Our inaugural InsurTech Summit in New York on June 16th included leading venture capitalists, emerging companies of all stages, and other key stakeholders. Below are key takeaways from the first panel, Top InsurTech Investment Trends: Valuation, Volatility, Convergence and Divergence.
Investing in the insurance technology sector is a mosaic of evolving risk and opportunity. Where are the truly revolutionary ideas and execution? How, where and when does venture capital best navigate this ecosystem? And what must insurtech startups do to attract the attention of an increasingly discerning investor base? McDermott partner Michael Halsband moderated a panel from an investor perspective that looked at investment trends in insurtech.
InsurTech is moving from a ‘T’ to an ‘I’ with a renewed focus on fundamental issues and risks that require solutions.
During the InsurTech Investment Trends panel, leading InsurTech investors shared how they identify opportunities for success when investing in InsurTech startups and offered their insights on missteps and failures experienced in the sector. The panel also examines the state of mergers and acquisitions (M&A) trends in the ecosystem. Finally, the panel looked at changes in funding streams for InsurTech in 2022.
1. Focusing on the “I” in InsurTech
While the industry is witnessing a technology-driven “growth at any cost” approach to generating interest in new insurance products, a return to emphasis on deep insurance expertise is key for new ventures. Investors are looking to sign an excellent impact book from deeply experienced management teams who fundamentally understand how to optimize a particular problem in the insurance ecosystem with an effective and profitable strategy. Jonathan Crystal, managing partner at Crystal Ventures, noted a focus on business-to-business (B2B) and transformational technologies being applied in a new way. David Wexler, principal at OMERS Ventures, noted a focus on early-stage to growth-stage companies and long-term investments of five to 10 years, with multiple rounds of capital to work with. Caitlin Johnson, managing director of AmFam, noted growing interest in incubation and Series B/C funding, applicable mode models and companies run by leaders who have developed those other than a pure growth model. Mike Millett, managing partner at Hudson Structured Capital Management, noted a focus on early-stage B-to-B startups and an eye toward viable companies that understand the fundamentals of insurance — the “I” in insurtech — that would be best positioned to make sense of disruptions to key industry sectors.
2. Lessons learned
Given the buzz surrounding new and disruptive InsurTech products, the panel suggested that new ventures might be best served to focus on thoughtful distribution innovation in addition to product innovation to build a great product and to identify a long-term strategy. Focusing on adding value to customers and thoughtful, fiscally responsible growth can help startups avoid the pitfalls. Each participant noted that new market entrants who have management teams with fundamental knowledge of the insurance space have a greater likelihood of long-term success. Again, focusing on the “I” in insurtech was part of Mike Millette’s core focus. Andy Tam, managing director of Perella Weinberg Partners, noted that to increase the likelihood of a successful fundraising or M&A deal, management teams must build financial cushions over the deal’s timeline.
3. Intentional funding
InsurTech funding fell 58% in Q1 2022, representing a 15% year-over-year decline from Q1 2021. [Source: CB Insights]. Although 2022 saw the lowest funding flows in the past few years, the market provides opportunities for lasting partnerships with more hands-on investors. The consensus of the panelists was that funding flows may continue to slow for the foreseeable future. This trend is likely to limit unbridled hype around less viable ventures and provide space for discerning capital to fully invest and build relationships with thoughtful ventures. The panelists pointed out that the market always adjusts the valuation.
4. Trends in mergers and acquisitions
InsurTech has seen a surge in M&A interest and continues to accelerate. This trend has allowed incumbents to acquire top talent and expand access to new customers. In addition, InsurTech investors are optimizing and engaging in their own M&A to gain new opportunities or consolidate in their own fields. Disruptive partnerships will be a differentiator in the M&A space.
5. Actor’s participation
Corporate VC (CVC) is important in InsurTech because businesses need both structure and innovation. A CVC can be quite successful when there is distance from the corporate parent, but it requires refinement of judgment (which in turn takes time and energy). This can create catch-up work for incumbents who either have to hire people with venture capital experience or through trial and error. A successful VC investment should insist on big exits and big returns.