Introducing Augmentum’s first insurtech investment
Insurance: Plus ça change, plus c’est la même chose
Up until now, Augmentum has held a more circumspect thesis on insurtech. Early consumer-focused propositions worked hard to solve similar issues that the neo-banks had addressed a decade previously, namely that user experience problems with incumbent offerings were suppressing distribution and access. In reality insurance, particularly consumer insurance in competed lines, is a commodity product that is won largely on price, and with which users interact as little as possible. Evident pain points in the interaction process therefore do not (usually) play a significant role in product choice, and churn is created as much by portfolio pricing decisions as it is by poor user experience.
As a result of these realities, liquidity in consumer lines has remained squarely within the incumbent carrier/re-insurance umbrella. MGA arrangements have been beneficial to carriers wishing to extend their marketing reach and, or tentatively examine new market spaces. Where “full stack” (i.e. part self-insured with aggregate liabilities re-insured) propositions have gained some traction in the US with exit successes in the heady markets of late 2020 and 2021 (Lemonade, Hippo, Metromile, Root), these have all since suffered from a sell off as the defence of growth economics met the realities of public market profitability expectations in the grittier environment of 2022. Unit economics have consistently been strained in competitive lines, and the move to full stack is a significant investment in the unknown. In short, the moats for defensible scale in commonly competed commodity insurance lines appeared to us to be too large to date.
Seeing the wood for the trees
Looking past these frontier propositions, we have however always been cognisant of the broader opportunities in the insurance space of which we saw two broad themes.
Firstly, though “Insurtech 1.0” has focused roundly on distribution, more than three quarters of the expense ratio of a typical incumbent insurer is in opex and claims. Yet despite its gargantuan scale, the $6trn global insurance industry has been one of the lagards in embracing the opportunities presented by new technologies that have enhanced automation and accuracy in most other industry verticals.
Secondly, is the opportunity presented by enhanced data capabilities. New technologies now provide the means to capture, process and monitor huge swathes of data that allow for the calculation and assessment of risk across a broader set of asset types. Previously un-insurable risks are now quantifiable, opening up significant new areas of opportunity for innovative propositions. Cyber insurance has been one of the more obvious categories amongst them.
Seeding the cloud: the nascent world of cyber
In a post-covid world, the question of cyber resilience is becoming omni-present. With the dual challenge of businesses being ever more dependent on their digital channels, and the inability of incumbent insurers to embrace the data challenge presented by potentially systemic risks, we are facing an increasingly wider gap between the potential for loss and the effective level of insurance.
Commercial property and liability insurance is available in most insurance markets worldwide. However, most property policies only cover damage to physical assets such as production facilities, and exclude cyber risk, as is generally the case with liability policies. In response to this situation, a specialized market providing coverage for cyber risks has emerged in recent years, most prominently in the United States.
The US has taken a distinct lead in cyber insurance partly as a consequence of a more digital based economy where wholesale cyber exclusions from mainstream commercial insurance have preceded similar moves in Europe. As a consequence the US has had reporting requirements for cyberattacks against large corporates in place for several years. Violations of these reporting obligations incur heavy fines and have considerably increased the awareness of cyber risk for all businesses, not just corporates. Now, discussions about the introduction of reporting obligations are taking place in Europe (eg. European Commission have already shared a draft proposition).
SMEs are clear targets and victims of cyber-attack and are largely unequipped to cope with the associated risk versus large corporates which have in-house CISO teams. On the other side of the table, many traditional insurance companies have failed to get control of this risk with outdated and un-adapted questionnaires to collect data, no risk prevention tools and finally a lack of data-oriented approach towards risk quantification. This has led to spiking loss ratios over recent months and as a result, increased premiums (eg. 3x in Dec-21 for AIG in France) and a capacity crunch from incumbents — leaving a white space for new players.
And the opportunity is there for the taking. At the time of its $200m Series E raise in September 2021, Coalition, the US market leader reported run rate GWP (Gross Written Premium) of $325m growing at an annual growth rate of over 800%! This gave the business a funding round valuation of $3.3bn, one amongst several unicorn/near-unicorn US focused propositions including At-Bay, Corvus and Cowbell. Their tech-first approach to insurance underwriting is proving to be a more successful model of risk management, with Coalition saying its policyholders experience less than one-third the claim frequency compared to other (incumbent) cyber insurance carriers.
Baobab: An advantaged approach to the European opportunity
Enter Berlin-based Baobab. Baobab is built on the thesis that despite the macro-tail winds outlined above (increasingly digital dependence/value, systemic risks, inability of incumbents to price given portfolio rather than data/risk led approach), penetration of cyber insurance has been slow for two primary reasons.
Firstly an inability to measure and price for risk. Simplistic portfolio level pricing with arbitrary risk assessment, and no guided/un-biased risk mitigation advice has led to escalating loss ratios for incumbent insurers addressing the space, and increasingly tighter qualification criteria. The second factor is therefore significant friction in distribution. 90%+ of European SME insurance (in particular in the DACH region) is distributed via broker channels. Simply put, brokers are unwilling to engage with clients on an advisory basis when they have neither the required level of knowledge, nor any degree of certainty of conversion success given the high rejection rates of most incumbent cyber insurers.
Baobab has taken the time to build out a fully scalable platform that provides tri-partite value to its capacity backers, to its broker distribution partners and to their ultimate client SME users. They have won resilient backing from a leading tier 1 capacity provider in Zurich and have already built out a rapidly expanding network of broker partners.
Baobab’s platform enables better client conversion without extensive cyber knowledge by simplifying and training brokers in the routine requirements of their customers. Deeper risk analytics within a screening cyber scan, combined with a full data enrichment process and targeted risk questionnaire, allows for pricing to be fit to individual SME risk profiles as opposed to a blanket portfolio pricing subject to a static screening hurdle, as generally applied by incumbents. This enables outlying risks to be rejected more efficiently, and for lower risk clients to benefit from much lower pricing.
In Baobab we see a team poised to fully address the exciting and nascent opportunity in Europe, one that has been fore-shadowed very clearly in the US. In Vincenz Klemm and Anton Foth, it has an exciting founding team who have deep experience in the insurance and cyber spaces. Vincenz is an impressive and visionary entrepreneur who has previously co-founded Gabi, a valuable insurance proposition in the US.
This is our first investment in the insurtech space. We take this step having developed deep conviction in the opportunity space, and having developed a strong relationship and a similarly strong belief in the founding team. We continue to look for other exciting technologies that create leverage in the core stack for existing insurers, and for propositions that use their data advantage to open up new fields of insurable risks. We look forward to being part of a new frontier.
Learn more about investing in fintech with Augmentum here.
This financial promotion is issued by Augmentum Fintech Management Limited which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number: 811734. Augmentum Fintech Management Limited is appointed as manager to Augmentum Fintech plc. This financial promotion is for information purposes only and nothing contained in this financial promotion constitutes investment advice. This financial promotion is intended for professional investors and for retail investors who have sufficient knowledge and experience of UK listed investment trust companies. If you as a retail investor are uncertain whether an investment is suitable for you, you should seek advice from a regulated financial adviser. The value of investments, and any income from them, can fall as well as rise and you may not get back the amount invested. Reference to “Augmentum” or “Augmentum Fintech” refers to “Augmentum Fintech Management Limited” unless otherwise stated. Reference to the “Company” refers to Augmentum Fintech plc. Reference to “we”, “our” and “The Augmentum Team” refers to employees, consultants or advisors of/to “Augmentum Fintech Management Limited”.