A 25 year prediction for InsurTech
A prediction: the best-performing insurer over the next 25 years will be either an InsurTech start-up or an existing insurer that is or becomes radically digital-first.
This is not a bold prediction.
According to Dowling & Partners (Note 1), the best-performing major US P&C carriers over the last 25 years, measured by growth in book value plus dividends, were Progressive, Markel, Berkshire Hathaway, and WR Berkley.
The top performers' 25-year value creation through 2019 was 8X that of the worst performing insurer.
Progressive, Markel, and Berkley, which are today ~$80 billion of collective market cap, developed in their modern form when minicomputers were disrupting mainframes. The big multi-liners were proud of their powerful room-sized computers, but the best performers took advantage of a smaller, cheaper, and more flexible technology.
As computers kept shrinking and getting cheaper, yet more new business models became possible. In the 1990s, the Bermuda reinsurers emerged, using a combination of spreadsheets, catastrophe models, and PCs. Dowling's study found that the best performing insurer in the 15 year period to 12/31/2019 was a Class of 2001 Bermuda start-up, Arch Capital. (The best performer in the 5 and 10 year periods to 12/31/2019 was Progressive.)
Today, technologies like cloud computing, APIs, and mobile are having a similar effect as the technologies of yore, enabling yet another generation of new and differentiated business models.
The market value of the 16 US publicly-traded InsurTechs shown below is $66 billion, with $40 billion of that market cap from companies that went public after January 2020. (Note 2)
The analysis doesn't even include Verisk, an insurance analytics and data provider with a market cap of $30 billion. (Verisk was founded in 1971 as an industry not-for-profit consortium.)
By comparison, the last wave of disruption in insurance, the Bermuda reinsurer of the 1990s and early 2000s, represents about $50 billion of market cap (Note 3).
As a second comparison, the total of "alternative" capital in insurance, $92 billion, may soon be exceeded by US InsurTech public market cap if rumored IPOs/SPAC mergers are consummated and equity markets remain robust.
My prediction does not mean that every InsurTech will be the next Progressive, and it's certainly not investment advice or a commentary on whether public markets are right or wrong. But after 5 years of increasing hype, there are increasing signs of durable change emerging from InsurTech.
Change happens gradually, then suddenly. We're in the "suddenly" part.
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FOOTNOTES & DISCLAIMER
(1) IBNR Weekly #31, 2020, by subscription. Dowling's analysis included 45 large insurance groups, mostly comprising US and Bermuda companies.
(2) Data as of 1/28/2021. Metromile is shown at the announced valuation pending final closing of its merger into a SPAC.
(3) Represents the market cap as of 1/28/21 of Bermuda-headquartered companies traded on US exchanges who have a substantial presence in P&C or Life reinsurance, excluding financial lines companies.
The views expressed are the views and opinions of Adrian Jones, Managing Director of HSCM, as of February 1, 2021 and may not take into account material economic, market, regulatory and other factors that could impact such views and opinions. Certain information has been obtained from sources believed to be accurate and reliable – any of which may be erroneous or change without notice. Hudson Structured Capital Management Ltd. has no obligation to update or advise you of any changes or errors. There can be no guarantee that any prediction, projection, forecast, or opinion will be realized. Certain information discusses general information related to the specific industry, activities and trends, or other broad-based economic, market or other conditions and should not be construed as research. The views expressed may change at any time subsequent to the date of issue hereof.