The third quarter of 2020 saw an unprecedented level of global funding into insurtech businesses, as $2.5 billion was raised by firms across 104 deals. Compared with the prior quarter, funding increased by 63% and deals by 41%.
With everyone working from home, never has the true value of technology been more real and manifest in our industry. Six mega-rounds of $100 million or more accounted for more than two-thirds of total funding, including Bright Health, Ki, Next Insurance, Waterdrop, Hippo and PolicyBazaar. Early-stage deal share grew to 57%, up 15 points to pre-COVID-19 levels, bolstered specifically by property & casualty startups.
With the huge amount of capital being deployed, and the rate at which it is being deployed, one can quite easily see this quarter as clear validation of investors (industry and non-industry) being prepared to put their money where their mouths are as it relates to the pursuit of digital operations – both for pure investment returns and also for securing digital capabilities.
What is particularly interesting is that a handful of well-established insurtechs have raised an enormous amount of capital (for example, Bright Health raised a seismic $500 million), and brand new entrants with very limited track records have also been successful in raising capital – 73% of those insurtechs that raised seed capital this quarter were raising any form of capital for the very first time.
There is no shortage of capital to support nascent businesses in the less expensive, earlier rounds and certainly no shortage of capital to support well-established insurtechs that are demonstrating their ability to deliver and that are in need of later-stage capital to support scale-up/growth mode. What we are also seeing, however, are the clearest examples of a (relative) drying up of Series B and C funding. Insurtechs struggled to secure funding in the $20 million to $50 million range, relative to the number of insurtechs looking to raise this amount of money.
This is a very natural evolution of any burgeoning space that requires investment – the novelty and promise of a new firm meets the reality of commercial success criteria. With so many fantastic insurtechs in our midst, investors can be pickier and hold the knowledge that the winners will be relatively few. Similarly, with so much clear reliance on technology, "less risky" bets are been fiercely sought.
This particular phenomenon is a version of the barbell strategy (a reluctance to support the intermediate growth of insurtechs with additional investment). While we try not to overinterpret any particular quarter and ascribe a theory as to why something might be happening in the short term, this particular issue is something we have been observing for a while – for want of a better description, we are seeing clear evidence of a widening funding gap.
As a result of these investment evolutions, relatively well-known but not particularly well-established insurtechs across the board could be about to face their toughest moment to date. With global markets preparing for one of the largest forecasted recessions in a generation, most insurers and reinsurers will look either to accelerate, conclude or temporarily slow down their ancillary technological endeavors to focus on ensuring that their core business functions are able to operate in this new digital and remote environment.
Consequently, (re)insurers' appetite to support well-established insurtechs will be much greater than that of insurtechs that still have things to prove. Traditional investors, the principal drivers of the earliest stages of investment, are pushing extremely hard to make sure that they make the most of the digital revolution that our industry is undergoing at scale. This is creating an investment no man’s land in-between.
The toughest challenge that less well-established insurtechs will face pertaining to this expected slowdown of investment (and most likely partnership) activity is its duration. While this gap is undoubtedly a natural feature of investing, it is also a symptom of the current COVID-19-induced recession. This impending recession could be with us for a good while. Incumbent technology strategies will be clear: surviving this brave new world. The impact of an economic slowdown, coupled with a surge in remote operations, presents less-established insurtechs with a cruel irony: Never has the true value of technology been more real and manifest in our industry, and yet the lifeblood of budding insurtechs that rely on Series B and Series C rounds to scale is, relatively speaking, drying up.
For very well-established insurtechs, the situation could be quite different. The current climate presents a great opportunity to continue to support the incumbent landscape. Those insurtechs that originate remote risks can arguably write more business as their traditional competitors catch up. We are seeing a big push toward digitalization, and well-known insurtechs can play a big role in this process.
See also: The Next Wave of Insurtech
We also expect to observe in-house technological initiatives ramping up as technology and technologists become increasingly pervasive and synonymous with our industry, as (re)insurers grapple with the challenges of remote environments. As such, we will most likely see a growth of organic projects – this could well squeeze certain insurtechs that have, until now, enjoyed a lack of competition in certain areas. We also anticipate that (re)insurers and end consumers will continue to be increasingly better-informed and better-experienced with regard to judging successful engagements with technology.
Arguably, we are on the brink of a very healthy milestone, and this next step should be celebrated by those insurtechs that have a clear digital strategy and those that have been successful in building solutions for our industry. If nothing else, there will be greater scrutiny on what is out there and how technology can be leveraged most effectively. For both incumbents and established insurtechs alike, we expect that the more successful initiatives will be those that can react quickly to the changing environment and those that show a true appreciation for the direction in which our industry is headed.