Insurtech investing activity turned around in second half of 2020

PitchBook Fintech Analyst Robert Le sees opportunity for "hybrid model" insurance distribution plays

It’s no secret that the insurance industry has been slow to adopt digitization. And while the COVID-19 pandemic significantly slowed insurtech investing activity in the first half of 2020, the pandemic accelerated technological adoption in the sector.

Nonetheless, insurtechs raised $6.1 billion in venture capital funding in 2020, a decline from the $6.3 billion it raised in the year before, according to a PitchBook report. More than 40% of that deal value came from health and life insurtech companies.

PitchBook Fintech Analyst Robert Le said in an interview with FinLedger that the dip in insurtech investment activity was largely due to the COVID-19 pandemic and the uncertainty it caused for VC investors.

“We saw things turn around for the second half of the year,” he said. “Because of that, we think that’s going to continue, because if it wasn’t for the pandemic, I think 2020 would have been a really strong year for insurtech investments.”

Globally, cumulative deal value across VC, private equity and merger & acquisition activity for insurtech investing declined to $18.3 billion in 2020 from the $19.3 billion it reached in 2019. The main driver of transaction value was M&A with $9.8 billion invested in 2020.

Although the insurance industry is digitizing, Le pointed out that this transformation will happen slowly. He expects that it may take another decade for the insurance industry to be fully automated and online. Until then, he expects to see a “hybrid model” where consumers can buy online but also have the option to interact with another human being to do things like make a final purchasing decision, especially for more complicated insurance like some life insurance policies or commercial insurance.

“That’s what we’re starting to see right now is we’re going to be in this hybrid zone of insurance distribution for the next three-to-five years at a minimum,” Le said.

The Pitchbook report found that pre-money valuations for late-stage insurtechs at the time of the funding transaction were notably depressed, recording a median of $80.0 million in 2020 compared to a record-high of $235.0 million for all of 2019. The PitchBook report attributes this negative valuation delta to the sector being negatively impacted by the pandemic. However, it is highly likely that this valuation trend is influenced by fewer late-stage fintechs raising large rounds given that public equity markets have welcomed insurtechs to the big board via initial offerings and SPAC deals.

Either way, PitchBook anticipates that as the economic recovery ensues, insurtech valuations may resume growth as VC-backed underwriting and claims providers continue to take share.

The commercial insurance sector was an area within insurtech that saw plenty of investment growth in 2020, Le said, especially cyber insurance. For instance, Next Insurance raised a $250 million Series D round in September 2020. Meanwhile Pie Insurance raised $127 million in a Series B round in May 2020.

Traditional carriers often underwrite insurance relying a lot on historical data, but Le thinks that underwriting is shifting in a way in which it looks at alternative data sets and not just historical data. This will be a big growth area, because Le said when he talks to insurance carriers “they know that they can’t rely on their historical data forever.”

Prior coverage of Pitchbook fintech investment reports that fintech funding saw a slow start in 2020 due to COVID-19, but predicted a tailwind for fintech dealmaking in the second half of 2020. This came to fruition.

FinLedger’s 2021 outlook for insurtech included expert perspectives predicting an increase in private equity investment in insurtechs this year.

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