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First published in Digital Insurance Magazine, Aug 21, 2017

In 1990, when we were raising capital for Risk Management Solutions (RMS), the earliest venture-funded insurance-focused startup, there were virtually no tech VCs who had ever invested in insurance. Most firms were reticent to even speak with us, believing we would be swallowed by the bureaucracy and slow decision-making of insurance carriers and the tough regulatory scene.

Fortunately, much has changed since then – both in venture and in the breadth of industry-specific technology startups – but the tried and true formula for successful venture capital investments hasn’t.  This bodes well for InsurTech, because the opportunities are plentiful and the industry is far more receptive to change than people used to believe.

The most successful venture investments are usually those that exhibit compelling business opportunities and are led by exceptional management teams.  However, behind these basic characteristics, foreseeing what differentiates winning investments in InsurTech is certainly enhanced by a deep understanding of the subtleties of the insurance industry.

At XL Innovate, we are a venture firm focused exclusively on InsurTech, and invest only in the property and casualty sector.  We believe that the value creation opportunity is large, and that the current venture creation trend will extend for a long time.  Based on the current dynamics of the insurance industry, we have developed an approach to assessing what characteristics lead us to want to invest in a particular venture.

Success is about addressing business problems in the sector


Entrepreneurs often presume that the large scale and primarily traditional business processes of insurance indicate major opportunities for disruptive new approaches.  We are cautious about this thesis.  In fact, the insurance industry is significantly more complex than many entrepreneurs presume, and arguably the highest value-creating opportunities have little to do with leveraging size or scale or maximizing disruption, but rather applying technologies that solve the highest value problems.  Here are the leading aspects of a venture we look for, in InsurTech:

  • Customer Value: Risk reduction, expense reduction, and market expansion are high value opportunities.  Marginal cost reduction and temporary distribution improvements are typically not.

  • Business Model/Revenue Opportunity:  Is there a viable business model that allows the startup to share a meaningful and sustainable portion of the value provided to customers?  Carriers are loathe to share premium, and brokers can be even less willing to share commissions, particularly if their own businesses do not expand from the additional expense implied by working with the new venture. Leading InsurTech business models provide incremental value to a customer for every dollar of revenue derived, ideally at a multiple. 

  • Defensibility:  Is the approach defensible and sustainable (employing proprietary technology, information, or relationships)?  Technology, or the efficient application of technology, is typically the driver of both value and defensibility.  Relationships in the industry are valuable, but are also typically replicable.

  • Scale: Is this opportunity scalable, or limited to a niche set of customers?  We generally have a hurdle whereby a company should be capable (not certain) of achieving the equivalent of at least $100 million in revenue in a 5-7 year time frame, to be “viable venture scale.” For ventures pursuing insurance underwriting or distribution models, the scale required for high value outcomes will be higher in insurance than was often the case in other venture capital sectors such as software or I.T.  Insurance underwriting and distribution businesses will probably need to reach premium levels of several hundred millions of dollars, before they reach efficient scale and high-value liquidity opportunities.  

  • Innovation:  Is the venture creating a long-term value opportunity by leading impactful change in the industry, or simply harvesting short-term value from the status quo?  Building a new brokerage firm does not excite us.  Building a new distribution model or a new form of technology-enhanced brokerage certainly does.   

Successful InsurTech teams almost always employ both outstanding technology skills and insurance knowledge.

It may be cliché, but team matters

Successful InsurTech teams almost always employ both outstanding technology skills and insurance knowledge.  While ventures may get started with one or the other and not both, we view the two skill sets as equally critical for long-term success.                  

Leading VCs assess management teams along the following lines:

  • Articulation of the Opportunity:  We need to be sold.  Moreover, we need to believe that this team can sell its vision and its specific solution, to its market. 

  • Relevant Experience:  Does the team have entrepreneurial experience?  We seek demonstrated success in a combination of areas, including the venture-backed structure and style; grappling with uncertainty and reacting to change; and ideally experience in the specific technology or market that the venture will address.

  • Self-Starting:  Investors are the coaches, not the athletes.  A great entrepreneur will constantly impress his or her investors, and not look to the investors for initiative or courage. 

  • Team Building:  Every growing venture needs to attract talent.  Talent and culture attract more talent.  A leader needs to have the personal and professional characteristics that attract, motivate and sustain a great team, and the self-confidence to hire truly great colleagues.

  • References:  Have the individual’s prior experiences borne out the assumed characteristics?  There is no substitute for deep diligence with references. 

Insurance incumbents matter…more than in other industries

We have found that many, if not most, InsurTech ventures benefit from the resources and partnership of incumbents in the industry, whether they be carriers, brokers or consultants.  The insurance industry has an unusual element of relationships driving both distribution and risk sharing.  ‘Insider’ status is achieved through team member experience or through industry partnerships.  As a venture fund, we seek to be unique in this area, by providing the combination of equity capital (a commodity), leading experience and expertise in the P&C InsurTech space, and the resources of a global industry partner in XL Catlin. In addition, we avoid focusing on specific technologies (AI, Machine Learning, Blockchain, etc.) or industry sectors, or functional areas.  There are opportunities across the entire spectrum.  Incumbents are hungry for specific solutions that leverage technology to address aforementioned opportunities (risk reduction, cost reduction, and market expansion), rather than technology in and of itself. Incumbents have proven themselves to be some of the earliest adopters and explorers of tech, but they must be presented with solutions, not technologies.

Over time, we expect to see InsurTech ventures that address new risks, redefine consumer experiences and distribution, significantly reduce operating costs, and apply capital more efficiently than the status quo.  This new wave of InsurTech has just begun.


About the Author

Tom Hutton is Managing Partner and Director of XL Innovate, XL Group’s venture capital iniative to foster innovation in the insurance industry.

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