Building insurance technology and innovation independently rather than acquiring it from another party provides for potentially greater customization to fit a strategic insurance player’s existing operations. This customization could lead to greater competitive advantage in the marketplace if the ideas and technology developed offer a unique approach to addressing business challenges in the insurance industry. However, taking a greenfield approach could be costly, requiring a great expenditure of time and resources without the assurance that the technology and innovation will still be relevant by the time the concept is ready for launch.

Collaboration with insurtechs and investing in or acquiring an insurtech is typically faster and gives the strategic investor greater assurance that the technology and innovation being acquired has commercial viability in current market and regulatory conditions.

There are four typical types of transactions to acquire insurance technology and innovation, listed here in the order of level of effort, time and money to complete the transaction.

1. Venture Capital Investment. Participate in the insurtech company’s funding round. Typically motivated primarily by financial return and potentially to address the investor’s strategic objectives, including having higher priority access to technology, protecting potential technology/innovation from competitors and setting up a future acquisition of the insurtech company or its talent. Potential early mover advantage.
2. Minority Investment. Purchase of non-controlling stake (i.e., less than 50% of equity interests). Often motivated primarily by financial return and potentially preferred access to the insurtech company’s technology, data, etc. Potentially less risky than venture capital investment but unavailable if early strategic investors in the company have preempted the opportunity for other strategic investors.
3. Majority Investment. Purchase of controlling stake (i.e., greater than 50% of equity interests). Often motivated by the desire for day-to-day control over operations while allowing for the equity “upside” for managers or strategic players.
4. Full Company Acquisition. Acquisition of the insurtech or its business via stock deal, asset deal or merger.

Deciding whether to build, collaborate, invest or buy depends on a strategic insurance player’s desire to control the use and development of the technology, risk tolerance for potential business and regulatory uncertainties relating to the new technology (some of which may not be able to be fully addressed by due diligence) and ability to monetize the business through an IPO, sale or synergies through integrating the technology into existing operations. The below table lists a few of the strategic considerations to take into account when determining whether to make a smaller minority investment or a larger majority investment or full acquisition of an insurtech.

Preliminary Considerations

 

	Venture/Minority Investment	Majority Investment	Full Company Acquisition
Diligence	Least Amount	Higher level (virtually the same as Full Company Acquisition)	Highest level of diligence
Regulatory Burdens	Can be structured to minimize regulatory burdens	Insurtech company will generally be a "Subsidiary" of Acquirer and may be subject to regulatory supervision and oversight	Insurtech company will be a "Subsidiary" of Acquirer and may be subject to regulatory supervision and oversight
Control Rights	Very limited	More control (but potentially subject to minority "veto"), which also brings responsibility	Full control
Exit / Liquidity	Critical consideration, but value may be discounted for lack of control, and timing/ability to exit may be subject to restriction (e.g., ROFR)	Drag/Tag /ROFO typical approach	Full control and responsibility for seller indemnities
Culture/Fit/synergies	Not as important	Culture "fit" and key employee retention concerns Ability to achieve some synergies	Culture "fit" and key employee retention concerns Full realization of synergies