In the first quarter of 2020, 96 InsurTech deals were completed, a 10.0% increase compared to Q1 2019. Total funding, however, fell 54.0% to $912m, as only one funding round over $100 million was executed. A sizeable majority (83.0%) of this funding went to P&C InsurTech firms, with early-stage and US-based companies representing a large, historically atypical share of completed deals.
Dr. Andrew Johnston, Global Head of Willis Re InsurTech, believes that the COVID-19 pandemic explains the shift in Q1 funding towards early-stage and US-based InsurTechs. As insurers and reinsurers’ focus swung to mitigating COVID-19 related issues in Q1, they decreased investments in InsurTechs by 49.0%, compared to Q3 2019. The slack was partially picked up by private equity and venture capital investors, who generally prefer smaller diversified bets, which explains why deal count was up while gross funding was down. Further, US-based InsurTechs likely received more attention in Q1 because of COVID-19’s later arrival to the US compared to China and Europe.
The funding of non-established InsurTech firms comes at a critical time, as their fates are largely connected to the actions of incumbent insurance industry players. Cash-constrained (re)insurers may not have an appetite for purchasing or distributing new InsurTech products, while other (re)insurers may look to InsurTech solutions as a way of coping with change brought about by COVID-19. Current funding levels are low, which, in combination with a reduction in available cash, will likely cause a wave of InsurTechs to shut down.
Dr. Johnston expects a decline in InsurTech investment from investors over the next few years, but the current bottleneck on large deals and flurry of early-stage investments could set the stage for a temporary burst of M&A and funding activity when COVID-19-related uncertainty subsides.
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