Ongoing macroeconomic challenges prompt insurtechs to demonstrate their value

As the story of 2023 starts to unfold, the insurtech sector – like many others – continues to face ongoing challenges around inflation and cost of living pressures.

These macroeconomic events have spooked potential investors into acting more cautiously, meaning that insurtechs must demonstrate that they are adding value to a myriad of insurance processes and businesses if they want to woo new investors and funding.

For example, Gallagher Re highlighted in its Q4 2022 Global Insurtech Report that insurtech funding dropped to its lowest level since Q1 2020, plummetting by 57% quarter-on-quarter – this equated to a $1.01bn (£813m) fall.

While this rose 37.6% in Q1 2023, Gallagher Re’s global head of insurtech Andrew Johnston warned investors were being “cautious” due to the current economic landscape.

“There is a general reticence to go out alone as an investor at the moment because of the macroeconomic environment,” he told Insurance Times.

“Insurtech returns have not been as spectacular for the investment community as people probably once thought they might be.”

”That information is well and truly trickling down now to all investors.”

Risto Rossar, chief executive of insurance software insurtech Insly, told Insurance Times that “monetary tightening” was bumping up both the cost of business and short-term thinking.

He explained: “It means investors are not doing any long-term investments because the thinking is more in the short term.”

Furthermore, research and advisory firm Forrester noted in an article published in November 2022 - entitled Predictions 2023: Evolving risks and recession fears will redefine insurer strategies - that as insurtech funding dries up, more than a quarter of insurtechs could exit the market via M&A or from winding down their business.

This situation could create ”a buyer’s market” that is in stark contrast to 2021’s unicorn boom, which saw three insurtechs gain valuations of over $1bn (£81m) in the first half of that year.

This included Tractable, Zego and ManyPets – formerly called Bought By Many.

The article stated: “Though insurtech investment reached an all-time high in 2021 – due largely to the digital transformation of insurance during the pandemic – that funding is now drying up.

”In 2023, look for the strong – or well-funded – to buy the weak.”

Supporting insurers

To entice investors, therefore, insurtechs must showcase every nuance of value they can contribute to insurance processes.

For Oxbow Partners’ principal George Hanks, this is why the business management consultancy has observed a shift away from insurtechs touting legacy system replacements to instead focus on offering incremental technological gains.

“In a world where profit margins are being squeezed, insurtechs [that] can both positively impact the expense and loss ratio of general insurance (GI) businesses are going to be well received,” Hanks explained.

”Insurers are fully committed to their digital transformation journeys and insurtech, obviously, has a critical role within that.”

Ellen Carney, principal analyst at Forrester and author of the aforementioned article, agreed with Hanks’ sentiment.

Although she felt carriers would curtail their overall spend on IT projects and legacy tech replacements in a bid to reduce costs, investments in areas designed to achieve business efficiencies – such as automation and robotics – were likely to continue.

Insurtech developments

Alongside investment concerns, initial public offerings (IPO) – where the shares of a private corporation are offered to the public in a new stock issuance – appeared to have stagnated in the insurtech market in recent years.

US-headquartered Lemonade, for example, shelved its IPO plans in November 2019 after reporting an underwriting loss of $15.8m (£13.7m) in its 2017 full-year accounts, as well as a $1.5m (£1.3m) underwriting loss in the first three months of 2018.

Fast forward a few years, however, and IPOs may be making a reappearance. Insurtech Ondo – previously known as LeakBot – became the first UK insurtech to make an IPO in March 2022 following its purchase by Spinnaker Acquisitions.

A further trend to watch – and another way the insurtech sector can demonstrate its value – is insurtechs being viewed as collaborators rather than disruptors in the insurance market.

One example of this is Akur8, which offers an artificial intelligence powered pricing and rating platform that aims to help actuaries build and update pricing models more effectively.

Another example is RightIndem, which offers a self-service, digital platform to speed up claims’ lifecycles.