It’s a new year for the insurtech industry. While the market has left its nascent stage, it hasn’t reached maturity yet. We are in the midst of what many consider its “2.0” era, where companies have learned what works and what doesn’t, along with new approaches. All this is taking place against the backdrop of the economic downturn and broader challenges that are affecting businesses in every sector.
Here’s a look at what’s likely ahead.
Top of mind for many insurtech leaders is consolidation, which is generally consistent with the economic climate companies are navigating. Recessions, rising costs and inflation typically affect funding at a macro level. As that happens, organizations that are not profitable or that rely on funding to survive often look to sell. Others face more drastic measures such as cutting staff or, in the worst cases, are forced to close their doors. Consolidation starts to rise as a result, sparking an uptick in merger and acquisition activity. Larger organizations begin to buy smaller players, or businesses merge. We’re seeing this consolidation now and will likely see it for a while.
Market consolidation isn’t limited to down cycles. It can be a natural part of an industry’s lifetime, even in relatively positive economic conditions. The shift is ultimately good, in general, regardless. Markets can’t support companies that aren’t profitable or can’t show a clear pathway to profitability. Consolidation cuts the fat and reduces saturation. It typically creates efficiency and opportunity, freeing funding where it is available and enabling top-performing organizations to rise. Those in a position to capitalize can get great deals, merge, make moves and generate other benefits. Amazing businesses are often built in these conditions. Companies that need to be bullish and acquire companies can do so, and companies that are struggling can find a way out. Watch for consolidation in the coming year, and, if considering M&A, now may be the time to start.
2023 will also likely see less investment funding in insurtech. Signs of change began last year, with potential impact to continue in the next 12 months. This will in part play a role in further market consolidation, though funding won't completely stop. It will just become more focused and selective. VCs are looking to deploy investments more carefully, with an eye on organizations that can win the game of insurance, versus the moonshot risks and high valuations of the past. Successful companies with a track record can gain during this stage, as investors become more selective on where dollars are deployed and attention turns to companies that have insurance fundamentals and established paths to profitability.
See also: 20 Issues to Watch in 2023
Technology is always at the forefront of insurtech. However, it’s getting increasing attention among legacy insurance companies, which will likely drive a bigger focus on technology in the market this year. It will play a role in helping companies do more with less, reduce inefficiencies, streamline processes and create capital. We’ll likely see this also drive consolidation in the category as bigger insurance companies opt to buy insurtechs in niche markets instead of building innovation in-house. Smaller insurance and insurtech businesses will also do the same where they can, either merging or acquiring to gain technology assets. It’s not likely that there will be large, sweeping disruption or change that will uproot the whole industry. But we will see highly specialized insurance companies continue to leverage technology and do really well.
The coming year will likely present a lot of opportunities for big carriers to buy whatever they’re interested in. Larger companies are well-capitalized and tend to remain relatively recession-proof, with a lot of resources to deploy. They will be scrutinizing insurtechs and taking a hard look at their core business and fundamentals and their odds of achieving profitability in the coming years. The days when insurtechs could rely on outside capital and hitting milestones to get to the next funding round are gone. Business this year will be about hitting target milestones to be self-sustaining or finding other ways to make money. Highly specialized insurtechs that stay focused on their market niches will likely do well and will gain the most interest and attention from investors as well as large carriers looking for acquisitions.