Gallagher Re’s recent Global Insurtech Report revealed that global insurtech funding dropped below $1 billion in Q1 2024, its lowest since Q1 2020, while the three-month period saw no quarterly $100 million+ mega-round deals for the first time since Q3 2017.
However, turning the spotlight on early-stage insurtech funding, the report revealed that this corner of the market saw its funding sharply increase by 26.5% quarter-on-quarter with 28% of Q1 2024’s insurtech deals going to AI-centered firms, while 50% went to distribution-focused companies.
Ed Halsey (pictured), VP of marketing at Genasys shared his insights into what’s happening in the market.
“We’re moving into a more sustainable phase of insurtech investment, where businesses are going to need to demonstrate clear paths to profitability, robust business models and there’ll be far less early-stage, inflated valuations,” he said. “That’s a positive step forward as businesses can build solid foundations rather than the previous approach of ‘growth at all costs’ which saw many fingers get burned.”
Despite record growth between 2018 and 2022, the sector has since seen a sharp reset in investment with many realising that truly disrupting an industry like insurance requires three things: patience, deep pockets and deep subject matter expertise. In reality, Halsey said, disruption is too big a leap away and, instead, those who will prosper will be those focused on investing in developing world-class products that are accompanied by steady and self-sustaining growth.
“As a result,” he said, “we’ll see smaller fundraises with founders needing to bootstrap for longer and investors wanting to see evidence of significant and sustained viability before being willing to step in. You’ll therefore see far more early failures as businesses fail to support themselves, but the post-raise success rate will likely jump significantly as a result. Ultimately though, the previous 10x gains they were looking for will need remodelling and with that will come greater risk aversion.”
Evaluating some of the key factors behind the current insurtech funding environment, Halsey highlighted the impact of the economic challenges the world has faced in recent years. The reality, however, is that it’s largely the previous over-investment in the sector that has led to its present position. Unfortunately, he said, he believes it’s likely that in the 2024/2025 financial year, some businesses which have previously raised large sums of money will begin to struggle, leading to greater reticence from investors.
“High, often inflated valuations can push insurtech businesses to pursue rapid growth without really having the product behind them to justify such expansion,” he said. “Where they should’ve been hiring 10 more customer service specialists or 15 new developers, they’ve flooded their ranks with sales and marketing resource on the basis that ARR drives valuation.
“Over-valuation and a level of unrealistic urgency can force businesses to make bad decisions.”
The result of this for the sector has been a preoccupation with using valuations as an indicator of success rather than customer satisfaction, operational efficiency and that critical term, profit. Instead of focusing on the present by operating with absolute excellence, there’s often a sense of planning for a raise that may never come, with too many businesses simply looking to the next round of investment knowing that their existing cash runway is becoming exhausted.
“It’s a mindset that needs to be reversed for our sector,” Halsey said. “Raising money isn’t cool – making money and creating a sustainable future for your insurtech business, that’s what’s genuinely cool. We often see headlines about eye-watering valuations but what about those who didn’t take investment? Those who are quietly bootstrapping a successful business? Once making money, rather than spending money, becomes the collective goal for insurtechs then we’ll rapidly find ourselves back on track.”
Looking to the future of the insurtech space, Halsey noted that current insurtech players are leading the way, showing the possibilities of where the sector can go next. Now it’s up to the rest of the market to follow, he said, building upon their wins and learning from their challenges. Certainly, there are key themes that the market is right to feel positive about, whether it be cloud, connectivity or artificial intelligence, and technology as a whole will continue to play an integral role in shaping the future of insurance.
“The advent of low-code or no-code technology is democratising tech for insurance businesses, however mature their current digital ability,” he said. “As the character Syndrome says in the animated film, The Incredibles, “When everybody is Super, no-one will be” and I believe that’s the future for insurtech. Sooner rather than later, every insurance business will have the capability to be insurtechs and that’s incredibly exciting.”
