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Today's Viewpoint: A MarshBerry Publication

The InsurTech marketplace continues to boom with total capital invested exceeding $2 billion for the fourth consecutive quarter. While the sector has yet to prove that current valuations are justified, it’s likely inevitable that the sector as a whole is going to transform the insurance industry over time. Disruption may be imminent within the personal lines space and this article explores the potential implications for traditional insurance brokers.

Why is the personal lines segment so popular with InsurTech firms?

  1. Massive market size with nearly $350 billion in premium accounting for 53% of the total Property & Casualty market
  2. High concentration within this sector with personal auto and homeowners’ insurance accounting for $130 billion and $50 billion of premium, respectively.
  3. Lower complexity and low premiums resulting in a higher price sensitivity among insureds

So far, insurance brokers have had little to worry about. MarshBerry’s proprietary market data does not suggest that existing brokers have been meaningfully impacted by the entrance of new players. This is little surprising, however, given the current size of InsurTech firms with the two most prominent ones (Lemonade and Root Insurance) not even cracking $1 billion of written premium combined.

Given the significant amount of capital that has been poured into the sector to date, this is clearly good news for firm owners, as it demonstrates the resilience of this market segment. However, betting on the status quo to continue seems naïve at best as the growth rates tell a different story.

Between 2019 and the last twelve months ending June 30, 2021, the combined written premium of Lemonade & Root Insurance increased by a compound annual growth rate of nearly 50%. If they maintained that growth rate over a six-year period, their premium would reach almost $10 billion combined. Even if the impressive growth of these two were to slow down from current levels, there are many similar InsurTech firms waiting in the wings to siphon market share from incumbent players in this market segment.

Why the urgency?

While we expect that it will take up to five years until existing industry dynamics have meaningfully shifted, it is our opinion that valuations of personal lines-focused firms, or books of business, will be impacted the moment investors believe that the acquired revenue will no longer be sustainable, which will likely be sooner than that.

There is no doubt that insurance brokerage firms with heavy exposure to personal lines need to prepare for the rising tide of competition, which poses a significant threat to their business.

While large brokers have already started to make significant investments into their technological infrastructure to remain competitive in this segment, small-to mid-sized insurance brokers are lacking scale and capital to follow suit.

As valuations and overall appetite for personal lines-focused insurance firms may have hit a peak, there may not come a better time for owners of these firms to consider exiting their businesses.

If you have questions about Today’s ViewPoint, or would like to learn more about the implications of InsurTech in the insurance industry, email or call Tobias Milchereit, Vice President, at 212.972.4883, or email or call Ravin Rijhsinghani, Associate, at 212.972.4882.

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