Total InsurTech investment in the first three quarters of 2020 appears as robust as last year’s record levels.

Despite the COVID-19 pandemic and its economic fallout, total InsurTech investment through the first three quarters of 2020 appears as robust as last year’s record levels. However, the outbreak has prompted some significant changes in funding priorities, driven by shifting demand for the types of InsurTech products and services that can help legacy carriers adapt sooner rather than later.

The pandemic has spurred many insurers to accentuate digital transformation efforts and seek InsurTechs that can help accelerate virtual interactions in sales and claims, as well as reduce expenses. Attention also seems to be shifting toward InsurTechs that can provide insurers with more comprehensive, holistic offerings rather than single-point solutions that need to be integrated by the end-user.

The $3.49 billion raised by InsurTechs globally through the first nine months of 2020 already tops any prior full-year except for 2019’s record of $5.6 billion, based on data collected by Venture Scanner and analyzed by the Deloitte Center for Financial Services (see figure 1 above).

The first quarter got off to a slow start, as global investment plummeted to just $92 million in March after the pandemic first hit the United States (compared to $694 million in March 2019) and $205 million in April (down from 2019’s $436 million). But then demand really picked up, with the $1.3 billion raised in May and June propelling 2020’s first-half total to $2.39 billion — a tick above 2019’s figure.

Third-quarter investment normalized a bit to $1.15 billion, falling behind 2019′s record pace when $2 billion was raised — including $1.1 billion in September alone compared to 2020’s September total of $464 million.

One trend of note that 55% of investments went to just 10 InsurTechs, including 36% going to the top four, leaving all other startups to share 45% of the remaining dollars raised. That may be indicative of a flight to quality as investors seek the closest outcome to a “sure thing” as they can get in this challenging economic environment.

Indeed, capital providers are continuing to generally focus on later-stage investments in more mature InsurTechs. Only a handful of new entities have been launched over the past three years, compared to the hundreds of startups that hit the market between 2013 and 2017. Investors appear to be looking to place their bets with those entities that are ready or at least close to making an impact in the near term.

As for types of entities receiving funding, InsurTechs in operations are seeing investments soar for a second straight year, up to $971 million through three quarters. That’s about even with the amount raised for personal lines entities, which got off to a slow start this year but picked up the pace in the third quarter.

Meanwhile, customer acquisition InsurTechs have generated investments of $622 million so far, the highest in three years. This likely indicates insurers are keen to prioritize greater digital engagement with consumers, perhaps with the help of InsurTechs offering insurance comparison sites or support for direct-to-consumer sales. This at a time when face-to-face interaction between agents or brokers and their clients has been severely limited and may remain challenging for the pandemic’s duration — and perhaps beyond, as buyer preferences evolve, and online engagement becomes more common.

InsurTech outlook: Changing investment landscape

In addition to all the quantitative trends we identified, the consensus from interviews with senior executives at venture capital, private equity, and accelerator firms specializing in this segment was that many InsurTechs may struggle to raise additional rounds of financing well into next year. Priority will likely be given to those addressing the most pressing digitization and operational efficiency challenges faced by insurers continuing to adjust to the post-pandemic world.

Speed would appear to be of the essence, with many looking to achieve a level of digitization in three-to-six months that they originally thought might take one-to-three years. This likely reflects the urgency created by the industry’s nearly overnight transition to remote staffing, as well as the rapid virtualization of customer engagement in sales and claims. Indeed, the pandemic likely will turn whatever headwinds may have been slowing down core transformations into tailwinds driving faster action, our interviewees noted.

Given the pandemic’s extraordinary circumstances, InsurTechs with ready-to-use solutions to help overcome operational challenges and support digitization efforts were also cited as being much more likely to get funding in the short- and medium-term. Such offerings include those facilitating automated underwriting, online distribution, and virtual claims management.

As a result, investment firms we interviewed are in the middle of what one characterized as “portfolio triage,” determining which InsurTechs may be best positioned to help insurers adjust to the pandemic’s immediate impact. InsurTechs developing solutions outside the industry’s newly emerged priorities will likely be operating in what one investor group called “survival mode,” looking to manage cash reserves and “extend their runway” until crisis conditions ease up and insurers can return their attention to less immediate needs. In the interim, some InsurTechs may seek to sell to, or merge with other InsurTechs to combine resources and eliminate solution duplication.

Another major selling point for InsurTechs seeking investment and end-user interest going forward will likely be the ability to provide broad, rather than narrowly focused support, instead of leaving it to insurers to integrate individual point solutions. This could also spur greater merger and acquisition activity, as InsurTechs combine to offer a more comprehensive suite of products. Meanwhile, legacy carriers may be on the lookout for acquisition candidates to import new capabilities and specialized talent from undercapitalized InsurTechs.

Where might InsurTechs, investors, and insurers go from here?

It remains to be seen whether insurers will look to InsurTechs to help them do what they have always done, only faster and cheaper, or engage with them to rethink traditional operating and business models. Once the pandemic passes, insurers shouldn’t simply default to the way they always did business. Instead, they should think bigger and longer-term, permanently transforming how they operate and engage with customers.

The challenge ahead is to reimagine customer experience, generate additional revenue, control costs, launch new products and platforms, and deploy talent effectively in what promises to be an increasingly virtual, data-driven, and self-directed economy.

InsurTechs will likely remain well-positioned to help legacy carriers accomplish these goals, especially if internal innovation initiatives are scaled back or side-lined as part of an insurer’s expense management mandate to brace for an uncertain economy in 2021.

Source: PropertyCasualty360