Insurtech is one of the most exciting and impactful areas of innovation to be involved in today. Innovation in insurance is booming: the industry is experiencing significant transformation due to changing customer needs and purchase behaviour alongside the increasing digitalisation of financial services. These forces combined are pushing the boundaries in all areas of complex, and traditionally fragmented, insurance value chains; which are ripe for disruption from up and coming insurtech companies. Through the use of new and exciting technologies, insurtechs are improving traditional processes from distribution and pricing to underwriting and policy/claims management.
Kieran Borrett, Director, Plug and Play, said: “Insurance plays a hugely valuable role in society, protecting individuals and businesses from economic shocks. Insurtechs are bringing a new lease of life to this once unloved industry through technologies, product innovation and the attraction of new talent. The insurance industry represents a large market and there are opportunities for insurtechs across the whole insurance value chain from product development through to claims. In a world of ever changing risks, insurtechs are playing an important role in the development of a more resilient society.”
To assist insurtech entrepreneurs in their growth journey, as well as those looking to invest into insurtechs, Tech Nation’s Insurtech Board have worked with Plug and Play and LocalGlobe to develop an overview of proof points and key stages an insurtech needs to reach in order to raise funds in current markets. This analysis focuses on the risk transfer space, with business models that are linked to premium.
In recent years, we’ve seen insurtechs move beyond seed and venture capital rounds to advanced funding rounds in quick succession, with the emergence of the first UK insurtech unicorns in 2021 including Marshmallow, Zego and Bought by Many.
However, as a relatively new subsector of fintech, less data has been collected on the metrics an insurtech startup will need to demonstrate to go through a successful funding round. For starters, the important and relevant metrics in insurtech can be very different to those seen in SaaS, marketplace or fintech. This is particularly the case for insurtechs operating an MGA (Managing General Agent), full-carrier or broker model.
Lorenzo Chiavarini, Insurtech Specialist, Dealroom commented: “Insurtech is a nascent, but fast growing segment in fintech. A new generation of insurance innovators are transforming protection and risk prevention services for consumers, powered by advancements in AI, IoT and big data analytics. For this reason sector-agnostic, and fintech/SaaS investors are ramping up their investment in insurtech. However the differences in metrics and growth models have so far constituted a challenge to approach the sector, higher transparency and data availability can unlock further potential.
For this analysis we asked leading insurtech firms in Europe to indicate the primary metrics used to measure the success of their business. We also asked for fundraising metrics including the amount of capital raised per financing round and at what pre-money valuation.
Founders emphasised that the most important metrics looked at during their raise were:
Gross Written Premium
Customer Lifetime Value to Customer Acquisition ratio
Unpacking insurtech metrics
Gross Written Premium (GWP)
Gross Written Premium refers to the total amount of premium underwritten by an insurer in exchange for insurance coverage. Any insurtech that distributes insurance – independently of it being a full carrier, MGA or broker, looks at GWP as the primary top line metric. The operating model then affects how much of this GWP insurtechs get to keep as profit (discussed in more detail below in the revenue and growth section).
Insurtechs are leveraging new distribution channels, platforms, enhanced user experience, targeted insurance products, data-driven pricing models and reduced operational expenses to profit from a gross written premium based business model. When planning for the next funding round, insurtechs should be looking to demonstrate that there are plans for exceptional/significant growth in GWP in the pipeline.
For Insurance companies, brokers and many insurtechs, Gross Written Premium (GWP) is a key driver of revenue. There are a variety of business models which are directly linked to this metric which we highlight below:
Broker commissions: insurtechs receive a % of premium for selling or distributing standard insurance products. This is usually between 5-15% but can be as high as 25%.
GWP linked SaaS revenue: insurtechs receive a % of premium based on the GWP on a technology platform (this can be between 0.2-10%). The platform could be matching risk with underwriting capacity, policy administration or even claims.
Managing General Agent (MGA): Insurtechs have the authority to underwrite insurance risk on behalf of an insurance company. MGAs often are able to price risk and may have designed suitable insurance products. MGAs receive a % of premium underwritten (often between 5-25%) and a reward fee for good loss ratios (where premium collected exceeds claims) up to 10%.
Full-stack insurers: An insurtech obtains a full insurance licence and underwrites insurance risk onto its own balance sheet. Full-stack insurtechs follow the insurance business model, which at its simplest is essentially: Profit = Premiums + Return on Premiums – Claims – Expenses. Whilst being a full carrier affords insurtechs more profit, it comes with regulatory requirements on capital and cash reserves and as such can have a complicated impact on valuations by tech investors.
Customer Lifetime value / Customer Acquisition Cost (LTV/CAC)
This is a ratio of the lifetime value of a customer divided by the cost of acquisition. The metric is very frequently used by venture investors and helps to determine a company’s profitability and sales/marketing efficiency. A LTV/CAC ratio of 3 or more is desirable and a common benchmark used. Well known insurtechs such as Lemonade suggest a LTV/CAC ratio of between 2 and 3.
With SaaS in particular, there is a widely held view that companies should aim for a 12-month payback period, where the amount spent acquiring a customer is returned through retention and revenue. This can differ based on the industry, as explored further in this article by Balderton Capital.
For insurtechs, CAC will depend on the distribution model: there are standard distribution avenues such as comparison sites, and very specific distribution ‘hacks’ like embedding insurance products, direct to consumer insurance brands or distribution via employer benefits. More generally, insurtechs will often face the challenge of high customer acquisition costs as policy holders rarely switch insurance policies as insurance is famously ‘sold, not bought’, the same assumption makes LTV attractive too. For example, life insurance has an average LTV of 7 years.
Good CAC can be predicted through a clear ability for an insurtech to acquire new customers and also, once these customers have been acquired, a strong renewal ratio. This is the percentage of customers who continue coverage after their policy has expired. If an insurtech can clearly evidence the ability to acquire customers, it can also indicate a good product-market fit and the desire from customers for the product that is being offered.
Effective underwriting is front and centre of all top performing insurance companies. The loss ratio is one metric that is used to assess company performance. This is expressed as a percentage and is calculated by dividing the losses from claims paid by the total premiums earned. A loss ratio below 100% means premiums earned outweigh claims paid. When assessing loss ratios it is important to note that average loss ratios can look quite different depending on the line of business, for instance motor vs liability.
MGAs and full stack insurtechs have to strike a balance between growing gross written premium and ensuring effective underwriting. New forms of data and analytics are key to ensuring effective underwriting results.
One criticism of recent publicly listed insurtechs acting as full stack insurers or MGAs is high loss ratios, often above their incumbent peers. High loss ratios and high customer acquisition costs result in a combined ratio over 100%. The goal for insurtechs is to reduce loss ratios over time through better underwriting and pricing driven by new data. Lemonade, who have recently felt the pressure of high loss ratios, in the past wrote openly about this journey in their blog Nearly There.
The Combined Ratio is another important metric and is a measure of general insurance underwriting profitability. The Combined Ratio is: claims related losses + expenses divided by the premium earned.
The hard numbers
So now we’ve unpacked the acronyms, and helped distinguish the GWP from the CAC and the COR, what does it really take to raise funding as an insurtech with a business model linked to gross written premiums? What numbers could investors expect or entrepreneurs look to benchmark against?
Jemima Pitceathly, Operations Manager, Flock said: “Evidenced by high-levels of VC funding into the sector in 2020/2021, insurtech remains an exciting ecosystem to be a part of. As a relatively new sector, greater transparency into key metrics and milestones will help to drive sustained funding and many more disruptive insurtechs achieve unicorn status.”
Team and strategy will of course also play a key part in any pitch. Breaking down experience and expectations across the various investment rounds would suggest the following milestone trends and qualitative assessment:
Original idea and value proposition.
Founder with unique insight, often on either the insurance product itself, a new segment or a new distribution hack
Proven product/market fit with a first insurance product and customer segment.
Typically broker or MGA structure and good relationship with one carrier.
Proven ability to attract top tier talent, especially an executive team with insurance experience.
Typically switching to multi-carrier relationships to cope with growth and/or implementing a full carrier structure to have more freedom on product design and launches.
Team positioned to handle rapid expansion across geographies or market segments.
Clear product-market fit and high customer retention demonstrated through renewal ratio and net promoter
Ferdi Sigona, Partner, LocalGlobe said: “Despite recent downward pressure on insurtech valuations in the public markets, we remain bullish on technology’s potential to continue disrupting this extremely large market. Disruption is – we believe – not only inevitable because of technology enablers like AI, embedded finance and automation, but also necessary because in a world with ever-changing risks, there is an objective need to address the coverage gaps that leave people and businesses vulnerable to those risks.”
Katja Palovaara, Fintech Programme Lead at Tech Nation: “Insurtechs comprise a welcome segment of the companies Tech Nation has had the privilege to support on their scaling journey, providing innovative new products and services from both a B2C and B2B perspective. For example, Honcho empowering customers to choose the cover and features most suited to their needs, and Urban Jungle introducing flexible monthly policies on a pay as you go basis; or FloodFlash and Pikl bringing new products and IoT technologies to drive efficiencies and create new markets.
“Our latest programme sees new kinds of insurtechs thriving, from Bond Aval in the trade credit arena, to Supercede providing a new all-in-one reinsurance platform. Akin to the developments witnessed in the wider fintech sector, significant insurtech growth has often been greatly accelerated through successful partnerships with established insurance firms. Insurtech as a sector is really gearing up with success after success, and I’m excited to see what’s next to come.”
With thanks: to Tech Nation Insurtech Board, Kieran Borrett (Plug and Play), Ferdi Sigona (Local Globe), and Jemima Pitceathly (Flock) for their insights and expertise.
We also thank: The startups who filled out the survey. Lorenzo Chiavarini, Insurtech Specialist, Dealroom. The investors who helped us to validate the data which include: Matthew Jones MD Anthemis, Will Sheldon Investor Accel, Naoki Kamimaeda, Partner Global Brain, Nick Daley Senior Associate, Plug and Play. And finally the team at Point Nine for their inspiration through the SaaS napkin!
Methodology: This analysis draws on survey data from insurtechs in the UK and Europe. For Seed and Series A rounds we received 15 responses. For Series B and C rounds, data collected was augmented with estimates from leading insurtech growth investors. Please note that outliers have been removed from Series A GWP and revenue in order to calculate averages accurately. These outliers are included in the range.
For more information: about how the Tech Nation Fintech Programme supports scaling insurtechs across the UK please visit our website.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
3rd Party Cookies
Analytical/performance cookies: These help us to improve the way our website works, for example, by ensuring that users are finding what they are looking for easily.
Functionality cookies: These enable us to personalise our content for you, greet you by name and remember your preferences.
Targeting cookies: These cookies record your visit to our website, the pages you have visited and the links you have followed.
Please enable Strictly Necessary Cookies first so that we can save your preferences!