Prediction on InsurTech:

For all of those incumbent insurers and reinsurers who are still sitting on there hands  – not concerned about InsurTech, due to their inability to scale, current combined ratios, etc….the biggest Prediction on InsurTech =  prepare or beware!!   Align your efforts as this technology revolution is the future of the insurance industry.

These disruptors are here to stay and there is some meaningful, low hanging fruit in this industry.  There are some classes of business that have retail brokerage, MGA fees, fronting fees, and then other intermediary fees built into prior to reaching the risk capital.   While still providing meaningful returns to the capital -but with fees and expenses of >30% – it appears to have a big bulls-eye on its back.

See also...Books to help understand the InsurTech Revolution: MUST READ

Talking from a defensive position isn’t going to change the inevitable.

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InsurTech has the opportunity to retool and reformulate it’s algorithms and processes during this period of low scale.  These low risk periods will help formulate the models and train the model with holdout data and new data.  During this time, they will continue to source business and new POCs in new product.  But the distribution technology, once proven with better risk adjusted returns – can easily scale – using a variety of methods.  Even if customers aren’t jumping into this firms at a breakneck speed, don’t let that lull you into a false sense of confidence.

Things can change very quickly.

One example might be M&A in the MGA space.  InsurTech firms who survive might end up buying MGA’s and participating in book rolls.  Currently there are high multiples on this business (10-12x EBITDA) but these multiples might change.  Or on a relative basis they might not seem high.  But if the book is going to roll at 10x with no employees – the margins on this business should double for the distribution source and they can go out and acquire more and more portfolios of business.  Then they can partner with the cheapest forms of capital (See also…Hiding in Plain Sight – The Unicorn You May Have Missed)

Companies like Softbank or other Private Equity or Venture Capital firms have a ton of capital to support these efforts.  The advertising space and online ad space is getting pretty competitive, the pricing and returns may not make sense long term with all the personal lines competition.  Purchases of large renewal books of business based upon EBITDA – might be better uses of the capital.

See also…Game Theory and Insurtech

In addition,  MGA founders and owners will start retiring and looking for exit strategies as the Great Generation/Boomers start looking to retire.  It has been reported that >400k people will be retiring over the next 10 years.   This might present great opportunity for InsurTech.

The time has come for the incumbent industry to embrace this technology revolution.  The opportunity to wait and see may have passed and if you continue to wait, start packing bags.

Comment below or give us your thoughts about InsurTech and the industry.  

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Arnold Smith

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