Insurance

Slowdown in Insurtech investments | Business Insurance

Investment in insurtech companies fell in the second quarter compared to explosive growth in the same period last year, but interest in the sector remains high as companies continue to look for ways to better use technology throughout the insurance industry.

While funding in the second quarter fell around 50% from last year’s record levels, it was still the second highest total investment on record in the second quarter, illustrating the strains on the sector and indicating a possible inflection point for capital flows, sources said. .

Going forward, investors and market participants are likely to focus more on profitable growth, they say.

Insurtech’s stock price declines have also erased billions of dollars of value from publicly traded companies (see chart), but those losses must be seen in the context of the broader steep decline in tech stocks, they say .

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A report last month from Gallagher Re, a unit of Arthur J. Gallagher & Co., which showed a sharp decline in insurtech funding sounds a warning for the sector, but it will likely recover and remain promising for investors. , according to experts.

“Insurtechs are forced to reassess their growth strategies. In some cases, that may mean having less ambitious growth targets and focusing on things like revenue and profitability if they want to survive,” said Andrew Johnston, global head of insurtech in Nashville, Tennessee, at Gallagher Re.

Mr Johnston said there had been a relative drying up of capital which had previously funded the losses. “Companies are going to have to start generating their own revenue to that extent,” he said.

“There are macro factors and market factors that have driven more shadow, and I think that has had an impact on the level of activity,” said Emmalyn Shaw, managing partner of Flourish Ventures, a San Francisco-based venture capital firm with interests including insurtech and data and analytics.

“I don’t like to focus on any one quarter, but the second quarter had the strongest harbingers of an inflection point at which valuations become more realistic and the focus is more on revenue and profitability,” Johnston said. .

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Yet most sources agree that there is a lot of capital flowing into the sector.

Parker Beauchamp, founder and managing partner of Boulder, Colo.-based Markd VC LLC, an insurtech-focused venture capital firm that launched a $100 million investment fund in March, said that He had deployed approximately $20 million of capital in 12 completed or committed deals, mostly seed investments.

“Maybe this year people are working less with late-stage startups with high (cash) spend and high expectations. Those are the opportunities to catch more heartbreak this year than they do. would have had last year,” he said.

Macroeconomic factors, such as persistent inflation, are a source of uncertainty for investors, but this is not unique to insurtech or technology in general. “They left like everyone else,” Mr. Beauchamp said.

Mr Johnson noted that trillions of dollars of value had been wiped from public markets around the world and said the crisis had taken a toll on the insurtech sector. “What we’re seeing is that some insurtechs are laying off staff, and there are clear strategies in place to try to preserve capital,” he said.

Amelia Gandara, senior investment professional in Columbus, Ohio, with Nationwide Mutual Insurance Co.’s venture capital team, said that with $2.4 billion in funding in the second quarter, “there still has capital flowing into insurtech.”

In 2021, with capital plentiful, “boards have been focused on growth, which requires and burns a lot of capital,” she said. Worries about a possible recession “may make people more conservative” and make them more likely to try to preserve their capital.

Some insurtechs are raising additional capital to hedge against deteriorating market conditions, which can allow investors to potentially invest at a more favorable valuation than before, Ms Gandara said.

Nationwide dramatically increased its commitment to the insurtech sector last year, increasing its venture capital fund to $350 million after starting in 2017 with $100 million.

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The commitment to insurtech also extends to Axa XL, a unit of Axa SA, said Rose Hoyle, construction innovation manager based in Irvine, Calif.

“What we started here in construction, we are now extending to all of our other business units,” Ms Hoyle said. Customers across all Axa XL lines of business are looking to make better use of technology, she said.

Axa XL typically tries to connect a customer to specific technology that may allow the insurer to offer more favorable terms, she said.

Although premium savings will never cover the cost of the technology, she tries to emphasize to policyholders that future savings can be significant in terms of reducing or even preventing claims.

Water mitigation is one of the most tangible technologies with which to prove a return on investment, as potential severe water damage can be mitigated or avoided using sensors and automated shutdowns, a said Ms. Hoyle.

Other technologies, such as planning analytics, are much harder to measure, she said.