Insurance technology, or insurtech, firms have stormed the industry in the past few years, changing every aspect of the insurance business. Despite cries of disruption from incumbents, these tech companies grew rapidly, fueled by aggressive funding. The insurance industry’s digital transformation provided ample demand for these firms, but the future doesn’t look as rosy for insurtechs.
Ryan Schiller, head of strategy at Accelerant, predicts it will be harder to get tech funding due to macroeconomic factors and venture capital appetite, but “within insurtech, the pain is and will be heightened.” High inflation and economic uncertainty will shrink budgets considerably.
Insurtech funding dipped 2.5% quarter-over-quarter in Q3 of 2022 at $2.35 billion, according to Gallagher Re. While funding is far from its peak in 2021, some insurtech firms will still see capital injections next year, though investors will be much more discerning.
Companies will have to focus more on responsible growth, rather than just meeting investors’ needs, according to Ian White, co-founder and CEO of Koffie Financial, an insurtech providing financial services to the trucking and transportation sector.
“As the economy teeters on a recession, investors and business leaders continue to look for a path to profitability with less patience on vanity metrics, so it’s very likely that we haven’t begun to see heroes emerge from the current wave of startups,” White said. “Gone are the days of writing as much business as possible without consequence for outcomes or when margins may turn favorable.”
“Pressure is mounting on those companies that sold the idea of endless growth to secure funds,” said Dr. Andrew Johnson, global head of insurtech for Gallagher Re. “It seems very clear now that the era of rushed growth for growth’s sake at the expense of profitability is coming to a close.”
Insurtechs ‘dying on the vine’
With funding drying up, as many as 25% of insurtechs are predicted to exit the market, either through mergers with more established competitors or through a wind down, according to research firm Forrester. This trend already started in 2022, most notably when Lemonade shed 20% of its staff at auto insurtech Metromile days after completing its acquisition.
Collapsing time, flattening risk, increasing efficiencies. CEO @daschreiber chats with @CarolineHydeTV about why Lemonade is acquiring @Metromile.— Lemonade (@Lemonade_Inc) November 10, 2021
See the full clip here: https://t.co/Qlft1fzwTV pic.twitter.com/GHo0Dlo8Eh
“Scarce access to capital forces new players to identify meaningful opportunities with strong unit economics, versus the ‘spray-and-pray’ approach during a low interest rate period and seemingly unlimited venture finding,” White said. “In 2023, I anticipate a wave of companies ‘dying on the vine’ as they will lack sufficient runway to exploit product market fit, be consumed by regulatory compliance or unable to show a path to profitability.”
Schiller also cited meaningful barriers to entry as a significant hurdle for insurtechs, making it harder from them to innovate within. Heavy regulation and capital-intensive business will also mean poor performers won’t survive the competitive marketplace.
The next generation of insurtech companies, dubbed “insurtech 2.0,” will need to prioritize strong underwriting rather than growth, the way the previous cohort did.
“We see huge demand paired with limited supply – a result of relying on traditional questionnaire-based methods to gather data for underwriting. These methods have failed to appropriately quantify risk, leading to a chain reaction of underpricing, losses, and market pullback,” observed Madhu Tadikonda, chief executive officer of Corvus Insurance. Corvus provides AI-driven commercial insurance, specializing in cyber, technology errors and omissions (E&O), and reinsurance.
“Looking ahead, the insurtech landscape will continue to mature and focus on profitability and filling gaps between customer needs and current capabilities,” the CEO added. “An ‘insurtech 2.0’ approach will leverage the data and technology to properly assess and price risk, and even go beyond the insurance application to help proactively mitigate risk for policyholders.”
Insurtechs will also need to assess risk from a global perspective, especially when it comes to cyber. According to Tadikonda, these firms can gain a more comprehensive understanding of cyber risk by leveraging data from varied sources, including claims, automated scans of organizations beyond the book of business, and data from inside the firewall gathered through partnerships with cybersecurity vendors.
Finally, insurtechs will begin to embrace the independent model as the captive model loses its hold on the industry, and the direct model struggles to prove itself, according to Brian Pattillo, vice president at personal lines property and casualty agency Goosehead Insurance. “In 2023, not only will insurtech companies double down on independent distribution, but consumers will continue making the shift,” Pattillo noted.