Experts predict bumpy road for insurtechs heading into 2023

The insurtech sector, once hailed as the great insurance industry disruptor, is looking at a bumpy road for 2023 with investment capital at a premium, stocks in the dumper, recessionary pressures, and the inability to innovate stunting growth, experts say.

“The 2015-2017 class of insurtechs have chassis built for speed but the roadway will be whipped from under them,” said Robert W. Tomilson, a partner at the international law firm, Clark Hill and a recognized legal expert in insurance and reinsurance.

This is not to say that anyone is sounding the death knell for the fledgling industry. With more than 1,300 insurtech companies in the U.S. with an estimated market value of $3.85 billion and an expected compound annual growth rate of nearly 52% between now and 2030, the business is here to stay, and some companies will no doubt thrive.

Pressures of a maturing industry

Yet, clearly, the sector, which introduced the innovative use of technology and consumer ease to the stodgy old insurance business, is facing the pressures of a maturing industry during an unsettling economic era and backlash from overhyped predictions it would disrupt and displace the legacy market.

“There was this drum beat in the early waves of insurtechs, that we're going to come in and upend the way things are done,” said Tanner Hackett, CEO and founder of Counterpart, a commercial liability insurtech for small business. “The disruption that was talked about three, four years ago has petered out, if it ever existed. I think what they have done, though, is shed light on opportunities in the industry to improve. And I think that's more directionally where we're going.”

Indeed, said Hackett, the emergence of the insurtechs prodded established insurers to throw resources at technological upgrades, consumer friendly applications, and speedy online delivery of services.

“And this is a great outcome, maybe not for their investors in the publicly traded companies, because they haven't seen the success that they all hoped for,” he said. “But it's been a great outcome for the end consumer. For decades there was no urgency to change behaviors and finally, you have some businesses that are trying new things. And this is why I'm hesitant to knock that first wave of insurtechs because they did bring something to the table; they brought capital and urgency.”

But cheap capital has now all but dried up and experts predict a shakeout will mark 2023 for insurtechs.

The cost of capital in 2023 will end some early stage ventures and kill some very fine mature businesses with a high burn rate.Robert W. Tomilson, partner at the international law firm, Clark Hill

“The cost of capital in 2023 will end some early stage ventures and kill some very fine mature businesses with a high burn rate,” said Tomilson. “The former will simply fail to find capital to get off the ground and the latter will not be able to adjust quickly enough.”

Ian White, co-founder and CEO of Koffie Financial, an insurtech focused on providing financial services to the trucking and transportation sector, agreed that some insurtech thoroughbreds will spit the bit in 2023 forcing a survival of the fittest.

“It’s often during recessionary periods that enduring companies are born,” he said. “Scarce access to capital forces new players to identify meaningful opportunities with strong unit economics versus the spray-and-pray approach during a low interest rate period and seemingly unlimited venture finding.”

Next year, White anticipates a wave of companies “dying on the vine” as they lack sufficient runway to exploit the product market or be consumed with regulatory compliance and be unable to show a patch to profitability.

Insurtech funding at lowest level since 2020

Insurtech funding dropped to its lowest level since 2020 during the third quarter of this year, to $2.3 billion. And for the first time since 2018, there no new insurtech unicorn births, according to CBInsights.

Meanwhile, insurtech companies have been perhaps the biggest victims of the stock market downturn, most notably those firms that went public in 2021. Thus, the lack of easy funding will spur mergers and acquisitions, most experts believe.

“The 2022 market downturn and rise in cost of capital will put insurtechs that only recently contemplated going public in the cross hairs of incumbents looking for acquisitions at fair value,” said Tomilson. “There are a number of very smart insurtechs that could be game changers for the industry if acquired and given the opportunity to scale their operations across larger platforms.”

Several executives surveyed said investors in 2023 will focus on the profitability potential of insurtechs as opposed to the overall growth or market share potential that spurred the initial overheated market for insurtechs.

Share prices 'at all-time lows'

“The share price for publicly-traded insurtechs is today at all-time lows,” said Tomilson. “However, the same firms have already taken the hard medicine of market demand and pivoted 12-18 months ago, trimming their numbers, cutting back on customer acquisition costs, and turning a profit from solid underwriting. In 2023, those early efforts show results that should be reflected in their share price.”

Prioritizing profitability overgrowth will put some insurtechs in position to better capture the market share from legacy producers that was long predicted, said Guy Goldstein, CEO of NEXT Insurance.

“Those who don’t prioritize or achieve profitability in a timely fashion, might not survive,” he said. “2022 was a year for insurtechs to reassess and reevaluate their operating costs, customer acquisition models and coverage offerings, laying a strong foundation for the path to profitability.”

In 2023, he said, insurtechs will continue to build on these changes and will double down on digital solutions, artificial intelligence and data analytics to improve underwriting, loss ratios, and risk assessment, to achieve sustainable profitability.

“Insurtechs will continue to stay competitive with traditional providers by capitalizing on the widening gap in digital experiences and tech-driven back-end efficiencies over the next 12-24 months, allowing them to create responsible, viable companies, while delivering more choices and a better experience to customers,” Goldstein said.

Counterpart’s Hackett said he expects to see more insurtechs forge partnerships with legacy companies and even lure some managers to leave the old firms for the new.

“It’s a matter of how you prepare people with a vision for the future with the folks that have been in the weeds and understand the nuance of everything from the coverage lines to distribution, and the value chain of how insurance is actually delivered to the end customer,” he said. “I see it as it's more of what they call ‘intrapreneurship.’ If insurance companies are completely ignoring it, we'll see how successful they're going to be in 20 years.”

More 2023 predictions

Some other insurtech predictions for 2023 include:

Tomilson: Droughts, hurricanes, wildfires, floods and, of course lawyers, sapped industry profits in 2023 (especially in Florida and California). While legislative reform and a hard market will bring some relief, insurtech innovations in these most difficult sectors of the market will shine in 2023. Parametric insurance as well as other innovations to provide relief in homeowners, crop, and property insurance.

Hackett: With most of the major coverages (auto, workers comp, general liability, etc.) already facing significant price pressure from new and existing carriers, insurtechs will hedge their bets and focus on dominating specific verticals (e.g., specific industries, geographies, size of business, etc.) with more specialized distribution, underwriting, and support services.

White: While funding has slowed since the craze of 2021, insurtech continues to receive funding, indicating the clear promise of modern-day approaches applied to an antiquated industry. Companies will have to focus more on responsible growth, which recognizes the quality of underwriting, forced to pay more attention to their underlying business rather than solely meeting investors’ needs, allowing the "good” companies to be the ones that last.

Goldstein: Artificial intelligence has played a role in fintech and insurtech innovation for several years now with machine learning powering policy design, chatbots, and other tools being used to streamline all aspects of product development and customer experience. But generative AI will take automation to new heights, allowing financial services companies to make marketing, customer service and customer acquisition even more streamlined. Initially, it will impact lines of business across industries before becoming mature enough to have vertical industry applications.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].