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Electronic Chat with Matt Perlman, Partner, IA Capital Group

Matt Perlman is a partner at IA Capital Group, a New York-based private investment firm dedicated to partnering with innovative entrepreneurs in venture and growth capital investments in insurance technology and financial technology.

In general, how would you describe the current landscape for insurtech investment?

The investor landscape is very favorable from the perspective of insurtech companies. The capital markets are definitely open, a function of the fact that there’s a lot of capital available that’s mandated to invest in insurtech. Interest is high and there have been a number of successful IPOs, which is encouraging investors to be aggressive.

The last decade has seen lots of interest in investing in insurtech, and this still appears to be the case. Why does this market segment seem to be politics-, recession-, and COVID-proof?

You can reasonably ask this question about the market as a whole, but one aspect of it is that the insurance industry is less directly tied to the economic system than other industries – it’s in many cases a non-discretionary product that businesses and consumers need no matter what. Although some lines may be more negatively impacted than others, others have been positively impacted by COVID, such as life insurance; and auto insurance was seeing significant improvements in loss ratios because people weren’t driving as much during the lockdown.

In terms of insurtech in particular, the COVID environment has actually been actually a boon to a number of themes we’ve already been developing prior to the shutdown that have only gained momentum. Digital distribution--buying insurance products through mobile and digital channels--has significantly accelerated, as well as the idea of remote underwriting and claims adjudication, for example virtual home inspections through drone or aerial imagery, or photos or videos collected by homeowners through their smartphones using AI and image recognition to simulate or improve upon insights from on-site inspections. We’re seeing similar themes in life insurance underwriting. While there’s an increased demand for life insurance, it’s harder to underwrite policies in the traditional ways, through in-person exams and lab-based analysis, during COVID. This has spurred an interest by life insurers to underwrite more policies based on electronic medical records or other forms of real time data such as wearable devices. Insurance companies were already interested in all of these methods, and now they’ve become an imperative.

What are the key attributes of a startup that you look for when deciding to invest?

A lot of the same things that most VCs look for – a large addressable market with significant pain points acting as near term catalysts for adoption, strong product-market fit as validated by material revenue traction with paying customers, management teams with industry-leading capabilities and experience, teams with a lot of relevant industry experience and credibility. The insurance industry is not going to change overnight. Startups need some understanding about why the industry is structured as it is, as opposed to someone who’s never worked in the industry before and just thinks insurance should work differently. We look for that insider’s perspective.

We also look for strategic relevance for our limited partners, so in addition to being a good financial investment, companies we invest in need to be operating in an area that aligns with areas that our investors are focused on. Our clients look to us not only as stewards of their capital, but also a source of strategic insight and referrals to potential partners, vendors, or acquisition targets down the line.

How many investments do you typically make in a year?

We don’t want to spread ourselves too thin, so our annual investments are in the single digits. Our philosophy is that we’re industry specialists, we bring a lot of understanding to the table so we want to leverage that as effectively as we can and do everything we can to help our portfolio companies succeed.

Although we have raised multiple funds in insurtech across all lines of business because of the high level of activity in insurtech investment, we’re very busy; but we really try to make sure we’re appropriately resourced for the size of the portfolio we have.

We try to be selective about investments because of our two-sided strategy: startups on one side, insurance investors on the other. To make sure our business model works for both, we make sure we’re spending adequate time helping portfolio companies succeed, which also means making connections with incumbents in the industry, including our clients, whenever possible. They get strategic value from our seeing every relevant opportunity, and because we have strategic relationship with incumbents, it makes us more attractive to startups. It creates a flywheel effect.

What do you see as some of the outstanding investment moves in insurtech over the past 6 months?

Some high-profile examples include last fall’s acquisition of Assurance IQ by Prudential, which was emblematic of a change in the role of the agents, making it easier for them to work flexibly and be more time efficient and successful with sales by using big data. Some have analogized it to the Uberization of the agent force. It was a great outcome for Assurance IQ and an important deal for the industry.

The general areas we’re excited about investing in include companies that embed insurance offerings into other industries, such as partnering with someone in the mortgage industry to market homeowners insurance since it’s a natural opportunity to talk about insurance to someone who’s buying a home. These partnerships use technology to find the customer at highly relevant moments and using somebody else’s customer base to distribute products rather than the traditional agent-based distribution or expensive direct-to-consumer marketing. E-commerce is another great example of the opportunities in embedded insurance plays, for example our portfolio company Protecht.

We’re also interested in companies that are using computer vision and AI for remote underwriting and risk management solutions across various lines; the interoperability of medical records for life insurance underwriting; data analytics for claims management; customer service and other process automation, innovative solutions for guaranteed income in retirement, tech platforms that augment the capabilities of human agents to help them stay competitive in the digital world, and climate and weather risk solutions such as our recent investment in The Demex Group. Lastly, we are proud to be supporting Marble as they build the insurance industry’s first loyalty and rewards platform, which is a white space we’ve been thinking about for some time. These are just a few of the many insurtech themes we are paying attention to.

Where do you see the market heading into 2021?

Insurtech will continue to be a very active space. A lot of capital has been raised from both financial and strategic investors, earmarked to be deployed into insurtech, so that’s a lot of capital supporting high valuations. This will probably continue into 2021, but there will come a point where the more high-profile insurtech deals become the less viable business models will be exposed and that could lead to a little thinning of the herd and more selectivity on the part of investors. But when that happens is anybody’s guess.

Much of the innovation in insurtech has focused on “disruption.” Does this attitude overstate the need for change in the P&C insurance industry, and what role does “traditional” insurance play in insurtech innovation?

Looking at a paradigm of complete disruption overstates the need for change. Insurance as we know it has been around a long time; the notion of using data to underwrite insurance is not new, and insurers are looking to serve their policyholders and pay claims. They’re not evil, monolithic entities that are too incompetent or stubborn to change. There is a strong interest in innovation. There are key technical barriers to changing the way they do business, but the industry will adapt. Any new insurtech entrants are going to need to grapple with the role of the incumbents and intermediaries like agents, which we don’t see going away any time soon. They have a trusted relationship with customers. Yes, there are important areas where things should evolve, but not this across-the-board change that will sweep away everything as we know it.

The way traditional products are distributed is likely to change. New paradigms are emerging for distribution, whether it’s digital direct to consumer brands, embedded strategies where you partner with a company in another industry to offer insurance products at relevant moments, bringing the traditional insurance agency into the digital world, or new tech-enabled models for human agents. All these concepts have legs, but they’re still rooted in traditional insurance.

Product innovation is going on, too. Obvious examples are usage-based auto insurance, telematics-based underwriting or other models that pull data from connected devices, and emerging risk categories like cyber risk, pandemic coverage, or climate change. But by and large, it’s mostly evolution. We expect the insurtech world and the traditional insurance industry to continue to converge as we have observed with fintech and traditional banking.

Are we reaching a tipping point in the insurtech investment arena – do you predict a decline in investments in the near future?

Yes and no. The market has gotten crowded in a lot of areas and it’s possible there will be some sort of pullback from that. A lot of companies are trying to imitate Lemonade’s success for IPO, and that could have a cascading effect throughout the industry and make it a little harder to get funding if there are high profile failures; that in turn will make it harder for some insurtech companies that are not truly differentiated to survive. But the best companies in any given area will be successful no matter what point of the cycle we’re in.

 


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