Light at the end of the tunnel despite ‘muted’ insurtech series A funding for Q2

Despite “muted” series A funding and overall funding for global insurtechs slipping to $916.7m (£723.93m) in Q2, according to the latest Gallagher Re’s lastest insurtech report, there is light at the end of the tunnel.

Andrew Johnston, global head of insurtech at Gallagher Re and author of the report, said this was positive as the sector is going through a “correction process” whereby “insurtech is less synonymous with huge capital raises and more synonymous with precise business outcomes”.

The Global Insurtech Quarterly report, published 3 August 2023, revealed that total funding for Q2 was down by 34% compared to Q1, when it stood at $1.39bn (£1.10bn).

Johnston told Insurance Times: “We’re actually below a billion dollars for the first time in a few years, but I don’t see that as being any kind of alarm quite honestly, partly because I have the benefit of seeing the data, I can see where the money is going and it seems very healthy.”

Although Johnston said he tries not to read too much into any one quarter, “muted” series A funding for Q2 caught his attention.

The report showed that Q2 2023 saw a quarter-on-quarter percentage drop in early stage insurtech funding of 48.1% – from $416.6m (£325.5m) to $216m (£169m).

This makes Q2 2023’s early stage funding for insurtechs the lowest since Q3 2017.

Series A funding is the first round of funding that follows the seed stage.

“You could interpret [this] as being a microcosm of the broader insurtech space – people are just being particularly conservative right now,” explained Johnston.

“Series A [funding] is probably the hardest part of the lifecycle to raise capital because you are starting to see some big cheques and yet companies have not really proved themselves yet – some are still prerevenue.” 

What, not the how

Johnston added that he believed insurtechs should be focusing on the what, rather than the how.

He explained that the what could be defined as commercial outcomes, whereas the how was the technology being brought to market.

He added: “To me, that speaks to sustainability over the long term to deliver for customers because, ultimately, technology changes – new technology comes into the industry all the time.

”But, as an industry, we are focused on sensible commercial goals in the context of what we are trying to deliver to clients.”

In the report, the largest capital raise was from UK-based Accelerant, which raised $150m (£118.14m) in a series B round.

The capital raise was the only mega round this quarter and marked the third consecutive quarter with just one mega round insurtech deal completed.

Johnston said: “We’ve gone from a situation where we were having 13 to 15 mega rounds per quarter to now having just one, maybe two.”

However, the report also noted that Q2 saw significant activity from insurers, reinsurers and insurtech-specific funds. Funding from these types of firms reached its highest proportion this quarter as a relative percentage for reinsurer and insurer activity.

“More corporate venture capital (CVC) firms are participating, more insurtech specific funds were participating,” Johnston explained. 

”There’s relatively less participation coming from the opportunistic technology venture capitals that were driving the huge amount of growth in 2020 and 2021.” 

Johnston added that technology-focused venture capital hadn’t seen “that return on investment that they were probably hoping for”.

“There is undoubtedly still an appetite to invest for the right grey matter because our industry is so big – it still represents a huge opportunity,” he explained.

Johnston said he believed the increased funding activity from within the insurance industry was explained by the expertise needed to effectively invest in insurtech firms.

“There’s a degree of confidence that’s required to make the most of that opportunity,” he noted.

”This confidence comes from understanding the insurance industry – therefore for those investing from outside the industry a lack of understanding of what might and might not be successful would be impacted”.  

More humble aspirations

For Johnston, the highlight of this report was that the insurtech sector “seems to have evolved into quite a healthy and sustainable environment where companies aren’t raising money left, right and centre from predominantly venture capital funds”.

This is an exciting position to be in, he said, as the sector had moved away from “testing the art of the possible, raising loads of money and trying to grow at all costs”.

Now, the industry has “more humble aspirations”.

Johnston continued: “Sustainability is key for several companies right now and that is healthy.

“It wouldn’t surprise me if we didn’t see a huge uptick in activity this year – [funding] will probably be relatively muted for the rest of the year as people focus on the outcomes that are more sustainable and represent the best return on investment capital.

”The industry in general is still figuring out how to exactly deploy resources in this space.”