investor pointed out the precarious circumstances in which a few could find themselves.

Soberg at MS&AD Ventures said: “If you were an MGA that was already struggling through last year, you’re probably in big trouble now.”

Johnston added that some InsurTech MGAs are running out of money and it’s “kind of survival mode for a few of them”.

Blader pointed out the challenge for companies seeking a series B and C funding round, where there have been the most dramatic decreases in venture capital activity.

“What this implies is that either companies are quietly already going down paths to a private equity exit, or even administration, or their existing investors are reaching into their pockets to find more funding for them, and giving them more runway. I think there was a lot of the latter,” she added.

In a trading environment where investors believe many InsurTechs will soon run out of runway on current funding, it remains highly uncertain how many will go to the wall this year, but sources agreed the ultimate number could be significant.

One source suggested that, in the US, state regulators may support companies which try to find a solution for the more distressed InsurTechs.

Some think it could be another 12-18 months before the market sees how many InsurTechs have reached the end of the line.

As Blader remarked: “Through the end of 2023 and probably into early 2024 is when we’re going to start to see the smoke clearing on the InsurTech landscape, and we’ll be able to see what the battlefield looks like.

“Right now, investors are very much focused on their own portfolio companies, and less so on doing new deals.”

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