Strategy Note /
Global

Digital insurance: A niche fintech segment with plenty of growth potential

  • Insurtech is an underdeveloped EM fintech segment. Tackling financial exclusion will help drive its growth

  • Personalised service is the top value-proposition. Management expertise, first-mover-advantage are key success drivers

  • Strategic priorities: boosting management capacity, expanding reach. Growth constraints: market dynamics, distribution

Digital insurance: A niche fintech segment with plenty of growth potential
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
22 January 2021
Published byTellimer Research

This 13-page report, part of our series on the risks and opportunities in the emerging markets fintech space, focuses on digital insurance. Our work draws on the results of our detailed proprietary surveys of seven insurtech firms and 700 consumers in seven emerging markets (BrazilChinaIndonesiaIndiaKenyaMexicoSouth Africa), allied to desk research of 120 insurtech companies.

Our key findings

  • Insurtech is a relatively underdeveloped segment within the fintech mix, accounting for just 7% of all fintech firms (ranging from 11% of the fintech universe in India to just 5% in Mexico).

  • Recent funding flows (in H1 2020) into the sector have been weak. Covid-19 is one reason, but lofty valuations and a lack of exit opportunities have also tempered investor enthusiasm. 

  • Personalised service is the top value that digital insurers believe they deliver to their customers.

  • The most important factors driving these firms’ success to date are management expertise and first-mover advantage.

  • Insurtechs currently have c7ppts lower market share than fintechs in other product areas.

  • Over the next three years, digital insurers are likely to gain 8ppts market share (slightly higher than the 7ppts gain expected in other fintech products), mainly by serving currently financially excluded customers.

  • Top strategies for insurtech companies include enhancing their management expertise and entering new customer segments.

  • Targeted innovations are focused on chatbots/virtual assistants, easing customer onboarding and using blockchain technology.

  • Market dynamics and distribution capacity are the major growth constraints faced by insurtech firms. Capital requirements and data protection rules are key regulatory hurdles.

  • Innovative insurtech firms identified in our study include Coverfox (India, it has created AI-based chatbots to assist customers during the buying and post-sales process) and Youse (Brazil, it offers personalised insurance policies designed according to customers’ coverage needs and budgetary constraints).

The insurtech ecosystem in selected emerging markets

 

Source: Tellimer Research

Overview

We examine the insurtech landscape in seven large emerging markets, including the drivers of firms' success to date, their future strategies, targeted innovations, key growth constraints and the impact that insurtech companies have on their customers. We also discuss global funding trends. Our work is complemented by the results of our corporate and consumer surveys in these same seven countries. We ascertain consumers’ current service provider preferences, assess their future expectations and determine the implications of these findings for insurtechs. Lastly, we highlight some interesting innovations from selected digital insurers.

Insurtech is a relatively underdeveloped segment within the fintech mix, accounting for only 7% of all firms. By country, India has the highest weight of insurtech firms, at 11%, while Mexico has the lowest (5%). Recent funding flows into the sector have dropped significantly; deal flow had slowed even before the Covid pandemic took hold, mainly due to elevated valuations and a lack of investor exit opportunities.

According to insurtechs, the top value they deliver to their customers is personalised service. They think the most important factors driving their success to date are management expertise and first-mover advantage.

Based on our unweighted consumer survey, fintechs currently have 17% market share, below the 24% average for fintechs more generally; the segment is still dominated by traditional financial institutions. Based on our consumer survey results, insurtechs are likely to gain 8ppts market share over the next three years (slightly higher than the 7ppts gain consumers expect for fintechs generally), mainly through servicing people who are currently under/uninsured.

Key strategies insurtechs are adopting over the next three years include enhancing their management expertise and expanding their reach to new customer segments. Their most heavily targeted innovations are chatbots/virtual assistants, easing customer onboarding and using blockchain technology. Selected innovative insurtech firms we are highlighting include Coverfox (India, created AI-based chatbots to assist customers during buying and post-sales process) and Youse (Brazil, offers personalised insurance policies designed according to customer needs and budgets).

The most relevant constraining factors for digital insurers are overall market dynamics, plus distribution capacity. The main regulatory issues they face are capital requirement and consumer/data protection rules.

India has the highest weighting of insurtechs, China’s fintech firms are well-developed

Insurtech is a relatively underdeveloped segment within the fintech mix, accounting for only 7% of all firms. By country, India has the highest weight of insurtech firms, at 11%, while Mexico has the lowest (5%). Although China also has a low weighting of insurtech firms (we think due to its focus on blockchain and other areas of fintech like financial management and SaaS), several of its digital insurers have achieved good scale; for example, Ant Group’s insurtech business generates insurance premiums of over US$7bn annually, while ZhongAn Online Insurance underwrites premiums of cUS$2bn pa and has a market cap of US$7bn.

Weighting of insurtech by country

The insurtech sector has received weak funding flows

Investment flows to the insurtech segment dropped significantly in H1 2020, to US$2.3bn versus US$13.4bn in FY 2019. Deal flow had been weak even before Covid-19 (2019 flows were down 15% yoy), which further exacerbates the issue. According to KPMG, the insurtech segment saw pullback from corporates and VC funds due to elevated valuations as well as a lack of significant exit opportunities. That said, Asian insurtechs are coming into the limelight, as evident in the February US$81mn funding deal in India-based Digit Insurance. 

Insurtech funding flows

Personalised service is the top customer value-proposition addressed by insurtechs

According to insurtechs, the top value they deliver to their customers is personalised service. Relative to other fintechs, insurtechs are more focused on customisation, branding and security; they place less importance on lowering product costs and/or providing convenience.

The ability to personalise products automatically is a key competitive advantage for insurtechs relative to traditional insurance firms. Many insurtechs, like Crabi (Mexico) and Youse (Brazil), are innovating in this area and using technology to offer tailor-made products to customers, which maximise the value of the insurance coverage for the customer as well as saving underwriting costs on unnecessary coverage. 

Insurtechs' customer value proposition

Key success factors: Management expertise and first-mover advantage

The top success factors cited by insurtechs are management expertise and first-mover advantage. Compared with other fintech sub-sectors, insurtechs feel they benefit more from having management expertise, but less from providing good quality products.

Management expertise. Insurance companies often require expert personnel, eg from the actuarial sciences discipline for risk management and product development. Technology expertise is also required. Insurtech firms like Zenda.la (Mexico) and Toffee Insurance (India) mention management expertise as a key reason for their success to date.

First-mover advantage. When consumers become familiar with using a product, they tend not to switch to alternative providers. Insurance plan terms can range from less than one month to a lifetime, and existing insurers may benefit from better visibility of the customer’s risk profile (eg recent claims history), so there can be significant barriers to switching. Insurtechs that cite first-mover advantage as a key success driver include OUTsurance (South Africa) and Duobaoyu Insurance (China).

Key success factors

Insurtechs’ strategic plans: Enhancing management expertise, entering new customer segments

The top strategies that insurtech firms are deploying over the next three years are enhancing their management expertise and expanding their reach to new customer segments. Compared with the other fintech segments, insurtechs are less focused on fund-raising or increasing use-cases of existing products and more intent on improving management expertise.

Enhancing management expertise. As we discussed above, management expertise is particularly important for the insurance business and one of the key factors driving insurtechs’ success. Fintechs like Zenda.la (Mexico) and Toffee Insurance (India), are planning to further improve the skillset of their human resource. 

Entering new customer segments helps fintechs to diversify their revenues and capture more business from existing customers. Entering new segments can help build scale and generate a faster path to profitability. Insurtechs citing this strategy include Cermati (Indonesia) and Pier (Brazil).

Strategic priorities

Insurtech innovations: Chatbots, customer onboarding and blockchain

Considering their innovation plans over the next three years, insurtech firms are most focused on chatbots/virtual assistants, easing the customer onboarding process and using blockchain technology. Compared with fintechs in other sectors, digital insurers are more focused on blockchain technology and less on digital banking.

Chatbots and virtual assistants help improve the client experience by automating customer service/education and, at the same time, allowing fintechs to reduce their operating costs by limiting the staffing needed to handle customer queries. Insurtech firms with plans in this area include Acko (India) and Pier (Brazil).

Easier customer onboarding. Any complexities or difficulties in customer onboarding can lead to a bad first impression, resulting in lower business volume and less customer loyalty. Due to regulatory requirements, customer onboarding is traditionally often a lengthy process, but insurtechs such as Duobaoyu Insurance (China) are using technology to smooth the process.

Blockchain technology. Blockchain products have various use-cases, including improving operating efficiency and the customer experience. Insurtechs targeting blockchain technology include OUTsurance (South Africa) and Zenda.la (Mexico).

Targeted innovations

Insurtech firms will grow by serving more financially excluded clients

We asked consumers which kinds of providers were meeting their current financial services needs for insurance, and which ones they expected to use in three years. We use this data to estimate current and likely shifts in share of wallet for different types of firms.

Currently, fintechs have a 17% share of the insurance sector, which is below the 24% average share fintechs have in other products. Looking ahead, insurtechs are likely to gain 8ppts market share over the next three years, slightly higher than 7ppts average gain expected in other products — this gain would largely come from serving more financially excluded customers.

To avoid our questions being too intrusive, note that our consumer survey did not ask for quantitative information (such as the coverage levels of any outstanding policies); we think formal financial institutions would have a much higher share if our survey results were volume-weighted. For example, in China, consulting firm Oliver Wyman estimates that only 7% of insurance is being currently distributed through digital channels. 

Insurance providers' market shares

Key constraints on growth: Market dynamics and distribution capacity

The overall size and growth of the market, and distribution capacity, are the biggest growth constraints faced by insurtechs. Compared with fintechs in other sectors, distribution capacity is a bigger challenge for insurtechs, while regulation is less of an issue.

Size and growth of the market. Insurance penetrated in emerging markets tends to lag that of other financial products due to a combination of low purchasing power and low awareness. It can be difficult for industry leaders to outgrow the overall market, particularly as the number of competing fintechs rises. Cermati (Indonesia) and Pier (Brazil) are among the insurtechs that cite market dynamics as a concern.

Distribution capacity. Smaller/newer insurtechs can struggle due to a lack of distribution capacity, particularly if they have been unable to develop partnerships with established companies or agent networks. Insurtech companies citing this growth constraint include Acko (India) and OUTsurance (South Africa).

Key constraints on growth

Insurtech regulatory hurdles: Capital requirements and consumer/data protection

According to our survey, capital requirements and consumer/data protection data are the key regulatory hurdles that insurtech face. Relative to fintechs in other sectors, insurtechs find capital requirements more challenging, while (unsurprisingly) deposit insurance is not one of their main concerns.

Capital requirements. In general, fintechs tend to favour capital-lite business models; any regulations that challenge this approach can have a serious impact. This has been brought vividly to light by the last-minute suspension of the Ant Group IPO. Insurtechs citing this regulatory hurdle include Zenda.la (Mexico) and Duobaoyu Insurance (China).

Consumer/data protection requirements. One way that insurtechs generate a competitive advantage is through the collection and utilisation of customer data to develop customised insurance products. Data protection regulations play a key role in determining the extent to which these companies can obtain and use such information, and the processes they must follow to protect it. Insurtechs citing data protection regulations as a hurdle to their growth include Toffee Insurance (India) and Pier (Brazil).

Key regulatory hurdles

Insurtechs' innovative practices

In the table below, we highlight some innovative practices by insurtech firms, based on our desk research:

Insurtechs' innovative practices