InsurTech startups have a lot to offer insurance companies but the latter needs to understand that the real metrics of InsurTech success may not be obvious. (iStock)
Insurance companies can measure success in any number of ways, including number of years in business, in-force policies, dividends paid to stakeholders and investors, or profits left over after operational costs are subtracted from direct written premium (DWP). The list is almost endless.
For InsurTech companies, however, success metrics are harder to identify, and even harder to achieve, even in a market that saw approximately 85 deals with a total value of $1.42 billion in investment in Q1 2019. That's a new record, according to Willis Towers Watson.
But looking at deal trends and dollars invested, unfortunately, is part of the problem.
Funding locked in by startups and growth companies is a false success metric by which no company should ever want to be measured. By the same token, there are InsurTech startups out there touting the number of pilots or proofs-of-concept (PoC) which are in progress or already completed without actually being able to talk about how many of those pilots or PoCs resulted in paying customers.
For insurance companies trying to determine which InsurTech service providers to work with or which emerging technology solutions to invest in, there are natural steps in the evaluation process.
The proverbial 'sniff test'
When trying to decide if milk which has passed a "sell by" date is spoiled or not, most people give it a sniff. If it doesn't smell spoiled, it moves on to the next step, the taste test. It makes sense that if something as basic as determining the viability of a gallon of milk starts with the sniff test that evaluating InsurTech startups should start with something just as simple. So, first things first, insurers should at least attempt to discern which "startups" are actually startups. If there is innovation budget to be allocated, it is important to make certain investments aren't being made into old technology dressed up in new clothes, right?
The problem with this approach, however, is that the criteria which actually determine what constitutes a startup are subjective, at best.
"A startup is a company working to solve a problem where the solution is not obvious and success is not guaranteed," said Neil Blumenthal, co-founder and co-CEO of Warby Parker, in an article by Natalie Robehmed in Forbes way back in 2013.
This definition, problematically for many, completely ignores the time component of the equation which even Wikipedia acknowledges by defining a startup as "a newly emerged business venture that aims to develop a viable business model to meet a marketplace need or problem." But, time in business can't be the only measurement of a startup.
The questions asked in any given insurer's customized version of the startup sniff test could include:
- How many years has this company been in business?
- Has the company recently re-branded or relaunched its products?
- How much funding has the company secured since launch?
- How many employees does the company have?
- Are there several competing products or solutions on the market?
Answering any or all of these questions can help an insurer decide if the company being evaluated is worthy of innovation dollars, or if the product is actually taking a new approach to solving a strategic problem. Once this determination has been made, it's time to look hard at whether the startup in question is already achieving, or is future-capable, of success.
The paying customer
If funding secured is a false metric of success, the number of paying customers is the proverbial Holy Grail. For InsurTech startups, however, acquiring paying insurance company customers is a long and arduous process. And, many InsurTech startups are ill-equipped for an enterprise sales cycle which could take anywhere from 12 to 24 months on average.
The number of pilots or PoCs in progress or "successfully" completed doesn't say anything about a company's ability to provide adequate training or onboarding, to plan for measured and responsible growth or to scale effectively without overtaxing the company's newly established staff and infrastructure. And, the amount of funding secured absolutely fails to speak directly to a company's ability to understand the specific needs of the insurance industry, hire the right talent to build on a minimum viable product (MVP), or even to identify and exploit the solution's product-market fit once it has been launched.
Better than asking for funding or pilot/PoC numbers, insurance companies should attempt to determine:
- How much revenue does the company report annually?
- How many paying customers does the company have?
- How many of the company's founders are still involved and how many have cashed out?
- What is the company's level of commitment to, and knowledge in, the industry?
- Do the founders of the company have a pedigree in the insurance industry?
These questions are much more likely to determine whether an InsurTech startup has the ability to truly understand the business problems of an insurance company, the temerity to survive the complex regulatory and hierarchical environment inherent to the insurance industry, and the capability of implementing a product or providing services which ensure project completion AND success.
Commitment to, and knowIedge of, the industry may yet prove to be one of the most important evaluation criteria of an InsurTech startup's success. Whether weighing the pros and cons of a product or solution provider or an InsurTech services firm and even if answers to the other questions are all a thumbs up, insurers should pay close attention to the conversation once both parties come to the table to talk about solving a problem. Through satisfied customers and successfully executed projects, does this company demonstrate sufficient understanding of the inner workings of the industry? How certain are you that this InsurTech startup's leadership actually "gets it?"
At the end of the day…
Insurance companies should judge InsurTech startups against the same measures of success that determine winners and losers among insurance companies. Foosball tables and black mock turtleneck shirts aside, InsurTech startups have a lot to offer insurance companies if only insurance companies understand that the real metrics of InsurTech success may not be obvious at first glance.
Luke Magnan is the COO for Combined Ratio Solutions, a boutique provider of technology solutions and services. He can be reached for further comment or information via email at luke.magnan@combinedrat.io.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.