NTT DATA has presented the sixth edition of its Insurtech Global Outlook 2022, a study that analyzes the major trends in the insurtech ecosystem and the impact that advanced technologies and new business models have had over the course of 2021.
On this occasion, the research has been extended to delve deeper into the four Forces of Accelerating Liquid Insurance Ecosystems to those entities of their nature whose movements affect the evolution of the ecosystems, accelerating or decelerating the course of the insurance industry: insurtech; insurers and their digital garages; new entrants and technology giants; and regulations.
This edition approaches the market analysis by considering the recovery experienced after a 2020 marked by the pandemic and the strengthening of the sector in 2021. The combined analysis of all these elements reveals a realistic picture of the sector, of investor preferences and of the technology that sets the trend that is reshaping the insurance universe in the new digital era.
In the insurtech part, the report delves into aspects as diverse as the investment received, and the positioning of insurers, which stood out in 2021 in terms of relevant investment in startups. It also analyzes the role of new market entrants, who demonstrated a strong interest in monetizing their internal technologies in 2021 by investing in or partnering with startups.
Bruno Abril, Partner NTT DATA EMEAL Insurance, highlights that: "The expertise we have developed during the past six years allows us to better understand today’s Insurance industry challenges. Learning about the impact of these four forces translates into real and valuable knowledge for Insurance Executives to anticipate trends and opportunities and make informed decisions in the short and medium-term”.
Increased investment, market maturity, technology driving insurtech trends, and closing the gap between Europe and the United States.
Global investments in Insurtech reached $10.1 billion. This represents a 38% increase compared to 2020, marking a new historical upswing and a clear consolidation of the market. In fact, insurtechs have received 50% of their all-time funding in the last 2 years alone. In terms of the number of deals closed, there is a slight downward trend compared to 2019, which saw a record 393 deals.
The growth in investment is also a reflection of insurance companies’ commitment to the insurtech environment, as the number of investments and the amount invested grew exponentially in 2021. The massive difference in figures is a 175% jump compared to the previous year.
In 2021, thanks to the crucial role of vaccination and the economy’s bounce-back after COVID-19, the average deal size grew to reach the highest historical average per deal: $41 million. Investors maintained a clear interest in insurtechs and increased their investments once the COVID-19 recovery began, with exponential growth from 2020 to 2021.
When it comes to tech trends, AI, IoT and predictive analytics have seen increased investor interest in recent years and have attracted large investments from relevant insurers as well as tech and industry giants. Some 61% of insurers are using IoT, enabling new business opportunities, integrating new data sets to improve current risk level and risk prevention, tracking customer behavior and incentivizing changes in their behaviors.
Europe outperforms with respect to financing, and North America, although it holds on to overall leadership, is not home to the companies with the highest financing; major deals meant that Europe is the region that experienced the highest rate of growth in 2021. This year paints a much more diverse picture in terms of the regions where funding has grown. Growth has occurred in the three main regions: Asia, Europe and North America.
Thus, the United States continued to be the region that attracted the most investment, including five mega deals. However, Europe’s faster pace of growth means that it finally closed some of the gap with the U.S. market in 2021. In contrast, Asia’s growth was flatter than that experienced by the other two regions.
In terms of investor presence, venture capital is particularly noteworthy, showing growth in all regions. Through 2021, the presence of venture capital in Europe grew to 3.3 times the size it was in 2015.
The disruption dilemma: market maturity or bubble?
By taking an in-depth look at the growth of funding, the study reveals a number of interesting patterns that could confirm or call into question the actual maturity of these new models. One such analysis is the comparison of the valuation growth over the last three years of the top-funded companies that were founded between 2013-2015 and between 2016-2018. A comparison of both groups of companies shows that the younger ones are increasing their valuation at a faster rate than the rest. This is especially true for those that operated in the U.S. market.
The acceleration in the companies’ value may be due in part to an increased presence of venture capital firms in the sector, combined with the maturity of the market and the growing appetite for creating new industry leaders. However, there could also be a risk that a new bubble is being created in this market.
Types of insurtech companies
The number of companies that have received more than $100M in funding (unicorns) has increased fivefold since 2017. Nevertheless, insurtech startups have experienced a steady decline over the same period, possibly indicating a shrinking innovation space. Under such a scenario, large established leaders are draining funds in a move towards maturity in the "first" wave of innovation. In the sample used to produce this report, insurtech companies have been classified into 3 main categories: startups, scaleups and outliers or unicorns.
The report classifies startups as those insurtechs founded less than three years ago and with a maximum total amount of financing received of $5 million. Scaleups are those insurtechs that have received a total amount of funding between $5M and $100M, with a maximum of two years between funding rounds.
Finally, outliers or unicorns are those insurtechs that have received more than $100M in funding and have a valuation of more than $1B. It is interesting to note that outliers, which represent only 10% of the insurtechs in the sample, account for 75% of the 2021 funding. It is also worth noting that startups, 45% of the sample, account for only 2% of the total amount of funding.
The Insurtech Global Outlook 2022 NTT DATA has also identified several interesting trends when comparing the insurtech and fintech companies.
- Fintechs emerged on the scene earlier than insurtechs, in line with banking’s head start in digitization compared to the insurance sector. In general, their growth has been slower but steady.
- Insurtechs have shorter IPO timelines compared to fintechs which, in turn, are in line with the IPO timelines of startups in general.
- Although insurtechs generate more revenue per customer, fintechs have a much larger customer base.
- The market perceives that the value created by fintechs is much greater than the value insurtechs generate, which is reflected in the vast difference in market capitalization.
Considering the overall impact each has had, it is likely that financing alone fails to paint a complete picture, and the limited market capture of insurtechs suggests that it is still too early to make a definitive judgment. Comparing the stock market performance of fintechs and insurtechs, there is a clear difference; the investment boom and market impact are not aligned. While the stock price of fintechs is growing by more than the S&P index, the price of all insurtech stocks has declined by more than 60%.
Insurtech maturity: Is there room for innovation?
The report’s major findings include a sharp decline in the creation of new insurtech companies. It is also interesting to note a large gap between 2020 and 2021. The market behaves in terms of maturity and there is arguably less innovation. The top three main categories of relevant insurtechs that were hot topics in 2021 are definitely marketplaces, pets and wellness.
For marketplaces, their popularity in 2021 is driven by the growing need for B2B companies to join marketplaces, thereby offering the possibility of more liquid, transparent and real-time experiences that facilitate commerce. Embedded insurance is gaining a significant foothold in facilitating the integration of different solutions and parties that can jointly offer a seamless insurance solution in marketplaces.
In terms of lifestyle, an interesting development is how wellness continues to be a priority as a way of life. Consumers continue to push for a more integrated experience that can support their health wellness. Companies in this sector have the opportunity to become part of customers’ daily lives and deliver value through different channels.
Finally, pet insurance companies continued to gain ground in the insurtech arena this past year. Startups are creating interesting business models and offering customized products and experiences that connect with pet owners’ mindset and priorities.