Global insurtech investment fell 57% in Q4 2022, compared to the previous quarter, but smaller declines in the early funding round signal continued interest in the sector.
The return to the lowest quarterly investment total in three years was driven by the macroeconomic environment and a rationalization in the sector, which saw the number of insurers shrink as good ideas survived and others fell away, experts said.
There has been a sharp decline in the number of companies operating in the insurtech sector, from around 3,000 global insurers at the end of 2019 to an estimated 2,050 currently, according to the Global InsurTech Report released earlier this month by Gallagher Re, the reinsurer. Arthur J. Gallagher & Co. Brokerage.
Andrew Johnston, Nashville, Tenn.-based global head of insurtech at Gallagher Re, said “there was an unsustainable number of companies wanting to operate in the space”; along with unsustainable company valuations.
“There was obviously a huge valuation bubble going on in 2021 and for that bubble to be controlled you usually need a big event,” like economic trends including inflation taking hold in 2022, Johnston said.
“There was an irrational level of funding in the market,” said Bill Pieroni, New York-based CEO of Acord, the insurance industry standards body. “There were some exaggerated expectations.”
The market was headed for a shakeout, experts say.
“After a record year for insurtech investment in 2021, a downside was almost inevitable, especially given the economic conditions of high inflation, rising interest rates and escalating fears of a recession,” said Neil Spector, head of underwriting solutions for Verisk Inc. Jersey City, New Jersey.
Mr. Johnston said investors and technology users “now have a better understanding of what they want to get out of the insurtech space. I think there’s a realization that there’s only so much bandwidth within individual companies for technology focus.”
The decline in funding was largely driven by a decline in “mega-round deals,” those involving more than $100 million in funding, Johnston said.
Funding for such deals fell 89.7% to $153 million in the fourth quarter from $1.48 billion in the third quarter. The fourth-quarter total reflected just one deal, a venture-backed financing round for Clearcover, a Chicago-based digital auto insurance company.
There was a 66.7% year-over-year decline in mega-round funding, according to the Gallagher report. Property/casualty mega-round funding fell 54.5% to $2.38 billion in 2022 and life and health mega-round funding fell 80.8% to $866.93 million.
However, early-stage funding fell 25.1% to $408.8 million in the fourth quarter from $545.35 million in the third quarter.
The less sharp decline shows that investors are still interested in Mr. Pieroni said.
There is plenty of “dry powder” among venture capital and private equity firms and with the reduction in the number of insurtech firms, the money can be used more accurately and efficiently, he said.
He said smaller, earlier funding rounds still find favor with investors.
“What tells me that there’s still interest is the money that’s still flowing in early stage. There’s still an inflow, somewhat reduced, of seed funding,” Peroni said.
“The past year may have slowed investment and caused people to reevaluate the insurtech space, but interest is still quite high,” Mr. Spector.
Technology will continue to be in demand in the insurance industry. “Anyone who doesn’t think about technology right now will in the future. There’s only one direction for this,” Johnston said.
“There is still a strong appetite for innovation and new opportunities in the industry as digitization expands,” said Mr. Spector.