Around since 2010, and a natural extension of FinTech, InsurTech’s wave of technological advancements seemed poised to overwhelm the insurance market in the same fashion that various applications transformed banking. Relative to the Property & Casualty (P&C) value chain, InsurTech seemed well positioned to disrupt everything from sales and distribution to claims management and loss prevention.
The reality is that the transformation of the insurance sector through InsurTech has not occurred at the same pace as FinTech’s disruption of the banking sector. This difference is likely due to the more fragmented nature of the insurance market, primarily as it relates to insurance distribution. However, the transformation of the insurance industry has been accelerating within the last few years demonstrated by record funding activity and attractive valuations. The latter is being driven in part by an increasing maturity of the sector as well as heightened investor interest fueled by several recent successful public listings. Since the beginning of 2020, 12 companies entered the public markets via an IPO or through a special purpose acquisition company.
That being said, the InsurTech sector reached a significant milestone in its evolution when Lemonade (NYSE: LMND) agreed to acquire Metromile (NASDAQ: MILE, MILEW), a San Francisco-based technology startup that offers pay-per-mile car insurance, in an all-stock transaction which is expected to close during Q2 2022. This transaction is significant in the market for multiple reasons:
- Availability of Capital: InsurTech players, in a race to the top, are now willing to deploy capital (whether equity or debt) to fund acquisitions to achieve critical mass. This trend is anticipated to continue and further accelerate the evolution of this segment.
- Barriers to Entry: Barriers to enter new markets will continue to increase, ultimately making the purchase of an established platform the more attractive growth strategy. This is a result of the increasing maturity of the sector which has led to the development of more advanced and specialized InsurTech platforms.
Because of the acquisition of Metromile, Lemonade can significantly expand its state licensing for car insurance (from 1 to 49) and product portfolio, while gaining access to a trove of data. Given that the latter is a crucial component of the data-driven underwriting process, this acquisition should allow Lemonade to make more informed underwriting decisions. The acquisition further enables Lemonade to move away from traditional, proxy-based pricing models and adapt precision-based pricing.
As personal auto represents over 38% of the $730 billion U.S. P&C industry, Lemonade has its eyes now set on the largest, and perhaps most disruptable segment. By adding Metromile’s expertise in big data and AI for car insurance, Lemonade can potentially vastly improve its ability to predict losses driven per mile, enabling the company to compete for a leading position in underwriting and pricing.
The consolidation of the traditional insurance brokerage market has been ongoing for the past two decades, which has led to seismic shifts in the competitive landscape. We expect the consolidation within the InsurTech space to yield the same results, albeit at a more rapid pace given the greater market reach and access to capital.
If you have questions about Today’s ViewPoint, or would like to learn more about the implications of InsurTech in the insurance industry, email or call Tobias Milchereit, Vice President, at 212.972.4883, or email or call Brian Refici, Vice President, at 440.769.0321.
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