COVID-19: Hard road ahead for insurtech companies

The past few months have set the insurance industry back and forward, simultaneously. We are in both pause mode and fast-forward mode.

The sector is facing unprecedented historical losses and yet the value of reinsurance has never been clearer. The strength and reliance on technology has never been greater, and yet poor market investment performances and focus on COVID-19-related priorities could see a downturn in technology investments from reinsurance industry players over the next few years.

The sector is facing unprecedented historical losses and yet the value of reinsurance has never been clearer.

To say that we are in uncharted territory would be an understatement beyond measure. For reinsurers, investable markets in general and individual insurtech vendors/start-ups, most “best-laid plans” for 2020 have probably been put on hold (or scrapped altogether). And yet as the world around us seems unfamiliar and strange, perversely from a technological perspective at least, we are achieving the goals that we have been opining on for decades at a lightning-quick pace. We have gone “digital”.

Businesses in our industry are now either fully floating on the digital rafts they have been inflating for years or digitising increasingly and relying more on remote systems (increasingly cloud-based) that can support electronic quoting, policy binding and issuance, and claims paying technology. If reinsurance is still unable to digitally/remotely procure business, quote business, distribute product and service a living policy up until the contract ends or a claim is made, then it is leaving itself vulnerable to obsolescence.

As demonstrated by the results in the latest quarterly insurtech report from Willis Towers Watson, there has certainly been no lack of global investment activity in the second quarter of 2020.

Following the COVID-19-induced slowdown in global insurtech investment during the first months of 2020, $1.56 billion was raised by insurtech firms in the second quarter. The total, up 71% over Q1, was driven in part by later-stage investments, including four “mega-rounds” in excess of $100 million.

Deal count was down 23% from Q1, but many individual rounds were larger as investors continued to turn away from seed and angel deals in favour of support for more mature ventures. Property and casualty (P&C) sector investments accounted for 68% of funding, but the share of life and health (L&H) sector investments was up 17 points to 32%, as the pandemic crisis continues to compound the value of technology, and particularly telehealth.

While the majority of activity continues to be concentrated to the US, UK, and China, Q2 2020 saw deals across a record-breaking 25 countries, including newcomers such as Taiwan, Croatia, and Hungary. In contrast, the previous quarter saw the least geographic diversity since Q3 2018 with only 15 countries represented. As the top markets continue to work toward recovery, investors may continue to place bets in newer regions to diversify risk.

The insurtech investment in Q2 is certainly an uptick when compared with Q1, but most of the underlying issues which affected Q1’s downturn have not gone away. Whether Q2’s surge comes from a handful of mega-deals, or a genuine play by many investing in L&H Insurtechs to capitalise on life insurance and telemedicine solutions, the impact of COVID-19 is likely to continue for many quarters to come. The ways in which this manifests itself into future investments is yet to be seen.

While it is very difficult to gauge the true impact that COVID-19 will have on the future of individual insurtechs, it possible to offer a view on how things could well play out at a more macro level for the wider industry.

In the short term, I anticipate that consumer and industry investment confidence will test the status quo. In addition to the speculation of short-term returns and survival speculation of some highly leveraged insurtechs, certain risks and their associated vectors have fundamentally changed — and could be changed forever. Will the travel insurance industry ever be as buoyant again? Will we ever drive as much again? Will we all have offices in our home? The short answer is possibly yes, possibly no. As such, we anticipate seeing a fairly unpredictable next 12 months of activity.

In the medium term, we will likely see a different kind of constraint affecting the status quo. Changing risk classes might be being better understood, and consumer optimism might be starting to rise (driving an increase in leisure activity and asset purchasing), but the true economic impact of COVID-19 will most likely not be really felt until 2021 and 2022. This will in part be driven by changing market rate prices, but more importantly it will be impacted by the longer-term effects of poorly performing market investment returns. This will undoubtedly impact the view of many reinsurances, and their shareholders, regarding how much they are prepared to invest in technology — and technology firms themselves.

The other thing to consider in the medium term is the survival prospects of many global Insurtech businesses. While insurtechs are probably much more adept at hibernating than their incumbent relatives, if the use case of a business has been lost forever through fundamental change, or the prospect of ever “making it” now seems (more) unlikely, then many founders may cut their losses and move on. As is the case for many recession-like waves, certain assets may become more affordable, and it is quite possible that highly innovative and impacting technology will be available at lesser prices. This could well be someone’s opportunity.

In the long term, somewhat ironically, it will be technology that helps our industry survive this situation and reinsurances will come to realise this if they do not know it already.

Funding into technology will be a fixed budget item; legacy systems will have been jettisoned, and we will most likely observe a true convergence between technology and balance sheet activity. Technology will help to evolve and shape our industry, and Insurtech businesses will most likely be valued more realistically. It will be less about finding the next unicorn and more a search for appropriate technology that supports a firm’s core digital strategy. If we think back to the Gartner Hype Cycle (a graphical depiction of a common pattern that arises with each new technology or other innovation), this is where the “trough of disillusionment” will bottom out and then rise again as technology continues to be an embedded feature, function and commodity of our industry.

When sympathetic industry capital is replaced by much more demanding public investors, there is likely to be a very rude awakening for insurtechs who simply do not deliver financial performances associated with their valuation.

It is also worth noting that time and time again, our industry comes under fire for being slow and unable to “do the right thing” from a technology perspective, but take a moment and look at how so many reinsurances have reacted to this COVID-19 situation. One of the most fascinating facets of COVID-19 is not so much that we had no other choice but to go remote or digital, but that we could and can continue to do so. If COVID-19 had happened 100 years ago, or even 20 years ago, many of us would have been forced to go back to offices and commuting because the economic pressures not to would have been unsurmountable.

Whilst acknowledging the truly devastating impact at a human level for those affected by COVID-19, when viewed through the commercial/functional lens, however, the last few months have also proved to be an enormous experiment and validation of the technology that we have been investing in for over a decade. Many of the firms in our industry went remote because it was a feasible (albeit intimidating) option.