Join our webinar

How embedded insurance is changing the face of regulation & compliance

Thursday 25 May
1:00 PM CEST
Register now

Related solutions

No items found.
Blog post

The promise of insurtech: which business models are emerging as winners

The insurtech landscape has changed quite a bit during my time as CEO of Qover. We're starting to see some business models take off, while others are hanging by a thread. So which ones are most likely to succeed?
Time to read
12 minutes
Last updated
July 18, 2023
In a nutshell
  • Many insurtech business models that attracted funding early on are now struggling to survive – including traditional brokerages and D2C insurtechs – while a brand new vertical is already changing the game.
  • I break down the seven major insurtech verticals, including the pros and cons of each; whether it’s likely to fail or succeed; and Qover’s preferred player in each category.
  • While no clear winner has emerged, embedded insurance orchestration has the best chance for success.

The word ‘insurtech’ dates back to the early 2010s. Yet in 2016 – the year Qover was founded – the industry was still figuring out which business model would win.

Seven years later, some potential contenders have emerged, but we still haven’t seen a clear industry winner.

Having said that, we can examine which business models have failed and highlight which ones still have a chance for success.

Interestingly enough, many of the ‘sexy’ models that attracted lots of funding early on are now struggling to survive, while a brand new vertical is already changing the game.

So what are the key business models within the insurtech industry?

At Qover, we tend to group insurtech players into 7 major categories: traditional brokerage, D2C insurtech, B2B insurtech, tech supplier, balance-sheet-as-a-service, embedded insurance and new addition embedded insurance orchestration.

insurtech business models

As we pass the halfway mark of 2023, I’d like to take a moment to analyse where the insurtech industry currently stands, including the pros and cons of each major business model; my prediction for where it’s going; and even Qover’s preferred player in each vertical.

Consider this, if you will, my extremely biassed guide to the state of insurtech.

1. Traditional brokerage

Business model: Enables the traditional brokerage network to distribute insurance, either by creating innovative insurance products for them to distribute or by offering digital tools that enable brokers to sell more efficiently.

How they use their funding: mergers & acquisitions (M&A) portfolios

Pros: It leverages a proven large distribution network in many countries, leading to immediate growth with low acquisition cost. There is a real market demand from traditional brokers and plenty of opportunities.

Cons: It’s very local. Each country is totally different, and a solution built in one place might not be exportable or capable of penetrating a new market. Furthermore, a local sales team on the ground is required to animate the brokers, which is a bit old fashioned.

Decacorn opportunities: No

Qover’s preferred player: +Simple

The company has had a lot of success with its niche offering distributed by the most important brokers.

Players that are prone to disappear: Players that have been stuck in their local markets with a local-only solution and/or players that grew quickly but with a lack of focus or clear value proposition (i.e. trying to grab a small piece of the pie in different ecosystems).

2. D2C insurtech

Business model: Focused on building a digital solution to sell insurance to end consumers. These insurtechs could either be full-stack (with their own balance sheet) or a managed general agent (MGA)/broker relying on a third-party balance sheet.

How they use their funding: Facebook and Google Ads

Pros: This vertical attracted the most funding due to its promise to improve a broken industry by offering the best service and user experience.

Cons: As an insurance and tech expert, I don’t quite understand how this vertical attracted so much funding. Maybe it took a long time for non-expert investors to realise that Gross Written Premium (GWP) should not be equated with Annual Recurring Revenue (ARR), and that the full-stack approach is unable to deliver a return on equity above its cost of capital without a significant minimum volume and strong business diversification.

Furthermore, this vertical has close to no moat – it’s a traditional insurance product sold via a digital flow; with a very high acquisition cost; and requires a lot of funding to build a brand.

Most of the players are monoline – meaning that they only focus on one insurance product vertical – hence not benefiting from portfolio diversification. Thus they end up caring more about pricing and pay little attention to servicing.

An insurtech will never be cheaper than a traditional portfolio because insurance is all about renewal – i.e. having a big portfolio that delivers a massive economy of scale and profits – which an insurtech doesn’t benefit from.

Decacorn opportunities: No, with the exception of ManyPets. I firmly believe that those who decided to have their own balance sheet made the wrong decision, as it’s not easy to achieve the necessary book size to be capital-efficient.

Furthermore, we see that these players continue to struggle in the current paradigm where reinsurance costs are skyrocketing and capacity is going down; some of them will likely fail or be purchased at a low price.

Qover’s preferred player: ManyPets

Besides the fact that we’re pet lovers at Qover, ManyPets has an impressive track record of geographical expansion from Europe to the US and has hacked their growth through aggregators and affinity – establishing themselves as a true leader in the pet category. 

Players that are prone to disappear: D2C insurtechs that are monoliners of a complex product and that focused too heavily on their local market instead of expanding quickly, and/or that were too quick to get a balance sheet (we’ve seen this start to play out).

3. B2B insurtech

Business model: Similar to the D2C insurtech vertical, but B2B insurtechs sell insurance to businesses rather than end consumers. This often includes traditional insurance products for small- and medium-sized enterprises (SMEs) like fire insurance, cyber protection, product liability, legal protection, property and casualty (P&C) insurance and more. 

How they use their funding: Tech and revenue teams

Pros: Businesses looking for insurance tend to focus on quality services and service-level agreements (SLAs) – and less on the price. Considering that insurtechs are lacking in capital efficiency and economy of scale – and therefore can’t be too aggressive about pricing – it seems that there might be a sweet spot for B2B insurtechs. Plus, the right tech can be a game-changer when it comes to improving servicing.

Cons: A lot of B2Bs are still expected to have a more traditional, human approach. One reason is that SMEs tend to go to brokers for their insurance needs, which requires an on-the-field sales network. What’s more, typical B2B brokers know that SME owners will require coverage for their personal assets, like their car and house. This might seem outdated, but it is still very much the case, and ends up forcing these insurtechs to do more and more products until they end up becoming a retail company more than anything else. 

In order to succeed, B2B insurtechs need to be in a specific niche that is still big enough to be profitable; where the human advisor relationship is less important; and where business owners will not request traditional P&C products.

Decacorn opportunities: Yes, but mainly those that are sector-specific (i.e. health, cyber, legal protection).

Qover’s preferred player: Alan

Alan has nailed it from a service and tech perspective, by going multi-country and by focusing on employee benefits – a niche where they can bypass the cons mentioned above. The only attention point is the long-term loss ratio as it’s a long-tail business.

Players that are prone to disappear: B2B insurtechs that are focused on traditional SME insurance. Similar to D2C insurtechs, they face the same issues in terms of customer acquisition cost (CaC), financial metrics, etc.

4. Tech provider

Business model: Tech-only players that focus on building a specific tech solution to solve a given problem. Applications range from insurance software to pricing tools to AI fraud solutions and more.

How they use their funding: SaaS-like business model

Pros: One of the biggest obstacles to growing quickly in the insurtech space is the level of regulatory compliance required when a company operates as a regulated business. The advantage of this business model is that a tech player is much less exposed to regulatory requirements, so they can focus on building a state-of-the-art tech solution with fewer constraints. Not to mention a tech solution can be easily deployed across borders.

Cons: Although risk carriers are slowly evolving, they have a reputation of trying to build everything themselves. They’re quite reluctant to partner with tech providers, especially when it involves one of their core activities.

What’s more, insurance tech solutions tend to be cloud-native, but the vast majority of insurance companies either prohibit cloud solutions or would need specific exemptions from their security and compliance teams. 

Decacorn opportunities: Not really, but I believe a few of these tech players can achieve a decent valuation and bring a strong level of innovation to the market.

Qover’s preferred players: Akur8 (pricing and actuary), Five Sigma (claims solution tool) and Shift Technology (AI decision making)

Players that are prone to disappear: It will be interesting to observe whether AI developments could potentially wipe these players out by developing more advanced algorithms.

5. Balance-sheet-as-a-service

Business model: Risk carriers that are focused on providing insurance capacity to MGAs, brokers and sometimes directly to business partners. They would typically operate under the Freedom of Services (FOS) in order to serve the entire European Union from one specific country.

Balance-sheet-as-a-service players focus on the regulated part of the business and bring solvency capital at the service of other players to innovate. Normally, they don’t manage the commercial aspects of a partnership, customer care and claims or the tech solution.

How they use their funding: Teams and regulatory capital

Pros: They solve one of the biggest pains in the market with an agile balance sheet and the ability to execute quickly.

Many companies are looking to offer insurance at a European level, which traditional insurers – who are local by nature – tend to struggle with. Balance-sheet-as-a-service providers solve this issue by exploiting the FOS as much as they can.

Cons: Some of these players tend to be mid-sized, which means they’re exposed to a lot of different risks. This leads to low retention of risk, and the need to enter strong reinsurance treaties and cede an important portion of the risk to reinsurers.

With the recent inflation and increased cost of capital, the cost of reinsurance has significantly increased. This makes balance-sheet-as-a-service players less competitive in terms of pricing and gives them a higher level of risk aversion (hence lower available capacity).

Decacorn opportunities: Yes; not only is the insurance market huge, but there’s a clear path for a few large players to take hold and become the next insurance mammoths. 

Qover’s preferred players: Descartes Insurance, Helvetia, Wakam and the up-and-coming Hesse Digital

Players that are prone to disappear: A few balance-sheet-as-a-service players entered the market in niche verticals with low-premium products focused on low severity and high frequency – mainly extended warranty, damage and theft, etc.

The unit economics will only work if there’s massive volume; however, the large players capable of generating such volume would only rely on insurance companies with at least an A+ S&P rating. As a consequence, I believe they have no chance of survival.

6. Embedded insurance

Business model: Players providing a digital solution that enables companies from virtually any industry to add insurance to their value proposition, either as an add-on or core component.

How they use their funding: Tech and revenue teams

Pros: More and more leading brands are looking to show their customers that they care, while also looking for a way to strongly differentiate their value proposition and generate more revenue. With increasing digitalisation worldwide, there’s new momentum to further increase the market size of insurance by building a solution that enables these leading brands to offer embedded insurance.

It’s a blue ocean, and most traditional players are unable to cope with the organisation, tech and structure required here. The size of the market is huge: according to Simon Torrance, $14 trillion dollars in fact, which opens the door to many opportunities.

Embedded insurance is the perfect balance between creating a global safety net with protection for all; reducing the insurance gap; and offering insurance when the risk is top of mind – and of course, the name of the game in insurance is distribution.

Once an insurance program is implemented, the cost of acquisition is close to zero – after all, it’s attached to the sale of a third party partner. Plus, if integrated well, the solution is very sticky. In short, it’s a long-term partnership.

Cons: Embedded insurance is extremely sophisticated as it requires the insurtech to cope with the complex regulatory framework of both the non-insurance distributor and the local regulation in each country where the insurance is distributed.

Embedded insurance insurtechs have no direct control over the volume of contracts; success depends first on the partner selling their core product or service, and then on attaching insurance to it.

As a result, there’s no direct way to boost revenue like D2C insurtechs might be able to with advertising. Therefore, the growth of B2B embedded insurance insurtechs is made plateau by plateau: each time a meaningful partner is added, revenue jumps to a new plateau.

And finally, B2B sales cycles are very long and often require long request for proposals (RFPs) and diligence processes. Once a sale is won, the distribution partner might request a bespoke solution and the tech integration might take time depending on the partner’s capacity.

This lack of control over growth and distribution – despite a CaC close to zero – might have driven non-expert VCs to disregard the vertical at the beginning of the insurtech era. Now they’re starting to understand the untapped potential of this vertical.

Decacorn opportunities: With such a huge market size and many oppportunities, I think the answer is pretty clear.

Qover’s preferred player: Do we really need to answer this one?

Players that are prone to disappear: I believe that a few embedded insurance insurtechs are almost scams. These players promise out-of-the-market commissions of up to 70% for business partners, which is fundamentally against the idea of creating a global safety net and generating more value for end users.

These insurtechs, which mainly focus on small, easy insurance products, will disappear through a combination of increased regulatory scrutiny and leading brands understanding the reputational risk of working with them.

Bonus category: embedded insurance orchestration

how embedded insurance orchestration works
Embedded insurance orchestration is a modular tech platform that can handle any element of an insurance program.

Business model: A modular insurtech platform that enables any company in any industry to orchestrate the insurance experiences they need on a global scale. Embedded insurance orchestration is essentially composed of four different layers on top of the balance sheet: tech, insurance, operations and data.

How they use their funding: Technology and legal teams

Pros: The ideal embedded insurance orchestration platform can support any product, country and insurer. The fact that it’s highly flexible means that it is inherently scalable and global.

This also enables multiple types of partnerships; insurers, brokers and business distributors can pick and choose the elements they want the insurtech to handle – whether that’s simply the tech or a combination of claims, data, etc. So it can accommodate partners who are building an insurance program from scratch or who want to modernise one that they already have in place.

Cons: Embedded insurance orchestration players still need to convince partners to look beyond pricing, and instead focus on being tech-first.

Additionally, many business distributors have yet to fully grasp the complexity of this kind of orchestration. They end up signing with traditional risk carriers only to realise later on that having a poor user experience is affecting not only the performance of their insurance program but also their reputation.

Decacorn opportunities: Yes.

Qover’s preferred player: Spoiler alert, it’s us. After all, we created the category less than a year ago.

Players that are prone to disappear: Those that are not risk carrier-agnostic and therefore aren’t flexible enough to find the best insurer for their business partners, and those without enough capital to convince leading companies to work with them.