Global InsurTech Funding Dropped in 2022 for First Time Since 2016

Global InsurTech funding fell during last year's fourth quarter to its lowest level since the first quarter of 2020, according to the fourth quarter 2022 Gallagher Re Global InsurTech Report.

InsurTech funding decreased 57.0 percent in the fourth quarter from the third quarter's level, to $1.01 billion from $2.35 billion in the prior 3-month period.

The number of InsurTech deals also dropped during the fourth quarter to 106, Gallagher Re says, the lowest number of deals since the fourth quarter of 2020.

Last year was the first year to see an overall drop in InsurTech investment since 2016, the Gallagher Re report says, as annual InsurTech funding decreased 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, according to Gallagher Re, from $9.41 billion in 2021 to $5.30 billion in 2022. Life and health InsurTech funding saw a 57.8 percent year-on-year drop from $6.39 billion in 2021 to $2.70 billion in 2022.

In a preface to the February 2, 2023, Gallagher Re report, Dr. Andrew Johnston, global head of InsurTech at Gallagher Re and Global InsurTech Report editor, suggests that while 2022 InsurTech funding levels weren't as impressive as those in 2021, the level of investment was, in its own way, remarkable. "One could make a very strong argument to say that 2022 has, to date, been the most important year for InsurTech to date," Dr. Johnston wrote.

He notes that 2022 began with considerable uncertainty and a number of macroeconomic factors influencing the attitudes of venture capital investors, as well as attitudes in the (re)insurance industry of the actual impact technology was delivering relative to its cost.

As investment declined, companies reconsidered their values and the definition of what InsurTech success should mean through a more conservative lens, Dr. Johnston suggests.

"As a direct result, the ability to leverage individual company equity for loss-propping risk capacity became increasingly difficult, and several InsurTechs had some very challenging decisions to make as they reviewed their own margins and likelihood of (near term) future rounds," Dr. Johnston wrote.

He describes 2022 as a year of "macro-realism" for many InsurTech firms, investors, and risk partners, as well as hardship for individual companies.

That hardship forced a number of InsurTechs to make difficult decisions, according to Dr. Johnston, including laying off staff or even shutting down altogether. He notes that while Gallagher Re estimates that at the end of 2019 there were nearly 3,000 InsurTech businesses worldwide, there are now 2,050 in operation.

Some InsurTechs have laid off up to 40 percent of their staffs, Dr. Johnston says, which could mean 300 to 500 employees at larger firms.

Layoffs were not unique to InsurTechs during 2022, Dr. Johnston notes, with the global technology sector overall seeing a large number of layoffs, even at some of the largest and most well-known companies. He cites an estimate of approximately 120,000 layoffs across nearly 800 companies over the second half of 2022.

Dr. Johnston also indicates that the hard insurance market has been having an impact on InsurTechs.

"The current risk capacity market is also applying pressure to the squeeze being felt by many (in terms of costs, margin returns, and availability to support originated business from an 'InsurTech player' where so many incumbent risk partners have been historically burnt)," Dr. Johnston wrote.

Noting that the current insurance market might be at its hardest since the September 11 attacks, Dr. Johnston suggests that most InsurTechs were either inadequately prepared for current conditions or didn't understand the insurance industry well enough to model for the current hard market and respond appropriately.

The insurance market outlook remains uncertain, Dr. Johnston wrote, with the current hard market cycle expected to continue well into 2023 or longer.

"This tighter risk capacity has been mostly the result of reduced risk appetite rather than capital shortage, and the onus is on risk-originating InsurTechs to make their business look attractive–this shift for many is culturally a huge one, 'not what you can do for me, but what I can do for you,'" Dr. Johnston wrote. "With modeling uncertainty affecting a lot of incumbents' written books, InsurTech capacity allocation is simply not a risk worth taking for a number of reinsurers."

Despite the headwinds that confronted InsurTechs in 2022, there is a select number of businesses that have done well, according to Dr. Johnston. "They are conscientious partners who understand our industry, and utilize technology as an enabling force, not just a product to masquerade bad business behind," he wrote.

The failed experiences of some InsurTechs who tried to disassemble the traditional insurance value chain and reassemble it in a more complex and convoluted fashion have provided a cautionary tale for new businesses, Dr. Johnston wrote.

"We are at the dawn of a new age where the role of technology, being brought to the table by InsurTechs is to support the global trillion dollar industry of ours, not to use it as justification to raise absurd amounts of money against unjustifiable valuations," Dr. Johnston suggests.

While 2022 was a down year for InsurTech investment, the future for technology in the insurance industry remains bright, he says, with InsurTech definitely having a role to play in that future.