Insurtech’s "hot air balloon" under pressure

Market drifting back towards earth, says Gallagher Re expert

Insurtech’s "hot air balloon" under pressure


By Jen Frost

Insurtech may not be witnessing a bubble bursting, but it is facing up to difficulties that could change the face of the market, according to Gallagher Re global head of insurtech Andrew Johnston (pictured).

“I wouldn’t categorise this as a bubble – rather a hot air balloon with a tear in its canopy that is bringing it back down to earth, but not at a startling pace,” Johnston told Insurance Business.

This month, Gallagher Re released its quarterly insurtech report, and found that while funding had improved on Q1 into Q2, it remained more than 50% lower on a prior year basis.

Insurtechs have witnessed a spate of layoffs. In recent months there has been at least one reported a week, with staff at higher profile insurtech businesses Lemonade and Zego among those facing up to unnatural attrition. Industry insiders, meanwhile, are confident that there are more that have not made headlines as founders and CEOs grapple with a changing economic and investment climate.

There are already signs that the market is shrinking, and recent closures include Swiss blockchain consortium B3i and the UK’s Honcho, which has said it is pivoting its model.

“A degree of churn is always present but it does seem elevated at the moment,” was how Johnston put it.

The current scenario was described as a “reality check” in the Gallagher Re report.

It is “too early to say” whether the market may be witnessing a seismic shift, Johnston said. However, early signs and uncertainty around the length of the current market cycle “would suggest that the shift could be universal and significant”.

It is not all bad news for insurtechs, or at least the ones that find themselves with a winning formula and in the right position at the end of a difficult period.

“At the ‘end’ of the process, we should have a healthier cohort of businesses that are more self-supporting and more robust,” Johnston said.

The winners, according to Johnston, will be “those whose commercial propositions are the most sound, and relevant”. This will need to be “coupled with a degree of luck”, he said.

Looking forward, insurtechs will want to look at staying lean and avoid over-bloating where it comes to personnel, Johnston predicted, and they should already be learning this lesson.

The insurtech expert set out that “even in the most bullish market, being lean is a virtue and some businesses are learning that now.”

With personnel potentially eating up as much as 90% or more where it comes to costs, this is likely to be a natural area for leaders to look when needing to trim down, particularly where staffing levels may not have been realistic in the first place.

“Think of this not necessarily as companies going below zero (where they might wish to return one day), but more likely a reduction of unrealistically high staff numbers (relative to revenue) to begin with,” Johnston commented.

“Some of the desire to have high staff numbers relates to company value, as, in part, the industry struggles to valuate insurtechs, and high staff numbers have been seen as one way of doing this.”

Insurtechs are also likely to take a more measured approach to capital raising in light of the shifting market, according to Johnston.

“An unnecessarily high valuation burden is not a good thing in this market, but the growth targets and expectations are just increasingly unrealistic,” Johnston said.

“Insurtechs who can wait probably are - for cheaper capital for example - hence the layoffs etc.,” according to the Gallagher Re insurtech boss.

Some have predicted that the changing market could spell opportunity for incumbents look to take a slice of the insurtech pie for their own businesses, though Johnston said there are likely to be caveats to this.

(Re)insurers made 28 insurtech investments in Q2 2022, five less than in Q1. However, the 68 deals for the two quarters combined was up on the 48 struck in the first two quarters of 2021.

Series A investment by (re)insurers comprised 32.1% of all (re)insurer deals, which Gallagher Re said was the highest level since Q2 2020.

The current market poses an opportunity for incumbents “confident enough to wade into these darker waters”, Johnston said, with relative acquisition and investment prices likely to be down as part of a bigger shift.

However, he pointed out that insurers have other distractions, “not least their other investments, which are probably not performing as they did – so there will be a real focus on underwriting results and portfolio optimisation at the moment.”

“That is not to say there isn’t continued interest in insurtech, but we have seen a reduction of reinsurers [and insurers] investing this past quarter,” Johnston said.


Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!