There are several approaches an insurance incumbent can take to enter the insurtech space as a venture capital investor:

• Investing in a venture capital fund that focuses on insurtech.
• Developing an incubator or accelerator program to help the development of early-stage insurtechs while assessing the insurtechs’ technology and strategic fit for future investment.
• Forming a venture capital arm to invest in insurtechs.

These three examples have differing levels of involvement by the incumbent in terms of investment amount, required venture team capabilities and risk exposure.

 

Investment Approach	Level of Involvement and In-House Capabilities	Information Rights on Technology Being Developed by Insurtechs	Strategic Value	Risk Exposure
Investment In a VC Fund	Low	Low	Low	Low
Incubator/ Accelerator	Low to Moderate	Moderate	Low to Moderate due to the insurtechs' very early stage of development	Low
Venture Capital Arm	Modorate to High depending on whether Venture arm is a lead Investor or follower investor	Moderate to high depending on level of Investment	Moderate lo high depending on whether a strategic relationship is developed	Low to Moderate depending on level of Investment

Investment in a VC Fund Focusing on the Insurtech Sector

Investing in a venture capital fund that focuses on insurtech investments is the most passive approach but allows an insurance player to become familiar with the breadth and scope of product offerings by a wide range of insurtechs without making a big bet on any one company or type of technology. However, the ability of the investor to glean any detailed knowledge of a particular company or technology may be limited. Also, the investor may not be given the opportunity to develop relationships with any particular insurtech company through the venture capital fund.

The typical way to invest in a venture capital fund is to become a limited partner of the fund. The general partner of the fund, which receives fees from the limited partner based on assets under management and performance of the fund, will oversee the management of the fund and negotiate terms of particular investment deals. The limited partner agreement sets forth various rights and obligations of the limited partner (including capital commitments and potential capital calls) and the general partner. The general partner may manage the fund itself or delegate the management to its investment arm affiliate.

Developing an Incubator or Accelerator

Establishing an in-house incubator or accelerator may enable an incumbent to develop relationships directly with early-stage insurtechs. An incumbent that wishes to go down this path customarily develops a program that provides office space, infrastructure and certain startup resources to insurtechs for a certain period of time ranging from a few months to over a year. The number of insurtechs per cohort class depends on the level of space and resources that an incumbent wants to offer under the program.

Some incumbents offer incubation/accelerator programs that are very selective and provide strategic opportunities to the selected insurtechs to provide products and services to the incumbent. This model works particularly well for an incumbent’s employee who is interested in being more entrepreneurial while not breaking away completely from the incumbent by forming a new enterprise backed, at least in part, by the incumbent. However, even if the insurance incumbent offers funding and much needed resources, some insurtechs are not attracted to such an arrangement due to the potential of restricting their business to being a narrowly defined technology provider to the incumbent. Accordingly, the incumbent needs to conduct its diligence in its selection of insurtechs to incubate/accelerate to ensure that it is getting access to best-in-class technology and innovation. In addition, the incumbent may need to manage potential conflicts involving its existing businesses that are developing similar technologies as the insurtech, and the insurtech that may have a confidentiality agreement with respect to confidentiality rights with the incumbent under the incubator/accelerator program.

The terms of an incubator/accelerator program are customarily set forth in a participation agreement between the insurtech and the incumbent. The incumbent will usually provide a limited amount of capital to the insurtech in exchange for the issuance of equity with an option to acquire additional equity in the future.

Forming a Corporate Venture Capital Arm

No risk. No reward. This mantra certainly applies in the formation of an in-house venture capital arm to directly invest in insurtechs. Direct investment in insurtech increases the potential financial and strategic value of the venture investment portfolio but also exposes the incumbent to greater risk. These risks could result in financial investment write-offs but also could have regulatory and reputational implications for the wider business. This could take the form of the insurtech portfolio company not being in compliance with law or suffering a major business problem, especially if the incumbent has representatives on the insurtech’s board and/or has also entered into a strategic relationship with the insurtech. In addition, a corporate venture arm, if not closely aligned with the incumbent’s wider business, could inadvertently create conflicts with the incumbent’s business, brokers agents and other marketing channels through investing in potential disruptive competitors.

These risks can be managed through careful due diligence and internal corporate governance that oversees and helps align the corporate venture arm’s activities with the rest of the incumbent’s business. There are also different levels of investment and involvement from more passive investments as a follower investor where an investment round is led by an experienced venture capital fund to a more active investment approach where the incumbent acts as a lead investor that takes primary responsibility for due diligence and corporate governance of the insurtech after completion of the investment.

To execute a corporate venture investment, an incumbent will need a team of people who are familiar with the insurtech and venture capital ecosystem. Insurtechs oftentimes want seasoned investors who have the experience to balance (a) the need to oversee an insurtech’s operations at the investor level with (b) the insurtech’s desire to grow independently through implementation of its business model. Insurtech investments are also typically structured like other venture capital investments that follow a fairly standardized set of investor documents that set forth the terms of the investment, investors’ corporate governance rights, voting rights (including veto rights and other protective investor provisions), information rights and transfer restrictions of securities held by the founders and investors. The concept around using standardized terms is to reduce the need for negotiations, accelerating the completion of a venture financing transaction in an efficient manner. However, due to the strategic nature of many insurtech investments by an incumbent, some of these terms are subject to negotiation

One additional challenge of forming a corporate venture capital arm is aligning the organization to support the corporate venture capital arm. The compensation structure for the team members who are part of the corporate venturing group may need to be different than those in other divisions of the incumbent to attract the appropriate level of experienced talent. Also, the organizational structure of the incumbent may need to be changed to better align and promote communication among business divisions that focus on technology, strategic alliances, M&A and venture capital.