Insurtech set sights on disrupting £100bn small business insurance market

Moves to disrupt insurance with the help of new technology are picking up a head of steam with the huge small business insurance market seen as a major, near term target by incumbents and insurtech start-ups

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Insurers may have lagged banks in exploring and exploiting the potential of new technology but the sector is now very much on-board the fintech train with the small business insurance market –  worth $100bn in the US alone - seen as one of the most promising for major disruption near term.

According to a report by US research firm CB Insights and insurance broker Willis Towers Watson insurers are already busy looking to leverage new technology for automating underwriting processes to accommodate a broad range of business classes. A major objective for them is to use new technology to combat the inefficiency of processing small ticket premiums and claims.

While digital distribution platforms have achieved limited market penetration to date, industry research by Morgan Stanley and Boston Consulting Group suggests that up to 25% of total US small business insurance premium could be digitally underwritten by 2020. That big shift is being supported by demographic trends and changes in the behaviour of small business owners which favour increased adoption of digital insurance solutions.

The report notes that small businesses in the US are expected to grow an average of 6% annually through 2020, at which point over 60% of them are expected to be owned by Millennials/GenXers who are much more likely to favour digital management of insurance coverages. Other recent surveys, furthermore, indicate that approximately 40% of small firm owners are willing to buy insurance online today if there were a solution capable of meeting the needs of their organization.

Not surprising then that the potential small firms hold is being eagerly eyed by insurance firms and indeed has been a major driving force behind the significant tech investments made by many of the industry’s biggest players. Recent pertinent deal flow includes the acquisition in March of UK online SME insurance broker Simply Business by US insurance giant Travelers for £400m.  A closer look at Simply’s performance and customer metrics reveals why Travelers, the largest commercial lines insurance writer in the US and a top five player in the US small business insurance market, was so keen on snapping up the UK firm to support its long term strategy for SMEs.

At £400m, the acquisition of Simply Business valued the firm at 50 times its 2016 EBITDA of £8m and more than three times the £120m price paid for the business by Aquiline Capital Partners only in April last year. The platform has achieved £113m of managed premium – an impressive 18% CAGR since 2014. Its customer numbers have nearly doubled to 425,000 since July 2013 and risen 21% over the last 12 months alone. Travelers is clearly hoping the success of Simply Business in the UK can be replicated and scaled in the US and other markets.

Among reinsurance giants, Munich Re has been especially active in embracing new technology through initiatives that include Digital Partners, its specialist division focused on investing in insurtech startups.  Last November it joined forces with app-based insurance provider Wrisk to become its exclusive carrier for business underwritten in the UK, Europe and US.

Munich Re is also funding California-based Trov, an on-demand insurer. Trov’s platform enables users to buy insurance for specific products, for specific amounts of time through their smartphones. Users can turn insurance on and off with a swipe and also file claims through the app. Another reach out to insurtech by the German reinsurer involves it providing funding to Bought by Many, which uses social media and search data to offer “insight-driven insurance”.

Meanwhile, insurtechs like Coverwallet, Decisley, Embroker, Nextinsurance explicitly regard the small business sector as their target market. 

With insurance incumbents actively looking to leverage new technology and the insurtech sector gathering momentum fast, it is perhaps surprising the CB Insights/Willis Towers report notes a reduction in the total global VC funding for insurtech in the first quarter of 2017, down 25% to $194m versus the fourth quarter 20-16, and a hefty 64% off the $783m recorded for the first quarter 2016. However, the authors believe the decline in first quarter funding is most likely the result of start-ups moving from significant fundraising in 2016 to product launch stage.