With (re)insurers distracted by Covid-19 and with a recession approaching, it may be the beginning of a very tough period for early stage insurtechs, according to Willis Re’s Andrew Johnston.

In your latest quarterly insurtech briefing, you challenge the term ‘insurtech’. Why is this and what shift has been taking place to make you do so?

Dr Andrew Johnston, Global Head of InsurTech, Willis Re

The disparate worlds of insurance and technology are increasingly coming together through the ubiquitous adoption of technology by insurers and reinsurers. Any new company, relationship, or strategy in our sector is invariably technology-oriented – that’s now a given, and it makes ‘insurtech’ and ‘insurer’ almost synonymous. A bifurcation remains between insurtech, the cultural phenomenon of widespread adoption of new technology into the industry driven mostly by outsiders, and insurtechs, the start-up tech companies themselves, although as our industry becomes completely synonymous with technology, the case to question the term’s long-term validity remains.

How would you define the insurtech landscape in 2020 - what have been the key tech trends?

2020 began in the same vein as 2019 ended, at the peak of the investment-activity flywheel. By early February it was quite clear that sector investors had become distracted by Covid-19 and M&A. We saw a decent level of deal volume, but the individual deal amounts were small.

Then by the end of Q2 it had flipped on its head. Investment levels regained their pre-Covid levels. But despite the big aggregate numbers, insurtech is still a relatively small space. Just one or two mega-deals can make a period look significant, as we can see by digging into the data. We have seen a slowdown in the sheer volume of overhyped, speculative, exitfocussed deals, which I believe was always going to happen in 2020, and Covid-19 accelerated that trend. But the impact of the pandemic is wider.

Many insurtechs are struggling this year, not just to gain revenues, but simply to get in front of distracted (re)insurers. The field is crowded, the conferences are cancelled, and the market’s holding companies are beginning to batten down the hatches in anticipation of recession. That makes it much harder to sell insurtech, since it is almost always a tactile proposition.

Our market is difficult to navigate at the best of times, and we do not yet fully understand all the challenges of navigation in a remote environment. Meanwhile the reason for the existence of insurtechs gets stronger all the time, as the (re)insurance sector embraces technology. This may seem like a contradiction, but it is worth noting that many (re)insurers continue to develop their own inhouse technological solutions.

On the question of specific technologies, the biggest trend has been towards appropriateness. Any insurtech proposition must adopt appropriate technology to be successful. It doesn’t matter if the technology behind the proposition is highly innovative, nascent, or leadingedge: what matters is only that it works. For example, cases remain where MS Excel is ultimately more appropriate for an initiative than, say, blockchain.

How has Covid-19 and the associated economic uncertainty changed investment behaviour towards insurtech and what is the outlook?

It is a temporary distraction that has poured a bucket of cold water over valuations. One or two firms may accelerate their IT strategy to make the most of waning public optimism in the economy, but overall people are considering the lessrisky bets. We will see fewer transactions as a result, and a top-heavy investment mandate which favours later-stage firms. That might mean fewer early-stage insurtechs get the lifeblood investment they need, which could lead to a slowdown in the number of more mature companies seeking support in two or three years’ time. We’ve seen a few moves towards insurtech IPOs. What are the key components for a successful insurtech IPO and just how many can say they demonstrate these? We have recently seen several IPOs around the world: Deutsche Familien Versicherung (DFV) in Germany, Policybazaar in India, and Zhong An in China.

For them, it is a highly specific business strategy to gain a secondary course of capital income, but for most insurtechs, an IPO will never be a suitable stepping stone, so few will want to go down that difficult route. Successful insurtech IPOs are generally launched by companies with a very strong brand that have distanced themselves from the crowd. They typically need a clear track towards profitability, a solid business plan, and a recent fundraising round that is indicative of the floatation price. Inevitably, we will see three or four more insurtech IPOs in the US over the next two or three years, and I expect several to be pulled forward to 2020, since we are facing a recession. It is worth reminding ourselves, however, that the insurtechs in ‘the IPO news’ are not particularly indicative, or at least representative, of the vast majority. We estimate that as many as 3,000 insurtechs exist in the world today. Even if we see five more IPOs this year, it will still represent only a fraction of the overall picture of insurtechs and insurtech development.

Why have reinsurers tended to be early adopters of technology?

Relatively speaking, I don’t know that you could make a strong case that they have been. Insurers have been just as open to the adoption of technology as reinsurers, and per the previous question, it is easy to focus on news headlines, and assume they represent the complete picture. The fact remains, however, that a lot of reinsurers have taken a relatively cautious approach to this space. Inactivity rarely makes insurtech news.

What is your outlook for the insurtech space for the rest of 2020/21?

We will see more investment, rather than dramatic underinvestment. That will be driven in part by the year-end expiration of some funds currently earmarked for insurtech opportunities. Those budgets are very likely to be slashed for 2021 if a post-lockdown recession hits, as the world now expects. That could make it tough for insurtechs without a solid, formal proposition, and for those which do not have embedded partner relationships, the latter being more difficult now to obtain, since (re)insurers are distracted and a recession is approaching. We may be at the beginning of a very tough period for early stage insurtechs, one which could last for the next couple of years.