Deals for insurance technology companies – insurtech for short – have dropped in 2022, as the wise money has migrated to later-stage firms on proven business models and surer financial footing.
Pie Insurance sailed against the current with a USD 315m Series D announced in September. The fundraise was one of 42 investment or M&A deals in insurtech announced during 2022’s first 10 months, yet it accounts for nearly a fifth of the total deal value of USD 1.56bn over the same period, according to Dealogic data.
This year’s deal count and total value are both on pace for their lowest marks since 2018 as equity market turmoil across sectors and macroeconomic headwinds shrank investment appetite significantly.
The slowdown will likely be more than cyclical for investment in the still nascent insurtech space, according to sector advisors. The economic downturn has resulted in a refinement of investment strategy in which potential backers will demand more of tech startups before committing money to modernizing the stolid and inert insurance business.
Innovation is marginal
Insurance is considered the last of the major financial services to digitize, trailing banking by about 10 years in attracting a slew of startups promising technological innovation.
Insurtech deals soared in 2019 and grew through 2021 when a record USD 12.3bn-worth of deals were signed. But digital improvements have so far worked on about 5% of insurance revenue margins, says Joe Coughlin, CEO and founder of Corporate Risk Solutions. His firm advises insurers and venture capital and private equity investors.
The holy grail for insurtech innovators is to smooth the way digitally from agents originating business to carriers underwriting policies, says Coughlin. Yet the established carriers’ technology platforms they use to price policies are proprietary, guarded, and not accessible to third-party “streamlining”, Coughlin says.
Randy Maultsby, president of insurance investor Tiptree [NASDAQ:TIPT], says not enough of the innovation his company has come across addresses the friction ushering policies from broker to carrier. Most existing offerings address “backend” operations, such as claims processing, but not “frontend” ideas designed to generate new business, Maultsby says.
“It’s rare from our perspective that we have a tech solution that significantly improves the front end of the process,” he adds.
Tiptree portfolio company Fortegra has set aside USD 15m for its expanding technology focus.
Deals should come
With the private funding stream slowed, several mature insurtech companies and investors spoke during InsureTech Connect conference in September about the arrival of ‘Insurtech 2.0.’ New companies with narrow focuses and dwindling capital options will need to sell to more comprehensive platforms.
Kaenan Hertz, founder of Insurtech Advisors consultancy, believes the steep valuation declines for public and private companies should lead to M&A opportunities. Shares in Hippo Holdings [NYSE:HIPO], Root [NASDAQ:ROOT] and Lemonade [NYSE:LMND] are trading at a fraction of their early 2021 highs. Hertz is “shocked” there is not already more deal activity.
The trick is the ability to rehabilitate, integrate or repurpose the technology of a foundering platform, Hertz explains.
“If you can do any of those, then I think it’s a great market [with some] potentially great opportunities,” he says.
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