Global InsurTech Funding Increased Quarter on Quarter in Q3

Global InsurTech funding increased 19.8 percent quarter on quarter during this year's third quarter to $1.098 billion from $916.71 million during the second quarter, according to the Gallagher Re Global InsurTech Report for Q3 2023.

The third-quarter investments were spread across 119 deals, up from 97 deals in the second quarter, Gallagher Re reports. The amount of funding and the number of deals both saw quarter-on-quarter increases for the first time since the fourth quarter of 2021, Gallagher Re says.

The average size of individual InsurTech deals dropped to a 6-year low during the third quarter at $10.3 million, the report says. Meanwhile, the share of deals for US-based InsurTechs—55.4 percent—was at its highest level since the first quarter of 2020.

During the third quarter, early-stage InsurTech funding increased 24.7 percent quarter on quarter, from $216.05 million in the second quarter to $269.45 million in the third quarter, according to Gallagher Re. The majority of InsurTech investments from (re)insurers were early stage for the fifth consecutive quarter, Gallagher Re says.

Another 15.1 percent of third-quarter InsurTech deals were in the midstage expansion category, Gallagher Re reports. Those 18 deals accounted for 29.5 percent of the third quarter's total InsurTech investments.

In a preface to the November 2, 2023, Gallagher Re report, Dr. Andrew Johnston, global head of Gallagher Re InsurTech and the Global InsurTech Report editor, suggests the InsurTech industry continues to move through a crucial inflection point.

In that context, this year's third quarter provided examples of what the change for both InsurTechs and investors looks like as the industry moves from its first phase—"the great experiment"—into a second phase of "sustainable, profitable business outcomes through precision, not volume," Dr. Johnston says.

Dr. Johnston notes that between 2012 and 2021 $42 billion was invested globally into InsurTech businesses.

"While many individual InsurTechs have not been successful (and many that were active during this timeframe no longer exist), one could argue that their net contribution overall has been enormous—bringing the topic of technology investments into the boardroom if nothing else," Dr. Johnston wrote.

During the most recent quarter, manifestations of the InsurTech inflection point included a handful of high-profile InsurTechs making various announcements that suggest some are facing difficult times, Dr. Johnston says.

"One InsurTech publicly stated it had made the corporate decision to focus on sustainability and fortify its existing business," he wrote. "To achieve this, the InsurTech would no longer write any new business until certain internal targets had been met."

Another InsurTech that had been quite successful at raising capital ceased trading during the quarter because of investigations into fraud and company malpractice, Dr. Johnston says. And a third company indicated that a significant layoff of core staff was necessary to keep the company above water.

Dr. Johnston suggests that in the InsurTech space—particularly among companies that are struggling—evidence is emerging about lessons that weren't learned during the critical phases of company development. Those include lessons about how capital was raised, from whom, at what valuations, and how it was managed, he says.

"So many of these issues were not dealt with because they did not need to be (at least, at that time)," Dr. Johnston wrote. "With wealthy backers writing enormous checks for many InsurTechs, companies could cut corners, they could ignore the importance of loss ratios, or customer retention." Instead, they could focus on the wrong metrics—growth and divergence—because those were the metrics many investors were focusing on, he says.

Still, for the right investors and the right InsurTechs, the opportunities today are greater than ever, Dr. Johnston suggests. And, with the (re)insurance industry under considerable existential pressure, new technology and new market entrants can play a critical role in preserving and strengthening the value of (re)insurance, he says.

Noting the size of annual insured natural catastrophe losses in recent years—with a combined industry loss since 2017 topping $900 billion in current dollars—underscores the potential value of the right InsurTechs, Dr. Johnston says.

"Such a huge total underscores the increased urgency facing the industry to get a better handle on fully understanding the growing risks posed by climate change and other socioeconomic or macroeconomic factors that continue to add more financial pressure," he wrote.

Dr. Johnston also notes that many insurance and reinsurance companies are struggling to define their future propositions and compete in changing markets.

"Therefore, InsurTech still represents a very feasible solution to remaining technologically relevant but also as a driving force for value-adding change and sustainable business models," Dr. Johnston wrote. "Now more than ever technology plays a hugely important role in our industry. As vanguards of experimentation and pushing the frontiers of the art of the possible, InsurTechs can play a hugely valuable role in supporting our industry."

The InsurTech "inflection point" then, for many businesses, is ensuring "that the great technology-enabled business ideas are housed in sustainable businesses that are being managed and checked properly," Dr. Johnston wrote.