HSCM's Jones: Insurtechs now employ 99,000 people, but half have frozen or cut jobs
Adrian Jones, partner at HSCM Ventures, examines the numbers behind recent headlines about insurtech layoffs.
Headlines about insurtech layoffs – are they real? Yes, sort of. I recently tallied the headcounts of over 400 start-ups and tech-driven companies in the insurance sector, based on adding up LinkedIn company page headcounts shown to premium members. Findings:
- Insurtech is a major destination for talent. Total headcount of the 400+ companies is approximately 99,000 – which is the size of AIG and Allstate combined. The median is 82 employees, average 241. The range is zero (companies that liquidated) to over 6,000 (Policybazaar). Our data set skews towards companies that have raised $25mn or more, with a median founding date of 2016.
- Aggregate headcount is basically flat. Headcount across the 400+ companies is up 51 percent over the past two years, but most of that growth was in 2021, as the chart below shows. In the back half of 2022, headcount barely budged, and may actually be falling due to possible lags in the data.
- Fewer than half (47%) of companies in the sample of 400+ grew headcount in the fourth quarter of 2022. Headcount at the other half of companies was either flat or down. Of the 51 percent of companies that have fewer people now than they had at their peak headcount in the last two years, the weighted-average reduction of headcount is 19 percent. In 2021, 83 percent of companies in the sample added to headcount. In 2022, just 68 percent added, with most of the “adds” happening in the first half of the year.
- The US companies (63% of the sample) have had more volatility in headcount. They hired more aggressively in 2021 and have recently reduced headcount more rapidly than their non-US counterparts. This may be a combination of greater labour flexibility in the US and US venture markets changing more rapidly.
- There is little difference in headcount trends by year of founding. The median year of founding in the sample is 2016. Recent headcount trends for companies founded before 2012 are broadly similar to trends for companies founded in the last five years.
In 2022, the higher cost of capital, driven by higher interest rates, has caused tech-driven insurance sector companies to reevaluate their spending. Companies may have decided that projects, initiatives and positions that might have exceeded an IRR hurdle rate at a lower cost of capital might not clear the hurdle rate at today's cost of capital.
Indeed, the biggest use of capital for most young companies in insurance is paying their people. (For carriers, the cost of regulatory capital can also be quite meaningful.) Hence it should not be surprising that half of companies in our sample have frozen or cut headcount in the second half of 2022.
The actual number of companies reducing or freezing headcount is probably even higher than the figures show because people might not update their profiles until they secure a new job, which may be months after being notified of a layoff. Based on spot-checks of companies that have announced material headcount reductions, the lag seems to be real. In one case, involving a publicly traded company, the bottom-up headcount was over 50 percent higher than the company says their headcount actually is following a recent layoff. This company's numbers were manually adjusted based on their public disclosures. (More precise figures might be possible by surveying each company directly.)
There are several weaknesses in the analysis:
- Generating the sample of companies is inherently imprecise. The list of companies combines several lists or market maps from third-party sources, which we edited based on numerous judgment calls about what is not a tech-driven insurance sector company. The sample includes both listed and private companies. We generally excluded private-equity sponsored brokers, PE-backed fronting companies and new reinsurers. We believe the list includes most companies that have raised more than $25mn of venture funding globally, several insurance software companies including incumbents, and a sample of smaller companies that are generally too small to move the numbers much.
- Not everyone uses social media. While this limitation exists everywhere, it is acute in China. Hence we excluded Chinese companies that operate mostly in China. Excluding China means the sample misses some notable insurtechs such as Waterdrop Inc, which reported 2,936 employees in its 2022 annual report but shows only 260 employees on its company page on LinkedIn. Overall, the sample is probably skewed somewhat towards US companies, which make up 63 percent by count.
- Advisors, board members, investors and other non-employees may show up as employees. On the other hand, outsourced staff typically would not show up in headcount. Insourcing versus outsourcing can be material in insurance because service centres are major employers by count of employees and are often outsourced.
- Some of the increase in headcount could be due purely to M&A rather than organic growth. Several companies in the sample have conducted mergers and acquisitions which may not always be properly considered. We refreshed all data rather than relying on prior analysis so as to better include merged entities. (Many thanks to the analysts who spent hours gathering the data.)
- There is a degree of survivorship bias. The first version of this headcount analysis used data from summer 2021. To mitigate survivorship bias, all 300 of the “summer ‘21” companies are in the sample of 400 companies in the present analysis, even though a few of them are now defunct. Just over 100 other companies were added to the sample. These newly added companies grew headcount faster in 2022 than the 300 companies in the summer ‘21 data set (23% vs 8%), which we attribute less to survivorship bias than the fact that the 100 newly added companies typically conducted major funding rounds in the last two years and hence began appearing on more lists and market maps. Again, the sample is neither representative nor comprehensive but probably includes most of the larger companies.
- The analysis does not pick up people who work in insurance technology but not for a company in the sample – such as internal innovation teams in large companies, consultants, venture capitalists, accelerators, or other members of the ecosystem.
Overall, the headlines about layoffs appear to have some truth to them. But 99,000 employees is an incredible number considering that the term “insurtech” was only popularised in 2015 (and deserves to be retired). However, perhaps surprisingly, 61 percent of the 99,000 people work for a company that was founded in 2014 or earlier, such as Applied, Insurity, Guidewire, SelectQuote, Vertafore and Zywave.
The data clearly show a generalised sector-wide belt-tightening that became noticeable only in the last six months and particularly concerns US-based firms. If interest rates remain elevated and capital markets remain tight, headcount will continue to be under pressure, which will have knock-on effects to wages and ability of talent to move.
On the other hand, now might be a good time to poach talent. For incumbents seeing prices surge, or growing companies that could not afford top talent in 2021, the hiring market appears to be noticeably weaker today than a year ago. For people looking to move, nearly half of our sample appears to be growing staff. That’s many fewer than it was, but it’s still 200 companies and probably thousands of job openings.
The views and opinions expressed herein are solely the personal views and opinions of Adrian Jones of December 2022 and are subject to change at any time. The views and opinions may not have considered material economic, market, regulatory and other factors. Certain information reported has been gathered or obtained from sources believed to be accurate and reliable – any of which may be erroneous or change without notice. We have no obligation to update or advise you of any changes or errors. Certain information discussed general information related to the specific industry, activities and trends, or other broad-based economic, market or other conditions and should not be construed as research. The information contained herein does not constitute an offer to buy or sell, or a promotion or recommendation of, any financial instrument or product or strategy.
Note that the reason I say "400+" is that the number of companies changes slightly over time as new companies form, get acquired, or go out of business (but defunct companies were kept in as 0 employees). The actual number is in the range of 400 to 405 each quarter.