BrokerFest 2023: The peaks and troughs of insurtech investment

BrokerFest2023: Insurtech firms faced vast uncertainty in 2022 as macroeconomic factors such as rising interest rates took a toll on investments and general market buoyancy.

Lingering in 2023 is a “mixed message” in terms of investment funding, said Innovate Risk Labs (IRL) co-founder and chief executive Ed Gaze.

Gaze told delegates at Insurance Times’ BrokerFest 2023 event last week (23 February 2023) that funding for insurtechs is now “generally more difficult, but for early stage [businesses], it’s actually not so bad”.

He explained that the funding landscape is more challenging compared to two years ago due to the likes of Lemonade’s “tanked” valuations, which has had a ripple effect on the market and made investors more “sceptical” about insurtechs.

Many early-stage insurtech brokers, on the other hand, receive friends and family or angel investment, which “hasn’t been impacted so much because [those businesses] are so far away from the exit that problems with the stock market are just irrelevant”.

Percayso Inform’s managing director Richard Tomlinson echoed Gaze’s sentiments and said that winning funding was “much harder” with “less hype” in the market compared to the “hayday” of insurtech investment in late 2021.

He further noted that venture capitalists “aren’t keen” on personal lines businesses, as “consumers are wanting to reduce their premiums and take on more excess themselves”, resulting in insurtechs’ premiums and revenue decreasing.

According to Gallagher Re’s Q4 2022 Global insurtech report published in February 2023, global quarterly insurtech funding fell by 57% quarter-on-quarter from $2.35bn (£1.94bn) in Q3 to $1.01bn (£834.7m) in Q4 2022 – the lowest level since Q1 2020.

Early-stage funding for insurtechs, however, increased to 24.8% in 2022 – a five-year high. Around 70% of corporate insurtech investments from (re)insurers in Q4 were early stage.

‘Chicken and egg’

The process of investment due diligence has been reversed for some risk originating insurtechs, added the report.

Venture capital (VC) firms are “now looking to see that (re)insurers are actually going to come to the table first, in some cases, before writing a cheque”, noted Andrew Johnston, global head of Gallagher Re Insurtech.

“This [occurrence] has created a chicken and egg type of situation for a number of insurtechs looking to raise money in this environment,” he added.

As a result of past lessons from the likes of insurtech WeWork suffering a $283m (£233m) loss, Tomlinson said funding in 2023 would be dependent on “having the proof, having those business fundamentals – being really clear about them and being very specific about what the problem is you’re solving and how you’re going to do that”.

When attracting investors, insurtechs should consider “what traction you have in the market, what the numbers look like, what the KPIs are [and] what is the credibility of the team”, he added.

To plug the funding gap, Gaze said insurtechs could turn to online equity crowdfunding firms such as Seedrs. When using this approach, however, he noted that insurtechs should ensure pitches were planned so that a “layman can understand what it is you’re offering.”

• Insurance Times has converted dollar amounts into pounds using an exchange rate of $1.21 = £1, which was correct as of 1 March 2023.