Insurance Tech: Where lies the opportunity?
All insurance companies need to become tech companies
In this deep dive, we will take a look at Insurance Tech or “InsurTech” — a sector that has recently gathered steam due to the rise of players like Digit Insurance and Acko.
But before we get into Insurtech, let’s first take a quick look at the history of Insurance itself. The “Rhodian Sea-Law”, often cited as one of the earliest examples of insurance law, stipulated that if any seafarer was forced to throw cargo overboard to save a ship from sinking, such a loss would be reimbursed collectively by the crew. Some historians pinpoint the origin of this law to the Greek island of Rhodes as far back as 1,000 BC.
Similarly, insurance has a deep-rooted history in India too. Ancient Indian writings talk about pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was a pre-cursor to modern day insurance.
India has come a long way since then and as of December 2020, there are 34 general insurance and 24 life insurance companies operating in the country and regulated by the Insurance Regulatory and Development Authority (IRDA).
There are 3 listed life insurers in India - HDFC Life, SBI Life, ICICI Prudential and 2 listed general insurers — ICICI Lombard and New India Assurance Co.
So why Insurtech and why now?
Indian insurance provides a giant opportunity for growth. Currently, the insurance penetration in India is 3.7% of the gross domestic product (GDP) versus the world average of 6.31%. Basis this, even a simple, back-of-the-envelope calculation puts the total Insurance opportunity at over $200 Bn in India.
The insurance density, which is calculated as a ratio of insurance premium to population, was $58 for life insurance and non-life insurance was even lower at $19 in 2019 in India. Globally, insurance density was $379 for life and $439 for the non-life segment respectively. (Source: Business Today)
The Indian insurance industry is in the midst of a transformation with changing customer preferences and growing digital adoption on the demand side. Apart from rising awareness, disposable income and demographic factors, this has been driven primarily by two reasons:
- Cheaper Data & Rise of 4G — The rise of Jio has provided faster internet at cheaper rates across India. At INR 6.7 per gigabyte (GB), the average cost of mobile data in India is the cheapest in the world.
- Falling Smartphone Prices — The increasing ubiquity of smartphones in both developed and emerging markets is consistently driving down the cost of smartphones. With constantly improving hardware and better features, Indians are rapidly becoming mobile-savvy.
On the supply side too, technology advancements are finding application across the insurance value chain right from sales to claims and from underwriting to customer service. Digitisation is allowing faster go-to-market, improving sales conversion and cost savings from analytics aiding in fraud detection, better underwriting and thus lower overall risk.
With these dual tail-winds, insurtech is disrupting the traditional insurance business by providing hassle-free, transparent and bespoke offerings at a much lower cost to the customer. COVID-19 has further accelerated the evolution with higher digital adoption by channel partners, customers and the insurers themselves.
Landscape for Insurtech in India
India has over 110 InsurTech players across aggregators, claims managers, online-first insurers and Application Programming Interface (APIs).
A large part of insurance has traditionally been sold through Bancassurance, primarily because they provide access to a large customer base with an easy payment/collection mechanism and without the requisite “feet-on-the-street.” According to McKinsey, nine out of ten insurance companies in India are struggling to develop technology infrastructure, owing to large distribution channels, legacy software and the sheer magnitude of their IT systems.
That’s where Insurtech players have come in and are carving a niche for themselves either by targeting younger, digitally savvy millenials with better service and products or by adding value to existing insurers with embedded offerings that allow them to tap into new pools of customers or optimise servicing of existing ones.
Any insurance business has the following key processes. New-age companies are slowly appearing at all points of the value chain.
1. Customer Lead Generation & Distribution — Insurance Aggregators are allowing insurers to move away from traditional channels (Coverfox, Policybazaar) or digitise existing agent channels (Turtlemint)
2. Information Processing — BeatO, a health app, worked with health insurance players to create a curated data backed insurance product that helped their 120k+ active diabetes community. (Health insurers face challenges on underwriting and pricing for diabetic patients due to data limitations).
3. Underwriting — Players such as Acko are disrupting traditional underwriters and distributors by going straight to customers and acquiring them via social media and search engines. Paytm’s acquisition of QBE and Navi’s acquisition of DHFL indicate that the rise of such “Challenger Insurers” is going to continue.
4. Policy & Claims Management — These startups develop platforms for digitizing the claim process by developing tech solutions such as video, mobile, and self-service options. They leverage technologies, such as machine learning and robotics, to provide cognitive learning systems for quicker payouts. Examples include Remedinet, SureClaim and VahanCheck
Apart from the above, Insurtech companies look to digitise core and non-core functions such as policy administration, marketing sales, data analysis, chatbots, CRM tools, APIs, and other white-labeled tools.
Emerging Opportunities due to Innovation by Insurtech Companies
- Bite-Sized Insurance — Bite-size or ‘sachet’ insurance are small-ticket insurance products that provide coverage for niche cases. They solve multiple requirements including small ticket-size, increasing demand for personalization and faster delivery online. Toffee Insurance is an example. Globally too, ZhongAn has seen success with 10 Bn+ policies sold with 40% of total revenues being accounted by its small-ticket “shipping return policy" for e-commerce buyers.
- Group Health Insurance — Group insurance affordability has been a huge challenge for MSME companies in India. Digital first players like Plum are focusing on Group Health insurance.
- Parametric Insurance / Underwriting via Alternate-Data — Multiple players are using alternate data sources to drive innovation in underwriting and pricing their offerings dynamically (i.e. price changes as per data). Parametric insurance uses advancements in data capture and analytic capabilities to also improve forecasting of risk/loss. CropIn is a player enabling assessment for crop insurance via machine learning, satellite monitoring and weather analytics to provide customized reports and information that is used by insurance firms. Similarly, Understory is a foreign company that provides parametric insurance for weather-dependent businesses. Tarla is another global name.
- On-Demand / Pay-as-you-Use Insurance — Short term covers that can be switched on or off as per customer’s needs (e.g. customers can switch off the COVID 19 insurance or Ola has driver accident cover that switches off when they park their cars). Multiple Indian insurers are testing this product.
- Infrastructure APIs — B2B offering of software and infrastructure APIs to both distributors and insurance manufacturers that serves as an enabler so that anyone can sell or service insurance (E.g. Riskcovry). This could also be an example of “embedded finance”
Some other opportunities which Venture Monk feels could be interesting to explore (but did not find any noteworthy players) is assisting with Underwriting / Risk Reduction via Big Data or AI/ML Analytics. Given how important underwriting risk is and its direct impact on claims (and thus profitability), it is surprising there aren’t too many companies solving for the same. The other area is ‘Float’ Management. We will not explain the importance of this ourselves when one of the greatest living investors, Mr. Warren Buffet has already done so.
Given the large opportunity and the myriad use-cases and segments, there has understandably been a growing investor interest in this sector, both globally as well as in India.
Funding & Investor Overview
India is seeing great traction in funding in line with the global trend. General Insurance and Health have been the key beneficiaries of global funding in Insurtechs (~70% of total). In India, the two key segments have been Insurance Aggregators (aka Multi-Insurance) and more recently General Insurance. From 2014–18, multi-insurance players such as Policybazaar, Coverfox, Turtlemint and Renewbuy dominated headlines. 2018 onwards saw the rise of two truly “online first” insurance underwriters in the form of Digit Insurance (Go Digit) and Acko Insurance. Funding to General Insurance focused Insurtechs has subsequently increased from an almost negligible share in 2014–16 to almost 75% of the total in 2020!
Insurtechs in India have continued to attract funding with Turtlemint raising $30 million and Plum raising $4.1 Mn in 2020. More recently, Digit Insurance raised almost $100 Mn in Jan-2021 at a valuation of $1.9 Bn becoming the second unicorn in this segment after Policybazaar.
Some of the active investors in the space include Elevation Capital, Accel India, Nexus Venture Partners, Kalaari Capital, Omidyar Network and SoftBank Group.
Some of the most active investors globally are given below (indicative)
One divergence from global investing trends however is that while the B2B segment accounted for ~62% of global funding in 2020, in India it was <10%. The B2B segment is yet to follow global trends, which could indicate a potential avenue for growth and investing opportunities.
Valuation Overview
The trading multiples for Insurance Technology companies (indicative for January 2021) are given below. While these may not be recent, they provide some indication of where the multiples trade for global peers.
A much more recent report by Houlihan Lokey however provides a breakdown of the listed Insurtech valuation multiples by type of business. As per them, Insurance Software and Online Distribution companies lead the pack, trading at 20.3x and 17.9x EV/2021E EBITDA, respectively.
What lies ahead? While India has yet to see an exit cycle in the Insurtech industry, the signs of it are looming. Policybazaar is reportedly looking to list by the end of 2021 at a rumored valuation of $3.5 Bn+. This, clubbed with the recent listing of Nazara Games and the upcoming listings of Zomato and Nykaa bodes well for companies with proven business models that underwrite a consumption story with a tech-first approach. Globally too, the recent listing of Lemonade Inc. and Duck Creek is a sign of growing interest in the Insurtech space.
Today’s digitally native customers look for technological tools and experiences from their insurer at par with what they receive from any other service or retail industry. This means faster checkouts, on-demand service and hyper-personalised offerings at competitive prices.
Venture Monk’s view is that a “collaborative” approach can go a long way to solve India’s legacy problems of complicated policies, lengthy settlement procedures, lack of transparency and the resultant trust deficit leading to low insurance adoption. Neobanks are one great example of a space where traditional players are collaborating with new age companies for better customer offerings. Product innovations, offering newer value-added-services (VAS) and also building large ‘platform' plays (like Navi or PayTM) could be the way forward.
Models for collaboration could be capital investments, partnership / distribution and clarity on regulatory policy. Insurers, Insuretech companies and the Regulators must come together to enable innovations in insurance. There are some interesting partnerships happening already such as between HDFC Life and Haptik, PayTM and Star Health and RevFin with PNB Metlife. On the regulatory side, IRDAI’s extension of the Regulatory Sandbox Guidelines and allowing insurers to invest in Fund-of-Funds is another promising sign.
This is the only way forward and can be achieved if the customer is kept at the centre of it all with the ecosystem evolving around servicing him/her. A 360-degree approach focusing on product, distribution, regulation and service simplification via digital, is what will increase reach and finally manifest into success for the sector!
