Briefing: Insurtech’s ‘stick or pivot’ culture could return for a post-pandemic sequel

“Pivot” – no, this is not just something acquainted with David Schwimmer’s sitcom character, Ross Geller, in the episode of Friends where himself, Rachel and Chandler try to hoist an overly large couch up several flights of stairs. 

Back in September 2020, I wrote a feature entitled Insurtechs navigating the pandemic amid shifting consumer behaviour – stick or pivot?

This took a deep dive into how the insurtech sector had to adapt to stay afloat during the Covid-19 pandemic and explored what elements were needed to make an insurtech pandemic-proof.

Fast forward to July and August 2021, however, and insurtechs were once again winning - the sector boasted six unicorn businesses with valuations of at least $1bn (£82m) as technology and digital became a necessity within the ‘new normal’ of living with Covid-19 in the UK. 

But this year, the story of insurtechs’ success has shifted yet again - both Zego and Lemonade have issued staff cuts this summer, for example.

The notion of pivoting business operations has also resurfaced following reverse auction marketplace Honcho shifting into B2B embedded car insurance in July 2022, therefore moving away from its original direct to consumer model.

The insurtech’s chief executive, Gavin Sewell, told me that this pivot “will be the essence of the new life of Honcho”.

Backing a ‘speculative bet’

This week, I spoke to Andrew Johnston, Gallagher Re’s global head of insurtech, following the publication of the reinsurance broker’s Global insurtech report in August 2022.

The report revealed that UK-based insurtechs saw global investment deals increase between Q1 and Q2 2022, rising four percentage points to represent 12.1% of worldwide deals by the end of 2022’s second quarter. Overall, 16 insurtech investment deals were completed in the UK in Q2 2022, raising $202m (£165m).

Johnston told me there “seems to be a healthy degree of conservatism coming into the investment landscape of insurtech at the moment”, with global investment in the insurtech sector improving by 8.3% between Q1 and Q2 this year.

Despite this, Johnston added that deal flow was down compared to the same reporting period in 2021 and that “early stage funding had been slashed in half”.

He explained that early stage investors are typically “less affiliated with the insurance industry”, meaning they could be less confident about selecting winning firms to back and investment may be more of a “speculative bet” - although there is certainly “no shortage of capital for the right kind of grey matter”.

The “knock-on effect” of this, however, is that ”it’s less clear when the next round of funding might be” for these early stage companies, Johnston continued.

Therefore, ”insurtechs that have raised money are looking to keep hold of that money”, while others are ”reassessing their projected growth targets”, he added.

It is this funding uncertainty that has contributed to the raft of insurtech workforce lay-offs, Johnston noted.

Zego, for example, has cut 17% of its staff, while Lemonade has laid off 20% of Metromile’s employees after it bought the business in July 2022.

’Sticking to their knitting’

This change in investment appetite paired with the current economic climate means that insurtechs are ”really sticking to their knitting”. US-based insurtechs, for example, have cut back ambitions to expand across all 50 states or write multiple classes of business.

Johnston explained: “A lot of insurtechs are now having to think about things like revenue and profitability in a way that they never had to write because, previously, there were investors that were propping up their losses.”

This means that insurtechs now “have got to stand up on their own two feet” if they want to survive.

“Historically, investors have really struggled to value the worth of insurtechs because it’s very hard to have objective benchmarking. But also, you can’t necessarily take somebody’s balance sheet or revenue seriously because they might not have any [due to] being an early stage company,” Johnston continued.

He noted that in the past, insurtechs used to hire lots of senior staff to raise their profile – he deemed this as “peacocking” for the next investor.

Johnston thinks the insurance industry is “now having to find another way to try and value insurtechs because if insurtechs aren’t prepared to take the bets to hire those who start off as an example, then what do we measure value on?”

In my opinion, the insurtech landscape is changing and only those with pandemic-proof business models will survive. However, the sector has always been agile - more so than incumbents - and I believe that most firms are capable, if need be.