Innovation and insurance: investments are not enough, we need insurtech excellence hubs

Innovation and insurance: there is a gap in the Italian market that cannot be overcome just by investing more capital. It is necessary for the industry to have a systemic approach, with the creation of open and ambitious digital hubs. As it happens in the USA: here is the Lemonade case

Published on 11 Mar 2021

Photo by Ricardo Arce on Unsplash

Innovation and insurance, in search of a balance between supply and demand. The percentage of digital policies will grow from the current 1.5/2% at European level, to 30/40% in a decade, in line with the development of the digital consumer and with the cycles of digital transformation that have already affected many other industries. We therefore expect in a short time a different insurance market, more digital, more technological and certainly larger. 

Innovation and insurance, the risk of a Technology Gap 

But if the demand for a digital offer seems to be already mature and pressing, the design is the adequacy of the insurance offer is still struggling, especially in Italy, where investments are below the European averages, especially in the last two years. According to the Global Insurtech investments of over 7 billion dollars in 2020, Italy will be at less than 0.5%, an order of magnitude much lower than France, Germany and the UK. 

Actually, in the last five years, Italy has absorbed less than 5% of the total amount invested in Europe: it is urgent to fill this gap, which, if confirmed in the years to come, will create a Technology Gap in the insurance sector as well, which will damage the competitive positioning of our champions both at European and national level. 

Innovation and insurance, the need for a system approach 

To prevent a gap in innovation today from soon turning into a gap in performance and therefore in market share, perhaps to the benefit of foreign players with a strong technological focus and oriented towards the new emerging consumer, increasing investments is not enough. The Italian Insurance Industry needs to have a systemic approach to the creation of Insurtech hubs that allow to accelerate the collection of technical and financial resources, the development of skills, the experimentation and the creation of new employment roles in the Insurtech field and that stimulate the sector by creating a new offer and new parameters. 

The creation of insurtech excellence hubs 

Such insurtech excellence hubs should be financed not only to execute ambitious plans but to create competences, technological acceleration and experimentation, in a systemic logic: the risk capital made available to them should be both public and private, rewarded with above-average return on investment opportunities where the initiative is successful – better through the stock exchange system – and in any case equal to at least 10 times the amount available today to finance Insurtech initiatives. In other words, not allocated in a logic of short or medium term but only and exclusively with a long-term approach, aimed at financing Insurtech Innovation and intent on reaping the economic benefits of this progress. 

To date, unfortunately, this is not happening, due not to a lack of ambition on the part of top insurance managers (many of whom are directly involved in satisfying the new digital demand), but rather for the absence of an industrial ecosystem that rewards the creation of such hubs, which are destined to invest (and therefore lose) a lot of money in the short term, but to create a sustainable advantage in the long term that stimulates the entire industry. 

The Lemonade case: an insurtech pole supported by private finance 

But if it is slow to happen in Italy, elsewhere it is a reality. In the USA the financing model of innovation passes through hubs that aggregate ambitious start-ups, very well financed, international, that don’t care – as well as their investors – about short term results. After the countless cases of OTT (Amazon, …) but also of dozens of smaller players but always billion companies (such as UBER, Tesla, Paypal, etc.), the long wave of the U.S. Strategic Vision of digital financing has arrived on Insurtech: it is the case of Lemonade. 

Lemonade is an American insurance company offering renters, homeowners and pet policies in the US, content and liability policies in Germany, the Netherlands and France. Lemonade provides insurance policies and handles claims via desktop and mobile apps using chatbots. Its business model includes giving underwriting profits to non-profit organizations chosen by customers. This is done annually in an event Lemonade calls “Giveback.” 

Lemonade’ story and growth is a typical example of insurtech hub design and implementation heavily supported by private finance, capital markets and system support. 

Lemonade was founded by Daniel Schreiber (former president of Powermat), Shai Wininger (co-founder of Fiverr) and Ty Sagalow, in April 2015. 

In December 2015, Lemonade Inc. announced to have secured $13 million in seed funding from Sequoia Capital and Aleph at a valuation (unconfirmed by the company) of approximately $50 million. It had just sold about 1,000 policies since its inception. 

In 2016, Lemonade Inc. raised $47 million in funding from XL Innovate, General Catalyst with participation from Thrive Capital, Tusk Ventures and GV (formerly Google Ventures), the VC arm of Google’s parent company Alphabet Inc. It had just completed 10,000 policies since its inception for total premiums of less than $1 million. 

In April 2017, the company announced additional investors – Allianz SE and Ashton Kutcher’s Sound Ventures. In December 2017, Softbank invested another $120 million in Lemonade in a Series C round, increasing the total money raised by the company to about $180 million. It had just completed 60,000 policies. 

In April 2019, Lemonade announced an additional $300 million investment in a Series D financing led by SoftBank Group, with participation from Allianz, General Catalyst, GV, OurCrowd and Thrive Capital, increasing the total money raised by the company to $480 million. 

On July 1, 2020, Lemonade Inc. went IPO, valuing 11 million shares at $29.00 per share on the NYSE. The shares began trading on July 2, 2020 under the symbol LMND. On that date, the prospectus states, Lemonade had just completed 500,000 policies since the beginning of its history. 

Since that date, Lemonade has seen its valuation rise to nearly $10 billion, growing in European markets (Germany, France and the Netherlands) and reaching 1 million policies. 

Since its inception, Lemonade has invested over $600 million in development, has always presented loss-making financial statements and even its 2021 estimates are negative. But it has always grown, hiring hundreds of people, developing unique customer centricity and claims management technology, and creating an innovative proposition for the new digital consumer. To that end, Lemonade has been backed by a capital market that has made it a “Digital Insurtech Hub” strong with nearly $800 million in funding. And in just five years. 

Lemonade: investing in innovation, not in profits 

Everyone who invested in Lemonade (investing in innovation and not profits) is realizing a significant return on investment. 

The end consumer has benefited from a new, flexible and dynamic offering that meets their new needs. 

The insurance markets have been shaken by a new player that sees customer satisfaction as a more important objective than return on investment. One that looks to the long term. This shake-up has a beneficial effect on competition and the supply chain, which must evolve in the same way as Lemonade’s development. 

Lemonade, in the face of large capital and subsequent investment, has improved metrics, not only the number of policies but also the average value per user. Because with 800 million in collections, things are expected to improve. 

In mid-January 2021, Lemonade announced the launch of its Life offering, which not only allows it to differentiate the portfolio and bring Innovation to another segment but also, to accelerate the achievement of profits. 

It is hard not to think that – following the race of other Tech Giants – Lemonade could not aim one day not far from 50 billion dollars valuation (note: Generali group is worth 22 billion euros) and 10 countries of activity, including Italy. And where it needs other resources its listing would make it easy. And at that moment everyone, not just investors, will forget about the huge losses from 2015 to 2021 that are actually investments. Because Amazon itself has lost billions of dollars for 11 years in a row. 

All this could not happen in Italy. Not because of the absence of capital, but because of a systemic model that does not reward the creation of tech and digital companies, because of the few skills and the lack of foresight that tends to distribute opulence to outdated industrial aristocracies, to accept often in a submissive way the foreign technological hegemony, but not to get seriously involved to create its own techno-digital elite. 

Insurance companies call for digital insurtech hubs 

If we don’t create digital insurtech hubs, with a sufficient critical mass of assets and resources, we won’t be able to make the leap: as emerges from the latest EY research in collaboration with IIA, only one company out of two has a structure devoted to innovation but only 1 out of 3 manages to guarantee sufficient resources for Innovation. On the contrary, 100% of companies believe they can “obtain” innovation from external entities (startups, universities, enablers) through collaboration, osmosis and stimuli: it is very clear that the industry is asking for the birth, growth and development of digital insurtech hubs that would bring benefits to all, to investors, to all players in the supply chain and to the final consumer. 

And this is not only true in the insurance sector: we need to fully exploit the knowledge economy coming from the Digital Economy – whose demand has been strongly accelerated by the pandemic – but whose supply requires much greater investments. It is necessary to design and implement a model to support the most deserving tech & digital initiatives, fostering critical mass and making them grow in a faster, more solid and sustainable way, through public and private investments and a more flexible stock market that invests in the long term. This is done with the strong awareness that it will be these very Tech & Digital Initiatives that will support the economic development of the coming years, thus job creation and the aspirations of the new generations. 

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