Amid the dynamic shifts and technological transformations shaping the insurance sector, the United Kingdom emerges as a key hub for insurtech innovation.
Aman Behzad, managing partner of fintech-focused corporate finance advisory firm, Royal Park Partners. Providing the expertise needed to enable entrepreneurs, founders and funds to build the future of finance.
London has been an integral part of the insurance industry for over four centuries. It is the bedrock of the industry and the epicentre of innovation in open/embedded insurance, generative AI, parametrics, telematics/IoT, and many other fields.
It’s no surprise then, that the UK boasts a dense network of insurtechs with an estimated worth of over £20billion, contributing almost £5billion to the UK GDP every year, according to the recent UK insurtech report from McKinsey supported by Insurtech UK.
The current landscape of insurtech financing in the UK and globally
Despite its strengths, the UK’s insurtech sector was affected by the recent broader fintech market correction. McKinsey’s analysis showed a 32 per cent decrease in funding into UK insurtechs last year, compared to 2021.
Royal Park Partners release regular reports, tracking financing trends globally. The latest monthly report, highlights that the UK is following global and European trends in terms of deal volume – with only 18 European deals so far in 2023 (versus 28 in 2022).
Private markets traditionally tend to follow public markets after a lag in time, so it’s promising that the latter are showing good performance in 2023. Royal Park Partners’ recent deep dive into insurtech tracked the performance of publicly listed insurtech companies, with findings showing that D2C (direct-to-consumer) insurtech companies benefitted from a 14 per cent uplift in 2023.
Additionally, insurtech infrastructure companies have demonstrated an impressive 44 per cent recovery so far compared to a six per cent decline across traditional insurers.
All signs point towards an upcoming global and UK-wide rise in private fundraising and more positive valuation benchmarks in the insurtech space. This undoubtedly reflects a public market recovery as McKinsey’s report rightly highlights an investor shift towards B2B insurtechs with a recurring revenue model, over B2C players that often grapple with high customer acquisition and marketing costs. There is a flurry of activity on the horizon with respect to financial and strategic investors in the insurtech infrastructure space.
Emerging business trends shaping the future of UK insurtech
Global innovation across insurtech is driven by several key themes, and there are four key areas where the UK insurtech universe may have an advantage when against other global peers.
A strong generative AI ecosystem
The UK’s strong research ecosystem combined with supportive public policy and investment in AI allows the UK to remain a global innovator, empowering AI solutions in insurance. However, the public and private sectors need to collaborate to ensure that UK insurtech companies can continue to attract European talent, equipped with insurance and AI knowledge, a concern highlighted in McKinsey’s survey.
The success of open banking
The UK has been a regulatory and technological pioneer in open banking, allowing for a seamless exchange of data between the financial services and customers. UK insurtechs are leading the way, developing methods to share customer data and embedding insurance solutions into third-party customer interfaces through APIs. This innovation lowers the barriers to entry for new entrants, such as distribution at scale and underwriting with diverse data and allows customised product offerings to be created.
A mature insurance market
UK consumers benefit from a competitive insurance market, with a wide variety of alternative solutions to fit their needs. On the commercial insurance front, the UK amongst other things enjoys a vibrant gig and freelancing economy with increasing insurance needs. Insurtech companies serving this diverse customer base must demonstrate their ability to innovate to attract and retain such clients.
UK insurtechs consistently showcase their ability to adapt across many areas, including cyber risk, product terms (e.g. on-demand and flexible coverage insurance) and customer experiences (e.g. self-service solutions). Such successful offerings and quality of service in their UK home market can subsequently be replicated across other markets, as they execute on their international expansion.
An established reinsurance ecosystem
The UK enjoys an extended insurance ecosystem, from a strong risk transfer market like that of Lloyds to a plethora of underwriters, operating under rigorous regulatory supervision. There is an excellent opportunity for UK insurtechs to continue their collaboration with other insurance partners, and offer IaaS (Insurance-as-a-Service) solutions to non-insurers, as well as other infrastructure services to other insurers.
In doing so, traditional insurers can benefit from insurtechs’ technology and digital infrastructure. We are increasingly seeing such incumbents and strategics seeking investments and acquisitions to accelerate their internal insurtech innovation agenda. This a positive development for founders and investors in the space, establishing additional routes of financing or exit.
Insurtech’s success in the UK is built on a foundation of insurance industry stalwarts, accelerated by innovation and technological advancement in the last decades. Echoing McKinsey’s report, there is more can be done to help the UK retain its leading position in the global insurtech space. The government, the regulator and insurtechs themselves need to safeguard the key business drivers without getting distracted by the short-term volatility of fundraising cycles. The UK’s technological strength as well as the UK insurance market’s favourable dynamics set strong foundations for the continued success of the UK insurtech sector.
Disclaimer: ‘RP Partners, Limited, is an appointed representative of Sapia Partners, LLP, which is authorised and regulated by the Financial Conduct Authority.’