InsurTech Funding Fell in Q2 as Market Faces an Inflection Point

Global InsurTech funding fell 34 percent from the first quarter of 2023 to the second quarter, according to the Gallagher Re Global InsurTech Report for Q2 2023.

InsurTech funding dropped to $916.71 million in this year's second quarter from $1.39 billion during the first quarter, Gallagher Re reports. The second quarter marked the first time since the first quarter of 2020 that global InsurTech funding fell below $1 billion, the report says.

The Gallagher Re report suggests that current InsurTech funding trends reflect an industry inflection point, brought on in large part by the shift away from a low interest rate environment. Now, investors are favoring InsurTechs focused on commercial outcomes rather than simply growth at any cost, according to the report.

Gallagher Re says the drop in funding was seen across both property-casualty and life-health InsurTechs. Property-casualty InsurTech funding fell 22.3 percent quarter on quarter from $967.89 million in the first quarter to $742.29 million in the second quarter. Meanwhile, life-health InsurTech funding dropped 58.5 percent quarter on quarter from $420.73 million in the first quarter to $174.42 million in the second quarter.

The August 3, 2023, report says the size of the average InsurTech deal dropped in the second quarter as well, from $14.77 million in the first quarter to $12.39 million in the second quarter. Life-health InsurTechs saw a larger drop in deal size than did their property-casualty counterparts. The average life-health InsurTech deal dropped from $16.18 million in the first quarter to $9.18 million in the second quarter, while the average property-casualty InsurTech deal dropped from $14.23 million in the first quarter to $13.50 million in the second.

The number of InsurTech funding deals was down in the second quarter as well, according to Gallagher Re. The 97 InsurTech funding deals in the second quarter marked the first time the deal count dropped below 100 since the second quarter of 2020, Gallagher Re says. Those second-quarter deals included 23 in the life-health area and 74 property-casualty deals.

Early-stage InsurTech funding fell quarter on quarter as well, from $416.59 million in the first quarter to $216.05 million in the second quarter. The 48.1 percent decline was the largest quarter-on-quarter percentage drop in early-stage funding since the third quarter of 2017, Gallagher Re says.

Property-casualty early-stage InsurTech funding fell to $157.71 million in the second quarter while life-health early-stage funding dropped to $58.34 million, both the lowest levels since the fourth quarter of 2020, the report says.

The average early-stage InsurTech deal size fell 40.6 percent in the second quarter to $5.27 million from $8.86 million a quarter earlier, Gallagher Re reports. Despite the drop in actual funding, however, the number of early-stage InsurTech deals fell only slightly, from 53 in this year's first quarter to 51 in the second quarter, Gallagher Re found.

According to the report, the second quarter saw 43 corporate InsurTech investments from (re)insurers. Of those investments, 34.9 percent were directed to InsurTechs in the United States, more than to any other country. For the fourth consecutive quarter, the majority of (re)insurers' InsurTech investments in the second quarter—60.5 percent—were early-stage investments.

In a preface to the second-quarter report, Dr. Andrew Johnston, global head of Gallagher Re InsurTech and editor of the Gallagher Re Global InsurTech Report, suggests that the InsurTech space remains a healthy one that continues to grow and mature.

"Quantitatively, on a quarterly basis, InsurTech can appear quite volatile, but over a longer period of time, the trends developing are in line with a naturally evolving space that was once associated with a rush to capitalize on quick equity returns, but is now increasingly associated with longer-term sustainability," Dr. Johnston writes.

Meanwhile, there are qualitative changes underway in the InsurTech market, with investors and the focus of InsurTechs changing, he says. "The general downturn in investing from 2021 has not only funneled a market correction but has forced a change of makeup in InsurTechs themselves," Dr. Johnston writes.

One of those changes is that investors are increasingly targeting InsurTechs that are focused on clear commercial outcomes for themselves and their partners, rather than those simply offering technology as a product, according to Dr. Johnston. "We have evolved into the era of outcomes—the 'what,' if you will, and no longer the 'how,'" Dr. Johnston writes.

Dr. Johnston notes that during 2019 and 2020, InsurTech as a general theme gathered considerable momentum, drawing investments from generalist technology venture capitalists, other venture capitalists, private equity, and asset managers who "piled into the InsurTech investment arms race."

But, he says, while many of those investors had a focus on the financial services sector in general, many weren't overtly focused on the (re)insurance sector and lacked a deep understanding of the industry. "Unsurprisingly, many of the InsurTechs who attracted big capital injections at this time from these investors were those focused on accelerated growth (at any cost)," Dr. Johnston writes.

The result was that the InsurTech market became "extremely frothy," according to Dr. Johnston, with short-term equity returns taking precedence over long-term sustainable growth aspirations.

"The label InsurTech itself was almost entirely synonymous with capital raising and valuations," Dr. Johnston writes. "And as funding amounts and valuations went up, so did the number of companies wanting to identify with the label of 'InsurTech.'"

In the low interest rate environment from 2018 to 2021, many investors saw InsurTech investment as an opportunity for healthy returns, Dr. Johnston says. Now, however, Gallagher Re estimates that as many as one-third of the InsurTechs that existed during that period are no longer in operation. "What is particularly striking is the speed at which the market corrected itself when the macroeconomic environment began to alter and certain investors stopped writing checks," Dr. Johnston writes.

The global InsurTech market is now at an inflection point, according to Dr. Johnston, moving on from "disposable examples of 'what if?'" to a much smarter industry.

"With the reset button being pushed and the investment sentiment changing, InsurTechs can now benefit from investors who have a more realistic sense of what can be achieved—and the patience required to achieve it," Dr. Johnston writes.