InsurTech startups wane, but funds still pour into maturing market
Investor interest in InsurTech startups remains quite robust, even if the focus has begun to shift to more mature players in a consolidating market.
While the InsurTech gold rush mentality that marked the first half of this decade may have passed, startup financing remains quite robust, although the focus has begun shifting to more mature players.
The number of fintech startups launched across the financial services industry peaked in 2014 at just above 700 after a rapid ascent over the prior six years. Since then, there has been a steep decline, hitting its nadir in 2017, when fewer than 100 startups made their debut, according to an analysis by the Deloitte Center for Financial Services, based on Venture Scanner data.
InsurTech has bucked the general trend a bit. Insurance-specific launches, which lagged the rest of the financial industry early on, was also slower to stall out. Indeed, InsurTech formations actually rose from 153 in 2014 to 172 the following year, when startup activity in other sectors had started to slow down. In 2016, InsurTech startups saw a far more modest decline (to 159) than did other financial sectors. Even last year, when fintech launches plummeted across the board, the 64 new InsurTechs represented 70 percent of 2017′s startups.
Looking at the bigger picture, startup activity by itself is not necessarily indicative of the health of the fintech or InsurTech markets. In fact, it’s more likely that development has entered a new stage — one where maturity matters. Investors seem to be growing more cautious about where to place their bets, preferring to double- and triple down on those showing the most tangible progress rather than take a flier on a brand new entity.
It helps to follow the money. Deloitte’s analysis found that while far fewer startups are being launched, funds continue to pour into fintech development overall. In insurance, for example, even though the number of startups in 2017 fell by more than half, the amount of money invested in the InsurTech market actually rose from $1.4 billion to $1.6 billion.
We also found that certain categories of InsurTechs attracted far more capital than others. Personal insurance drew the most funding last year at $600 million, even though there were fewer startups in that category than in insurance operations or customer acquisition, while investment in peer to peer startups nearly doubled.
What does this all mean?
Our take is that the dramatic drop in startup activity likely reflects a saturation of the market following years of rapid growth, as financial institutions rushed to stake a claim. Now, however, investors appear to be taking a breath and reassessing the landscape. Instead of focusing on providing seed money for raw startups, more funds are likely being invested strategically in those fintechs that have stood the initial test of time and show promise in actually bringing solutions to market.
This hypothesis is backed up by facts on the ground. The data shows a shift to later round funding, a reflection that more startups are going back to the capital markets for additional financing so they may move off the drawing board and/or achieve scale. We’re also seeing more startups being acquired outright, indicating the start of consolidation in what had been a rapidly expanding roster of fintechs.
Meanwhile, we see fintech development as a truly global enterprise. The United States still dominates the startup scene in terms of pure numbers of companies launched, but a closer look reveals that more serious money may be funneling into other geographic innovation centers. In payments, for example, while the United States has generated 288 launches, the money backing them totaled $8.2 billion. Compare that to China, which drew $7.1 billion in venture capital for a mere nine payment startups, and India, which attracted $3.1 billion for just 32 startups.
It’s said there are “horses for courses,” and the same apparently goes for fintech. The need to leapfrog payment options in China and India — two nations with a burgeoning middle class and relatively large mobile penetration — is likely driving more urgent financing of new digital options in those two rapidly developing nations.
Meanwhile, it’s no surprise that Bermuda is drawing more capital to back InsurTech startups in commercial insurance, given that the small island has for years been a trailblazer in alternative risk transfer, starting with the launch of captive insurers, and continuing on through formation of specialty underwriters, and, more recently, hedge fund driven reinsurers.
Looking ahead
So, what’s the near future look like when it comes to InsurTech? In the second part of our research, we’ve been interviewing incumbent financial institutions (including insurers), startups, and those facilitating activity between the two (often known as accelerators). The following is a sneak peek into what we’ve been hearing as the InsurTech market continues to mature:
- The bar is being raised for investment, as neither financial institutions nor fintechs have endless time or money for experimentation.
- Attention seems to be shifting from ‘cool’ ideas to practical applications.
- There is much more of a focus on measurable results, rather than backing intriguing ideas with uncertain outcomes.
- Financial institutions are seeking fintechs with actual industry expertise, preferring those providing solutions to known problems, rather than startups shopping generic solutions looking for a problem to address within the financial sector.
- Someone needs to own fintech within a financial institution to avoid duplication of effort, working at cross-purposes, and going off track in terms of strategy and goals.
- Fintechs are getting savvier about who to target at financial institutions with their pitches and are seeking a clearer path to adoption.
So, while the fintech gold rush may have come to an end, there still appears to be “plenty of gold in them thar hills!” (as prospectors used to declare back in the Old West). Whether insurers can successfully mine InsurTech treasures and forge them into something useful will depend on how well organized they are in formulating and executing a comprehensive strategy to develop and integrate new technologies across their organization.
For more details about InsurTech investment trends, download “Fintech by the numbers: Incumbents, startups, and investors adapt to fintech evolution.”
Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.
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