The latest crop of InsurTechs began appearing in force around 2015, with promises to disrupt the insurance industry and change the world. Industry veterans have often taken those boasts with a grain of salt, while others concluded the benefits were genuine but not necessarily revolutionary.

But that was then. Venture capitalists say some startups from that early batch of InsurTechs have accumulated enough size and capital that older school carriers should start paying serious attention.

“What we have now is a handful of companies that have reached scale. They’ve gotten to the point where, in the U.S. at least, they have licenses or are operating in most if not all of the states [and we’re] starting to see billion-dollar-plus valuations, and some scale on the revenue side,” Jonathan Soberg, managing partner of MS&AD Ventures, said during a panel discussion on the future of insurance technology during InsureTech Connect’s ITC Global virtual annual conference the week of Oct. 19.

With that scale and power-potential achieved, Soberg said these early InsurTech graduates will start making a greater impact.

“We will see where the big ones will start to take market share,” Soberg predicted.

Panelist Martha Notaras, managing partner at Brewer Lane Ventures, said she agrees that early InsurTechs are starting to achieve noticeable scale and valuation, adding that premium levels and customer attraction to InsurTech companies have also grown in tandem.

“It was absolutely a barren landscape in 2015,” Notaras said. “Now, there are InsurTechs that have staked out [market areas].”

One example she gives is Lemonade (a portfolio company when she led investor XL Innovate that has since gone public), which staked out renters insurance as its market focus. She also mentioned Root, which started with auto insurance and is trying to “take the higher ground, societally, not using non-driving data” in its underwriting. (Root’s substantial IPO is now pending.)

“That makes it difficult for another new InsurTech to come in unless they have something equally innovative,” Notaras said, asserting that newer startups essentially have a higher playing field at this point in which to make a profound impact.

Types of M&A on the Way

Notaras predicts some incumbent insurance companies will assess the overall landscape and pursue M&A deals among some of the more prominent companies.

Notaras observed: “Now incumbents are saying, are we going to buy, are we going to admit we can’t do it ourselves, or is it going to take too long to do it ourselves?” As a result, she said, some of those incumbents “will pull out ahead because they get it” and move toward more acquisitions.

As far as InsurTechs themselves, panelists said they expect M&A to pick up considerably in the near future because of funding pressures created by the coronavirus pandemic.

“There are some companies that have not benefited or hit the timeline right for COVID, so there may be some distressed sales or M&A opportunities that contribute to meeting the strategic priorities of some big [InsurTech] or incumbent,” predicted panelist Kate Sampson, managing director at venture capital firm Anthemis,.

Embedded Technologies

According to Sampson, a version of the idea “embedded fintech” is a future trend that insurers should expect as InsurTech becomes more integrated into the insurance industry.

What is embedded fintech?

“What that really means to us is creating a powerful financial system that is intuitive and invisible. We believe the consumer experience and the financial experience – these two things being separate – will become obsolete,” Sampson said. “Financial decisions, with the prevalence of data that is there – there are all these things were it just makes sense. In the insurance world we see that as well, i.e. the sharing economy … turning on and off home renting services.”

Soberg said his firm has also been focusing more on embedded technologies.

“It makes too much sense for you to have these things put together as opposed to put separate (i.e. going one place for a car, another for insurance),” Soberg said. “This will be where we are going to see the next innovation in the next few years.”

He said the approach of embedded fintech makes you look at the involved technologies much differently when they’re used together.

“It makes you look at data and analytics, AI and machine learning a little bit differently,” he said. [They are] great decision-making tools, but when you put them in a stack, … you realize how powerful these technologies are in transforming the insurance industry.”

What Kind of Startup Should You Be?

Startups need to take into consideration a number of factors in the months ahead if they hope for success in the pandemic and post-pandemic era, panelists said.

Notaras recommended that startups “make sure they are solving big enough problems that it causes someone [transformative] pain – [such as] older InsurTechs like [virtual claims technology provider] Snapsheet suddenly given the opportunity to prove how important remote inspection is.”

She added that incumbent or older companies also “need to be finding that edge” and pushing their limits and comfort zones to adapt with new technology and ideas.

Soberg said he has been talking to his firm’s portfolio companies about the need to prove themselves soon.

“There will be a crunch time here late this year, or early next year,” he said.

He explained that most of the VCs that worked with their portfolios to extend their cash burn rates was intended through the end of this year, but not into 2021. Faced with that reality, Soberg warned that startups will struggle to “get above the noise” if they’re not in “the quality band” of companies offering something urgently needed.

His message to startups is to “be careful with the runway and what they are doing to differentiate themselves from anybody else.”

Sampson concluded that COVID and the need to help startups conserve money has been a distraction in the marketplace. For 2021, she said, there will be some changes, with a focus on “getting back to basics and focus, to be well positioned and differentiate when we get to the beginning of the year.”

That transition will also be an opportunity for old companies seeking to transform their operations, Samson added, potentially through the InsurTech world in some way.

“This is a unique time to get away from that inertia,” she said.