In 2023, as tighter VC funding cycles and recessionary pressures are being felt across the broader economy, we can expect insurtechs to face even more scrutiny.
CB Insights highlighted muted funding trends experienced by insurtechs throughout 2022. In Q4, funding dropped to its lowest level since Q2 2022, and deal sizes were down by about a third.
As we saw with recent insurtech IPOs, the public markets have not been kind. Most of these companies were focused on disrupting or even upending the industry, and their aggressive approach to growth at all costs has yielded volatile results.
However, the more recent wave of insurtechs seems to have learned from this, with many of them determinedly recalibrating their strategy to fit with the changing macroeconomic environment and funding cycles (see InsurTech Market Will Reach of $165 bn in 2032).
Many insurtech startups will recalibrate their strategy in 2023 to fit changing macroeconomic environment and funding cycles
- Mega-round funding came in at $1.5B, representing over 60% of all insurtech funding.
- For the first time since Q2’18, there were no new insurtech unicorn births.
- In 2022 so far, average and median deal sizes are down 35% and 29%, respectively, compared to FY 2021’s totals.
- Asia (25%) surpassed Europe (21%) in deal share for the first time since Q4’22.
- After 4 quarters of decline, P&C insurtech saw funding grow 20% QoQ.
There is no one-size-fits-all approach for insurance, but we can expect the following five trends to dominate the industry in the months ahead (see Biggest InsurTech Startups in the World).
A sharper focus on unit economics
InsurTech Valuations Becomes Realistic. The slowdown in VC funding will challenge insurtechs to demonstrate that they have a path to profitability, namely through a more forensic approach to their distribution channels, operating model, and underwriting methodology.
Global InsurTech Market to garner $160 bn by 2030 at 32.7% CAGR
Startups will be pressured to detail their revenues and cash flow outlays, and provide investors with greater assurances that their business model has the strength to not just survive, but to grow substantially in the long term. Those that can back up their vision with cold hard data will be well positioned through 2023 (see How Insurers and InsurTechs Can Transform Insurance Platforms?).
With the downturn of investment came the revision of company values and a rethinking of what ‘success’ should mean in a more conservative environment. As a direct result, the ability to leverage individual company equity for loss-propping risk capacity became increasingly difficult, and several InsurTechs had some very challenging decisions to make as they reviewed their own margins and likelihood of (near term) future rounds.
The more recent cohort of insurtechs will focus on collaborating with carrier and distribution partners to move the dial, rather than smash it.
According to Global InsurTech Data Highlights, the aforementioned hardship has resulted in a number of different InsurTech businesses being forced to make some decisions that would have been previously unthinkable, even as recently as in the last 12 months.
Several businesses have publicly laid staff off, and in more extreme cases, been forced to shut shop. At the end of 2019, there were nearly 3,000 global InsurTech businesses. We estimate that currently there are 2,050 businesses that are actively open for business.
As every business owner knows, it’s tough when you are going it on your own, and insurance carriers offer the strong balance sheets and experience necessary to navigate the increasingly volatile market cycles.
Strategic partnerships, such as MGAs, simultaneously enable incumbents to work with passionate entrepreneurs and technical leaders who bring fresh ideas about how data and technology can create more value for all stakeholders.
We should expect a greater emphasis on transparency, innovation and mutual value creation between insurtechs, traditional carriers, and brokers to solve the challenges ahead together.
Greater specialization and segmentation
Most of the major commercial coverages — such as auto, workers comp and general liability are already facing competitive pressure, forcing new insurtechs to focus on more specialized verticals where they can gain a foothold with their unique distribution, underwriting, and support services.
We can expect startups to focus on servicing specific types of customers (industry, geographies, sizes, etc.) in a bid to identify lucrative, yet, underserved niches that offer enough headroom to build a sizable business.
Increased M&A and consolidation
You don’t need a crystal ball to know that there are choppy waters ahead for the startup community in 2023. Course correcting won’t be easy, meaning that the difficult economic period ahead will force insurtechs who have already made adjustments to explore all options.
For those that aren’t able to thread the needle with their current strategy or can’t make the necessary adjustments to change course, M&A is an attractive option.
Expect many carriers and even other cash-rich insurtechs, to be active in the coming months and drive greater consolidation across the industry.
In the absence of easy funding, the insurtech private market seems ripe for M&A, several investors pointed out. As insurtech valuations have become more realistic, many companies are probing, looking for M&A opportunities.
Insurtech M&A exits rose 40% in 2022 to 81, up from 58 in 2021. Despite a poor showing in the public markets, insurtech was the only fintech sector to see a year-over-year increase in M&A exits.
According to Insurance M&A Deals 2023 Outlook, overall, global fintech M&A exits declined 20% YoY to a total of 742. This also coincided with a 72% YoY drop in fintech IPOs, from 82 in 2021 to 23 in 2022. There were no IPOs or SPACs in the insurtech space in all of 2022 for the first time since the second quarter of 2020.
Focus on customers
Insurers Should be Think How Insurance Policy Fits with Customers Lifestyle. Despite the uncertain outlook, there is one group that is destined to benefit greatly, irrespective of how things unfold — the insureds.
The emergence of insurtechs prompted established carriers to focus more on tech upgrades, consumer friendly applications and the quick delivery of services online.
We are still just beginning to see what is possible, but the relentless focus on the customer by many of the new insurtechs is bound to help this industry close the gap between customer expectations and reality.
Helping customers understand how collecting and using their data will help them and educating them on the benefits, such as personalisation, is as important an investment as developing advanced AI models or IoT solutions. You cannot have one without the other (see How IoT Technology is Reshaping Insurance Business?).
Insurance customers are also beginning to think that insurers should be acting on climate change, but consumers in the UK are less willing to assume increased costs as opposed to their counterparts in other countries.
Fact checked by Oleg Parashchak