THE THREE TYPES OF CAPITAL INSURTECH STARTUPS NEED- AND INCUMBENT INSURERS CAN PROVIDE
There are over 1.000 Startups operating in the insurance industry seeking for capital. But from my experience as a startup scout and mentor, Insurtech startups do not even know that there are several types, what the differences are and that insurers very often offer them to new funded companies. What are the types of capital insurers offer Insurtechs?
Capital Type No. 1 - Investment Capital
Unless startups have bootstrapped their way to profitable growth, seed and venture capital investors are an essential source of money. Why is that? Because Insurtech startups have limited operating history, are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan.
The Investment Capital is used to set up operations and grow the startup. Hint: Incumbent insurers can provide this type of capital as a seed or venture capital investor.
Capital Type No. 2 - Working Capital
Working capital is required to ensure that the venture is able to meet the on-going operational expenses (it’s not only about payroll and other bills, but also for the preparation of preliminary work in the project business or product development and for customer acquisition, B2C/B2B).
Incumbent insurers can provide commission payments to brokers and MGAs or compensation within the scope of PoCs and projects.
Capital Type No. 3- Underwriting Capital AKA Underwriting Capacity
Underwriting Capital is required to finance potential claims. Insurtech startups who would like to offer innovative insurance products and novel business models need this form of capital to indemnify policyholders. Keep in mind: This form of capital is only provided by primary and re insurers.
There are three types of capital Insurtech startups need. the 1st type is investment capital: It’s needed for setting up and growing the company. The 2nd type is working capital: This is needed for financing day-to-day operations, pre-financing PoCs and projects, and of course for acquiring new customers like in the B2C or B2B markets. The 3rd type is underwriting capital: Underwriting Capacity is vital for financing potential claims.
Remember: All three types can be provided by incumbent insurers, No. 3 only by insurers.