In this extract from Gallagher Re’s Q2 2023 Global InsurTech Report, Andrew Johnston MA, Ph.D (pictured), Global Head, Gallagher Re InsurTech and Freddie Scarratt ACII, Deputy Global Head, InsurTech: UK, EMEA & APAC highlight a significant shift in global InsurTech funding and investment.
We are pleased to share this guest blog from Gallagher Re (one of ICMIF’s Supporting Members), which is reproduced here for the benefit of ICMIF members with their permission.
Between 2012 and 2021, investors poured an impressive USD 42 billon into InsurTech firms. A substantial portion of these investments came in the dynamic years of 2019 and 2020, when the InsurTech theme gained remarkable momentum. We saw a surge in interest from generalist tech venture capitalists and private equity firms, which flooded into the InsurTech investment landscape. However, many of these investors were notably lacking a specific concentration in InsurTech or a deep understanding of our industry.
At the peak of this InsurTech investment craze, inflated valuations became commonplace. However, as we moved into a higher interest rate environment in 2022, the consequences of these lofty valuations became evident, causing significant and long-lasting damage. Our Q2 2023 InsurTech report estimates that up to a third of the InsurTech ventures present during that exuberant period have since ceased to operate as viable businesses. These findings underscore the importance of prudent investment strategies and industry knowledge to ensure sustainable growth — as well as resilience in the ever-evolving InsurTech landscape.
Has the USD 42B been worth it then? For InsurTechs that have struggled, or the investors that backed them, probably not. What it has done, however, is dramatically spur the understanding and adoption of digital innovation among the insurance industry’s established players. Many large P&C carriers have been trying to harness artificial intelligence (AI), for example, since 2010. At that time, AI would have been confined to a few small, specialised companies with limited applications. What the first wave of InsurTech did was bring these types of innovations to the attention of the incumbents — and may have encouraged in-house investment in tech solutions. So much of the digital innovation we now see in the marketplace may not be due to the InsurTech firms’ own solutions being implemented, but it could still be largely attributable to their existence.
Importantly, a good portion of the cash that flooded in during this first phase came from investors prepared to see it used to test and fail.
This means that despite all the InsurTechs who were unsuccessful, the net benefit to our industry has been significant — arguably a good return for roughly a decade of research and development. That USD 42B was spent to foster innovation in an industry that processes some USD 6 trillion of annual global premiums. Or to put it another way, a 0.07% research and development spend per year of our industry’s global premium.
So what has changed since 2021 and 2023, other than the interest rate environment?
Corporate venture capitalists (CVCs, or VCs associated with (re)insurers) now represent a larger proportion of total InsurTech investors than they ever have. Many of the world’s largest (re)insurers now have some kind of dedicated fund for InsurTech deployment, or are at least being represented in an InsurTech-specific investment fund (as a limited partner, or LP).
In numerous instances, (re)insurers have gleaned valuable insights from the investment strategies employed by pure tech venture capital (VC) and private equity (PE) funds. Consequently, they have fine-tuned their value proposition, directing their focus towards the tangible business outcomes achievable through InsurTech, rather than being swayed solely by the allure of shiny technology in an industry that is often overestimated to be ‘ripe for disruption’.
Notably, a select few (re)insurer CVCs have taken a proactive approach by involving underwriters in the investment decision-making process, thereby placing the core business objectives squarely at the forefront of their endeavours. This shift towards a more business-centric approach demonstrates the commitment of these (re)insurers to leverage InsurTech to its fullest potential and drive meaningful industry transformation. As an example, Munich Re Ventures led corporate venture activity among (re)insurers in Q2 2023, with six investments.
This type of sensible, measured activity, where experience and expertise are put at the heart of innovation efforts, is a very welcome evolution in the InsurTech journey. It is certainly preferable to being led to believe that the blockchain, for example, is going to revolutionise our industry on the strength of its technological sophistication alone.
If Q1’s results are any kind of indication for the rest of this year, 2023 is set to be the largest year on record for (re)insurers to make private investments into InsurTechs.
The data points to a clear conclusion. The emerging (re)insurance-related VCs have undoubtedly reaped the rewards of the substantial USD42B investment in research and development over the last decade. Equally vital, they have adeptly learned from past failures, prioritising a comprehensive understanding of the ‘what’ rather than succumbing to the allure of the ‘how’ and inflated valuations.
This strategic approach puts InsurTech on a promising trajectory, with a keen focus on business outcomes – a critical necessity for sustained growth and prosperity.
This article summarises the preface to Gallagher Re’s Q2 2023 Global InsurTech Report; read the full report for comprehensive analysis of the trends in insurance and venture capital investment into the sector.