Prediction: Expect to See More Insurtech Funding in 2021
At the onset of the pandemic last year, no one knew what to expect, and the markets reflected that uncertainty. But as more and more businesses moved online, it was clear that insurtech, as always, was ahead of the curve. Technology is key to running a nimble and profitable business, and investors recognized that.
According to CB Insights, insurtechs raised $2.5 billion across 104 deals in Q3 2020, an increase in both funding and deal count quarter over quarter by 63 percent and 41 percent, respectively.
Granted, these figures are down from Q3 2019. That year in total saw a record-setting $7.3 billion over 548 deals. But given the pandemic and its impact on every part of the economy, last year’s funding activity promises insurtech momentum in the year ahead.
Venture Capital Per GDP & Room for Growth
Though fintech has proved to be a good investment over the years, insurance venture funding still lags behind, especially compared to insurance’s share of the GDP.
In 2019, insurance accounted for 2.9 percent of the nation’s gross domestic product at $630 billion. Yet it only saw $7.3 billion in insurtech investment that year, or 1.16 percent of the industry’s GDP.
If GDP is a true indicator of a sector’s economic health, investors would be wise to back the innovators who are shaping the future of the insurance industry. More traditional insurance companies will only embrace technology, as the pandemic demonstrated, or be left in the dust.
Because insurtech touches billions of consumers and businesses, it’s an opportunity with serious growth potential.
Insurtech Is a Natural Fit for VCs
According to Deloitte’s commentary, more venture capitalists want to fund insurtech companies that control the distribution rather than single-point solutions that require end-user integrations. The pandemic showed the old ways of doing business are brittle — if insurance is to thrive, it has to embrace digitization, control distribution, and simplify how things are done for the consumer. Folks should be able to shop for and buy insurance online, and artificial intelligence can help guide the process for a positive user experience.
Investors benefit from this disruption, too. For example, at Kin, we’ve proven we can lower margins, reduce costs, and make homeowners insurance more accessible by digitizing the entire quote-to-claim experience. That’s important in an industry that sees year-over-year premium hikes and positions an enterprising insurtech to succeed. When an insurtech wins, its investors do, too.
Lastly, insurance is an inherently digital product. It should operate more like other fintech services, like online banking and payment processing, and less like brick-and-mortar retailers. Insurance even has balance sheets like other VC- and PE-backed companies, so it’s a natural fit for investors.
Insurtech Stock Prices Continue to Climb
In 2020, Lemonade became the first insurtech to go public. It quickly saw a 72 percent increase from its target price of $29, opening in June at more than $50 per share. It was the second best-performing IPO trading debut in 2020, and that activity will only further attract investor interest in the sector.
While insurtechs saw higher share prices, traditional insurers were left scrambling. Allstate, Assurant, Federated National, Horace Mann, Mercury General, Progressive, and United Insurance Holdings saw share prices drop 24 percent in 2020. Chances are these legacy companies are paying attention to insurtechs and taking to heart the need to innovate.
The Future of Insurtech
COVID-19 forced many insurance companies to embrace technology, begrudgingly or not. We suspect that more venture capitalist and private equity firms have seen how the pandemic underscored the need for better technology in insurance and there will only be a stronger influx of investment in the industry.
A lot of industry players know they needs to evolve. The ones that have capital to invest in new ideas and technology will continue to do it.
