According to the fourth quarter 2022 Gallagher Re Global InsurTech Report, global insurtech funding fell during the fourth quarter of last year to its lowest level since the first quarter of 2020.
InsurTech funding fell 57.0 percent in the fourth quarter compared to the third quarter, to $1.01 billion from $2.35 billion in the previous three months.
The number of InsurTech deals dropped to 106 during the fourth quarter, the lowest number since the fourth quarter of 2020, according to the report. Last year was the first year in which overall InsurTech investment fell since 2016, with annual InsurTech funding falling 49.5 percent year on year, from $15.80 billion in 2021 to $7.98 billion in 2022.
Property-casualty InsurTech funding fell 43.7 percent year on year, from $9.41 billion in 2021 to $5.30 billion in 2022. Life and health InsurTech funding fell 57.8% year on year, from $6.39 billion in 2021 to $2.70 billion in 2022.
Dr. Andrew Johnston, global head of InsurTech at Gallagher Re and Global InsurTech Report editor, suggests in the preface to the February 2, 2023, Gallagher Re report that while 2022 InsurTech funding levels were not as impressive as those in 2021, the level of investment was remarkable in its own right. “One could make a very strong case that 2022 will be the most important year for InsurTech to date,” Dr. Johnston wrote.
He observes that 2022 began with significant uncertainty and a number of macroeconomic factors influencing venture capital investors’ attitudes, as well as attitudes in the (re)insurance industry about the actual impact technology was delivering relative to its cost.
As investment fell, companies reexamined their values and the definition of InsurTech success through a more conservative lens, according to Dr. Johnston.
“As a result, the ability to leverage individual company equity for loss-propping risk capacity became increasingly difficult,” Dr. Johnston wrote.
He sees 2022 as a year of “macro-realism” for many InsurTech firms, investors, and risk partners, as well as difficulty for individual businesses.
According to Dr. Johnston, this hardship forced a number of InsurTechs to make difficult decisions, such as laying off employees or closing down completely. He points out that, while Gallagher Re estimates there were nearly 3,000 InsurTech businesses in operation at the end of 2019, there are now only 2,050 in operation.
Some InsurTechs have laid off up to 40% of their workforce, which could equate to 300 to 500 employees at larger firms.
Layoffs were not limited to InsurTechs in 2022, according to Dr. Johnston, with the global technology sector as a whole experiencing a large number of layoffs, even at some of the largest and most well-known companies. He estimates that approximately 120,000 people will be laid off across nearly 800 companies in the second half of 2022.
Dr. Johnston also claims that the hard insurance market has had an effect on InsurTechs.
“The current risk capacity market is also adding to the squeeze being felt by many (in terms of costs, margin returns, and availability to support originated business from a ‘InsurTech player’ in a market where so many incumbent risk partners have historically been burned”),” Dr. Johnston wrote.
Noting that the current insurance market may be the most difficult since the September 11th attacks, Dr. Johnston suggests that most InsurTechs were either unprepared for current conditions or did not understand the insurance industry well enough to model for and respond to the current difficult market.
The insurance market outlook remains uncertain, according to Dr. Johnston, with the current hard market cycle expected to last until 2023 or longer.
“This tighter risk capacity has been primarily the result of reduced risk appetite rather than a lack of capital, and the onus is on risk-originating InsurTechs to make their business look appealing—this shift for many is culturally significant, ‘not what you can do for me, but what I can do for you,” Dr. Johnston wrote. “With modeling uncertainty affecting many incumbents’ written books, a number of reinsurers simply do not see InsurTech capacity allocation as a risk worth taking.”
Despite the challenges that InsurTechs faced in 2022, there are a few companies that have done well, according to Dr. Johnston. “They are conscientious partners who understand our industry and use technology as an enabler, not just a product to hide bad business,” he wrote.
Dr. Johnston wrote that the failures of some InsurTechs who attempted to disassemble the traditional insurance value chain and reassemble it in a more complex and convoluted fashion served as a cautionary tale for new businesses.
“We are at the dawn of a new era in which the role of technology, as brought to the table by InsurTechs, is to support our global trillion-dollar industry, not to use it as a justification to raise absurd sums of money against unjustifiable valuations,” Dr. Johnston suggests.
While 2022 was a down year for InsurTech investment, he believes the future of technology in the insurance industry is bright, with InsurTech playing an important role.