Some digital insurers will be in serious jeopardy as standalone companies in the months ahead, thanks in part to a big coronavirus crisis-related drop in venture funding. That reality, in turn, could spur a round of InsurTech mergers and acquisitions, Forrester Research said in a new report.
“Comparison marketplaces are doing well, but digital insurers have not gotten enough of a foothold to protect themselves,” the report concluded.
Forrester argues that consumers only think about insurance when they use it anyway, which potentially puts digital insurers at a disadvantage during the pandemic and the related economic conditions it has caused. Because of this, Forrester predicts mergers and acquisitions involving these companies, with traditional carriers poised to snatch up digital insurance startups so they can improve their operations more quickly.
“It will be hard to get the money to keep up large-scale ad campaigns, and traditional insurers that want to remake their consumer or business front ends will have the opportunity to make acquisitions on the cheap,” Forrester said.
Early in the quarter, multiline digital insurer Digit Insurance raised $84 million, and digital life insurer Ladder pulled in $38 million, much lower than Root Insurance’s $350 million and Lemonade’s $300 million rounds in 2019. What’s more, at the end of Q1 2020, when the coronavirus began to spread widely, new funding for digital insurers was non-existent.
“No digital insurers closed rounds at the end of the quarter as funding became tight,” the Forrester report said.
Digital insurers are not yet giving any major public indication of problems. Lemonade, for example, which has raised nearly $500 million to date, said it is continuing with targeted hiring to support an expansion in the Netherlands. Hippo, an MGA digital insurer that has raised $209 million to date, is pausing on expanded staffing, though it will fill “business essential” roles as they become open.
Behind the Numbers
InsurTech funding came in at $757 million during the 2020 first quarter, down by just under half compared to the previous quarter. That’s a bit better than the $701 million that came through in Q1 2018, though it is a steep drop from the $1 billion or more raised in the six previous consecutive quarters.
That number dovetails with Venture Scanner, which calculated $760 million in InsurTech financings for Q1 2020, though tracked it as about 50 percent lower than a quarterly funding average over the previous year of about $1.5 billion.
Forrester said that investments for the quarter reflected a “noticeable downward trend as the coronavirus spread and anxiety entered the market.”
According to Forrester, January’s biggest round for the sector was $100 million for comparison marketplace Policygenius. As well, investors for Q1 made their bets with a less-mature group of InsurTechs, leaving them with what Forrester said were riskier investments.
“There were not as many safe options at the beginning of 2020,” Forrester said. “Q1 saw many early-stage startups seeking funding, but uncertainty in the market made it less appealing to invest in unproven startups.”
Forrester said that investor funding for cyber insurance startups also evaporated in Q1, as well as in Q4 2019.
InsurTechs Drawing Attention Now
According to Forrester, InsurTechs that help carriers automate tasks flows or make sense of large datasets are drawing more investor attention right now. Standout companies include Unqork, which raised $51 million during the quarter, and UK-based Instanda, which raised $20 million. There’s also Tractable, a loss-estimating firm that pulled in $25 million, and Cape Analytics, which raised undisclosed amounts of funding in January and March.
Looking ahead, Forrester added that comparison shopping sites have been popular among digital carriers along with digital agencies. Policygenius, for example, drew investment from AXA, Mass Mutual and Transamerica. Insurify counts MassMutual and Nationwide among its investors.
Acquirers, mainly analytics firms so far, are looking at InsurTechs that specialize in analytics or back-office processes, Forrester said.
Forrester’s full report is: “InsurTech Funding Roundup, Q1 2020: Investors Reduce Risk as the COVID-19-Induced Downturn Settles in.”
Source: Forrester Research