Our inaugural InsurTech Summit NYC on June 16 featured leading VCs, emerging companies of all stages, as well as other key stakeholders. Below are key takeaways from the first panel, Top InsurTech Investment Trends: Valuation, Volatility, Convergence and Divergence.
Investments in the insurtech sector are 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 pull off to gain the attention of an ever-discerning investor base? McDermott Partner Michael Halsband led an investors’ perspective panel that addressed insurtech investment trends.
InsurTech is shifting from “T” to “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 in investing in insurtech startups and offered their insights on missteps and failures experienced in the sector. The panel also explored the state of mergers and acquisitions (M&A) trends in the ecosystem. Lastly, the panel addressed the changes in funding streams for InsurTech in 2022.
1. Focusing on the “I” in InsurTech
While the industry has seen a tech-based, “growth at all costs” approach to generating interest in new insurance products, a return to an emphasis on a deep bench of insurance experience is key for new ventures. Investors look to underwrite an excellent book with influence from deeply experienced management teams who fundamentally understand how to optimize a concrete issue in the insurance ecosystem with an efficient and profitable strategy. Jonathan Crystal, managing partner at Crystal Ventures, noted a focus on business-to-business (B2B) and transformational technology that is deployed in a novel way. David Wechsler, principal at OMERS Ventures, noted a focus on early stage through growth stage companies and long-term investments with a five- to 10-year lifespan, with multiple rounds of capital to work with. Katelyn Johnson, managing director at AmFam, noted growing interests in incubation and series B/C funding, models with applicable modes and companies managed by leaders that have developed theses other than a pure growth model. Mike Millette, managing partner at Hudson Structured Capital Management, noted a focus on early stage seed a to b companies and a look to viable companies that understood the fundamentals of insurance – the “I” in insurtech – that would be best positioned to meaningfully disrupt core sectors in the industry.
2. Lessons Learned
Given the buzz surrounding new and disruptive InsurTech products, the panel suggested that new ventures might best be served to focus on thoughtful distribution innovation in addition to product innovation in order to build a great product and identify a long-term strategy. Focusing on value-add for customers and thoughtful, fiscally responsible growth can help ventures avoid pitfalls. Each panelist noted that new competitors in the market that have management teams with fundamental knowledge of the insurance space have a higher likelihood of long-term success. Again, concentrating on the “I” in insurtech, was part of Mike Millette’s principal focus. Andy Tam, managing director at Perella Weinberg Partners, noted that to increase the likelihood of a successful fundraise or M&A transaction, management teams should build in financial cushions throughout the timeline of a transaction.
3. Deliberate Funding
InsurTech funding fell 58% in Q1 of 2022, representing a 15% year-over-year decline from Q1 2021 [Source: CB Insights]. While 2022 experienced the lowest funding streams in the past few years, the market is providing opportunities for durable partnerships with more hands-on investors. Consensus from the panelists was that funding streams may continue to slow down for the foreseeable future. This trend is likely to limit unrestrained buzz surrounding less viable ventures and provide the space for discerning capital to invest fully and build relationships with thoughtful ventures. Panelists pointed out that the market always corrects the valuation.
4. M&A Trends
InsurTech has seen an uptick in M&A interest—and continues to accelerate. This trend has permitted incumbents to acquire top talent and broaden access to new customers. Additionally, InsurTech investors have been optimizing and engaging in their own M&A to gain new capabilities or consolidate within their own spheres. Disruptive partnerships will be a differentiator in the M&A space.
5. Incumbent Involvement
Corporate VC (CVC) is important in InsurTech because ventures need both structure and innovation. CVC can be quite successful when there is distance from the corporate parent, however, it requires honing judgement (which in turn requires time and energy). This could create catch-up work for incumbents, who either have to hire people with VC experience or by trial and error. Successful VC investment should push for big exits and big returns.