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Insurtech investment remains strong during pandemic

Insurance technology has continued to draw capital investments at a solid clip during the COVID-19 pandemic, speeding up the adoption of communication channels and products that replace in-person interactions and provide large-scale operational improvements.

Investments in the sector slowed during the first quarter as lockdowns took hold before spiking again as insurable behavior returned and even increased, as commuters steered clear of public transportation and ridesharing in favor of driving on their own, according to Nigel Walsh, Deloitte partner.

"I then saw a whole bunch of people say, 'we had a right to be worried, our worries were unfounded, press ahead,'" Walsh said in an interview.

Lockdowns and social distancing protocols immediately opened up a void in front-office technology to prospect for customers and move from leads to sales quickly, said Jason Liu, CEO of Zywave Inc.

"Now, it's about how you can engage and identify prospects digitally," Liu said during a webinar discussion on insurtech. "Even how you manage your clients … increasingly you're going to have to learn how to do that remotely."

Respondents to a Deloitte survey indicated that insurtech investors were favoring companies that addressed "the most pressing digitization and operational efficiency challenges." Insurers are most interested in those that were ready to plug in to facilitate automated underwriting, online distribution through digital managing general agencies and direct sales and virtual claims management, according to a report that Walsh and Mark Purowitz co-authored.

Front office operations had been among the least automated aspect of the insurance world before the pandemic all but blocked the in-person interactions companies relied upon, Liu said during an online discussion hosted by Houlihan Lokey Inc.

According to Deloitte, first-half insurtech investments reached $2.19 billion, putting them on pace for the second-largest investment year of the sector's brief history, behind only the record $5.54 billion in 2019. Gathered by Venture Scanner Inc., the data showed that investments were significantly top heavy, with the largest four insurtech companies receiving 44% of the total.

Continuing that trend into the second half was Lemonade Inc.'s IPO in July and deals announced recently. Days after Liu spoke during the virtual roundtable discussion, Clearlake Capital Group LP announced plans to buy Zywave. Next Insurance Inc. subsequently announced a $250 million capital infusion in a funding round led by an Alphabet Inc. growth fund.

Insurtech investments made during the pandemic are part of a larger, long-term trend of capital being funneled towards more developed and integrated technology ideas, rather than more narrowly conceived applications meant to remediate "pain points," said Purowitz.

Carriers are not adept at integrating small-scale solutions, Purowitz said in an interview.

"I think we're going to start to see a rollup in the next 12 to 18 months where investors are looking horizontally rather than vertically and bridging together insurtechs that have complementary capabilities," he said. The new emphasis on scale could drive consolidation among insurtech companies, Purowitz added.

Buyers and investors are still willing to offer significant premiums for insurtech properties with the right technology characteristics, said Max Chee, partner of Aquiline Capital Partners LLC and head of the private equity company's technology growth fund.

Growth, strong margins and a "sticky" offering with high visibility revenue will continue to attract investment dollars, Chee said during the Houlihan Lokey roundtable.

"Investors' perception and willingness to pay for those characteristics have gone up to record highs," he said.