The Rise of InsureTechs in India

With a 1.7% share of the global insurance industry and a penetration rate of only 3.2%, India represents an under-explored opportunity in insurance. Increased smartphone usage and internet penetration has pushed the sector on a higher growth path. Particularly, in the case of InsureTechs, a subset of the larger fintech sector that operate at the intersection of insurance and technology, the space offers tremendous potential with ramifications for both insurers and regulators. How has the landscape evolved over the years? What are the key regulatory developments? What is the potential and the way forward? The paper tracks recent developments in the InsureTech space and shares some broad findings.

The opportunity in numbers

India’s insurance market remains one of the most underpenetrated in the world

The InsureTech Landscape in India

India's insurance market is still one of the world's most underserved. In FY21, India's life insurance penetration (premiums as a proportion of GDP) was 3.2%, while non-life insurance was barely 1%; India's insurance density, or premium per capita, is just USD 78, compared to a world average that is 10 times greater (USD 809[1]). In 2020, India ranked eleventh with a share of 1.72% (USD 108 billion) of the global insurance market, which is estimated at USD 6,287 billion[2]. There are 57 insurance companies operating in the country across life (24) and non-life categories (33). In the online insurance space, there are over 110 start-ups across categories such as aggregators, claims management, digital-first insurers, software white label and infrastructure APIs, and IoT. Online insurance brokerage platforms like Policybazaar, Paytm and Coverfox, as well as digital insurance businesses like Acko and Digit, are some prominent participants. The InsureTech market offers enormous potential – given that the majority of India’s population is still uninsured – and the online insurance space is expected to grow 10x from FY20 levels to reach a value of Rs 220 billion by 2024[3].

Factors driving growth

Fintech firms are seizing this opportunity, driven by the rapid use of digital technology, ease of purchase and cheaper premiums (by eliminating the middle men). The pandemic has accelerated the rate at which Indians are purchasing insurance online, pushing more and more players into the space. Customers are also drawn to new product innovations. For instance, ‘sachet-sized' insurance plans are gaining appeal because they are simple to buy and comprehend, and are customised to consumer needs. Examples include buying trip insurance while booking plane tickets or e-commerce insurance. Products that appeal to new-age demands, such as pet insurance, are also attracting the younger crowd. Online insurance firms are quick to innovate because they operate with lower costs than traditional insurance companies, free as they are of the burden of scale, a large workforce and legacy IT systems. In healthcare, there is a shift from protection to prevention, prompting online players to leverage data generated by health tech devices, sensors and wearables to create offerings at lower premiums. For instance, BeatO offers a comprehensive wellness offering for diabetes patients with connected glucometers, strips, and unlimited doctor consults in addition to the insurance cover (in partnership with Religare Insurance). The historical health data leads to better claim management and sharper offerings.

Widespread use technology, ease of purchase and lower premiums are driving the Insuretech market

Differential pricing for vehicle insurance based on driving behaviour is becoming increasingly widespread. In India, ICICI Lombard, has launched a ‘pay as you use’ plan, which is based on the data tracked by the company-installed telematics, enabling differential premiums basis the number of kilometres driven. Similarly, many other areas that were previously underserved due to a lack of data (such as crop insurance) are becoming more common as sensors, satellite-based data and better risk models become available. CropIn, an Indian company that enables such crop insurance assessments, has covered over 2 million farmers and 6 million acres of farmland in 52 nations. It uses machine learning, satellite tracking and weather analytics to process farm-related data and give personalised reports and information to insurance companies. Regulators are also supporting the space by enabling InsureTech firms to innovate via the ‘sandbox framework’ (a mechanism for live testing of concepts as per a pre-determined testing plan that is agreed upon and overseen by a designated authority).

Insuretech funding increased by 25x in the last five years

The funding boom

According to a report by the India InsureTech Association, the funding in the InsureTech sector jumped 25x from USD 11 million in 2016 to USD 287 million in 2020. In 2021, too, the fundraising boom continued, with many Fintechs seeing their valuations rise and numerous smaller firms securing significant early-stage funds. The year saw two insurance companies achieve unicorn status. The first was Digit, with a valuation of USD 1.9 billion which, with another round of USD 200 million financing went to USD 3.5 billion. Acko was the other case, becoming the most recent unicorn with a valuation of USD 1.1 billion. It is not just unicorns – companies like Onsurity, Turtlemint, LoopHealth, Plum Insurance, GramCover also witnessed a surge in investor interest this year with venture capital firms leading the charge.

Fintech firms too are seizing the opportunity

Further, leading Fintech businesses, in addition to pure InsureTech players, are stepping up their insurance game. In October, Paytm's insurance subsidiary secured Rs 920 crore from Swiss Re, a multinational reinsurance provider. PhonePe, a digital payments network, has updated its corporate agent insurance license to an insurance broking license, allowing it to sell additional products and operate as a direct insurance broker.

Lower premium and short-term commitment products will gain traction

The Way Forward

Digital distribution of modest premium and short-term commitment insurance products is likely to grow in the coming years. Complex insurance products, which rely on assisted selling, could be an area where InsureTechs could gain traction through active simplification.

Agent-based Insuretechs will counter existing players

Agent-based InsureTech firms could be another potential development in the sector. Insurance agents continue to dominate the Indian insurance industry, notably life insurance, selling over 70% of the country's insurance products. These offline insurance advisors will be able to establish hybrid distribution channels using enhanced analytics and digital distribution technologies provided by InsureTechs.

Traditional insurance players need to revisit their distribution models…

Traditional insurance carriers must increase their direct distribution and assisted channels to compete with growing pureplay digital insurance players. To engage directly with their customers, they must also streamline their offers. The present level of complexity of insurance products and associated documentation makes customers' purchase journey difficult. Consumers, especially in the gig economy and new-age occupations, who do not fall into standard paid or entrepreneurial categories should have products customised specifically for them.

…and invest in technology and ecosystem alliances

Larger core insurance businesses are expected to establish their own API stacks (platforms that communicate with each other) and invest in or ally with InsureTechs. The goal would be to take advantage of distribution partner networks, improve client onboarding and reduce time-to-market. Companies in InsureTech are projected to thrive in the coming years.

Tackling bias in AI-based decision making remains an open issue

Insurers using data driven technologies must ensure that algorithms used to make critical decisions are not biased or untrustworthy. In this regard, taking a leaf from the UK may be helpful where a new Centre for Data Ethics and Innovation was set up specifically to advise the government on challenges that may arise with AI technologies.