Insurtech Industry: Opportunities, Challenges, and Growth Drivers
The Insurance Industry in India is a promising one. The Indian insurance market had a total gross written premium of $106.31 Bn in 2019. It is estimated that the insurance market in India will grow to $234 Bn and contribute 2.3% of the global insurance market share by 2030. If the current growth rate persists, India will be among the 10 largest insurance markets in the world by 2030.
Insurance Industry
The insurance industry runs on a simple principle of risk management offered in the form of insurance contracts. The basic concept is that the insurer will guarantee a certain agreed payment for an uncertain future event in lieu of which the insured party would pay a pre-determined premium to the insurer for protecting himself or his family against an uncertain future occurrence.
Types of Insurance Companies
Given the nature of the business, insurance companies can be classified into two types broadly — life and non-life. Non-life would include general insurance products like auto, medical expense, home, insurance against a certain type of event, etc.
What do you mean by Insurtech?
Insurance technology (insurtech, or sometimes spelled insuretech) are technologies or platforms that are designed to optimize the success or requirements of insurance. It could lead to an increase in the efficiency and efficacy of insurance companies or directly lead to increased penetration of insurance in the ecosystem.
The insurance industry has used incremental technology changes for a long time, but insurtech refers to more innovative and disruptive technologies making their way into this space.
Currently, India has over 110 InsurTech players spread across subsegments such as aggregators, claims management, digital-first insurers, software white label & infrastructure APIs, and IoT.
“Given the large and mostly available opportunity, there is more than enough room for new players to enter the InsurTech or insurance aggregator space. However, it is equally important that new entrants enhance the ecosystem with value accretive and innovative solutions”.
— Turtlemint”
Insurance Industry Market Size in India
As per the latest IRDA annual report 2019–20, the insurance industry in India touched US$106.31 Billion in 2019. From a growth rate perspective, the Indian insurance premium grew by 9.21%. The insurance penetration increased to 3.76% in 2019 as compared to 3.7% in 2018.
The Indian insurance market had a total gross written premium of $106.31 Bn in 2019.
Insurance Market Globally vs India
● The global insurance market touched $6.3 Trillion in 2019 and India’s share in the global insurance market improved to 1.69%.
● In terms of insurance premium, in 2019, insurance premium in India increased by 9.21%, whereas globally, this no. was 2.34%. Globally, the share of life insurance business in total premium was 46.34% and the share of non-life insurance premium was 53.66%, in 2019. However, the share of life insurance business for India was very high at 74.94%, while the share of non-life insurance business was at 25.06%.
● In the life insurance business, India ranks 10 among the 88 countries, as published by Swiss Re, and its share in the global life insurance market was 2.73%, in 2019. Nevertheless, the life insurance premium in India increased by 9.63% when the global life insurance premium increased by just 1.18%, and the Indian non-life insurance sector witnessed a growth of 7.98%, in 2019.
● While India does well in the life insurance segment, however, in the non-life insurance premium segment it grew 0.79% as compared to the growth in global non-life insurance premiums at 3.35%. India ranked 15th in the global non-life insurance market.
REGULATORY LANDSCAPE
The primary focus of the Insurance Regulatory and Development Authority of India (IRDAI) over the years has been to increase the coverage and adoption of insurance in the country.
Over the past couple of years, IRDAI has taken positive steps in several ways to ensure that technology is used as an effective enabler to achieve these societal objectives. This is being affected by fostering innovation via InsurTech initiatives and programs — through incumbents and startups alike. Fundamentally, the pursuit has been to encourage the use of cutting-edge technologies and policy relaxations to reduce the cost of onboarding and operations, as well as augment risk assessment. The expected outcomes are improved digital reach of insurance products to consumers and businesses and improved affordability.
Some Key Measurements are taken by the Regulator:
i. Video-based CIP: Close on the heels of RBI permitting video-based customer identification for bank accounts, IRDAI announced the same for insurance products. This is expected to increase uptake in life and term products. Additionally, V-CIP can be used in claims management, a cost-intensive operation that is subject to high levels of fraud.
ii. Standardization: This measure refers to the standardization of policy terms & conditions and benefits for both consumers and corporate products. It aims to simplify the understanding of the product, thereby increasing conversion. Additionally, standardized no-frills health products must be distributed by all companies. E.g., Arogya Sanjeevani Health Insurance.
iii. Paperless KYC: Introduced to ease the process of onboarding and applicable to all carriers, e-KYC can now be done via UIDAI. Introduced during the early COVID-19 period, this policy relaxation is expected to reduce onboarding costs and increase adoption.
iv. Sandboxes: Into its third cohort now, IRDAI sandbox has been a hotbed of innovation. The sandboxes have allowed traditional and new-age providers alike to innovate on both product design and service delivery. IRDAI has been proactive and progressive in offering policy relaxations and trials as part of this initiative. E.g., wearables, crowdfunding of premiums, and new distribution models.
Our portfolio company Finsall has been one of the beneficiaries of the SandBox and has partnered with Oriental Insurance to pioneer the concept of “ Insurance Premium Financing” in India.
Growth Drivers
1.Growth in Financial Industry
> Overall growth in the financial industry — increasing the working population with higher disposable income.
>Increasing awareness about financial products including insurance.
2. Competition
> As insurance companies fiercely compete to provide a flawless customer experience, they are willing to use tech-enabled sophisticated products at competitive prices to improve the end user's experience.
> Regulations that are conducive for the growth of the industry
3. Innovation and Efficiency
> Increase in potential insurance customers
> Individuals and companies across different industries, small and medium enterprises, multinational companies.
> Expansion due to insurance universe due to the professionalization of companies.
> The scope of IoT in the Indian insurance market continues to go beyond telematics and customer risk assessment. Currently, 110+ InsurTech start-ups are operating in India.
4. Growth in Specific Segments
> The govt increasing focus on financial inclusion by bringing more people under the formal financial umbrella is helping the microinsurance sector emerge strongly.
> Increase in demand for motor insurance as a by-product of the rapidly expanding auto industry.
> Given the Pandemic and largest healthcare program Ayushman Bharat, increasingly the focus is also on health insurance
> Group insurance has also been a big driver of insurance growth in the country.
5. Flagship Schemes released by the Government
The Government of India has released four flagship schemes under insurance:
• Pradhan Mantri Jan Suraksha Bima Yojana: This scheme focuses on providing affordable insurance to people who are below the poverty line in rural areas
• Pradhan Mantri Jeevan Jyoti Bima Yojana: This scheme provides life insurance for people employed in the unorganized sector
• Atal Pension Yojana: This guarantees pension coverage to all citizens (in the unorganized sector) who join the National Pension System (NPS)
• Ayushman Bharat Yojana: Under this scheme, each beneficiary family will receive medical insurance cover of Rs 5 lakh (US$ 6,712.3), which can be used to get treatment at public or private hospitals.
Opportunities in Insurtech Industry
● Insurance reach is still low in India. Overall insurance penetration (premiums as % of GDP) in India was 3.76% in 2019, providing a huge underserved market.
● IRDAI set up a plan to develop a standard structure for title insurance for home buyers, which is mandatory for RERA projects.
● Life insurance in low-income urban areas.
● Strong growth potential for microinsurance, especially from rural areas.
● Strong Potential in Crop Insurance, as crop insurance in India, is 38.8%, and still, the crop insurance market in India is the largest in the world.
Challenges in the Insurance Industry
1. Less investment by households in insurance products
The average expenditure pie of an average Indian household comprises expenses like real estate (77% of the total expenditure), durable goods (7%), gold (11%), and the balance in traditional financial assets like savings, mutual funds, retirement planning, and life insurance. This meager investment by households in insurance is substituted by non-institutional debt, as it serves “as a high-cost, imperfect form of insurance” (Household Finance Committee, 2017).
2. Inadequate access to insurance products
To increase the penetration rates and density, uninsured rural areas and the urban poor must be brought under the ambit of insurance coverage. Improving accessibility of insurance products will be of prime importance in this regard.
3. Low penetration and density rates
Low levels of penetration and density of insurance in India imply that a large section of the population is still uninsured. A report by LloydS (2018) points to an enormous insurance gap of USD 27 billion in absolute terms in India. To harness the potential of the insurance sector as a driving force of economic growth in India, these low penetration rates will have to be dealt with.
4. Public sector dominance and depressed private participation
The dominant position of state-owned insurers in the insurance sector is proving to be a cause for concern for private-sector insurers as well as foreign insurers. Private-sector insurers are stepping up their performance and with the right amount of push (in terms of easing the regulatory issues in the insurance industry), they can do better. To reduce the dominance of the public sector entities, a host of measures can be introduced to diminish the advantages offered to the public sector insurers.
5. Prevalence of traditional distribution channels
With the emergence of new players and tech-enabled insurance products, the distribution of these products is seeing a change where the online medium is growing faster as customers become comfortable buying insurance and allied products online. Having said that, traditional distribution channels will continue to grow given the dynamic demography of the Country. New channels, including online and point of sales, are being developed with the support of regulations and guidelines introduced by the IRDAI; their market share is, however, insignificant (IMF, 2018). To drive the insurance penetration, the industry should increase its focus on enhancing distribution channels.
6. Lack of Capital
Insurance is a capital-consuming financial service and growing insurance companies require on-tap capital. Insurers in India are capital starved. RBI’s move to cap banks’ holdings in insurance companies at 30 percent for bolstering credit growth and shield banks from nonbank risks may have an adverse impact on insurers whose restricted access to banks’ capital is likely to affect its distribution via banks (Laskar and Gopakumar, 2019).
Impact of Covid-19 on the Insurance Market
● The COVID-19 pandemic will spark the deepest recession since the 1930s, and Swiss Re forecast that global gross domestic product (GDP) will contract by around 4% in 2020. This will lead to a slump in demand for insurance this year, more so for life (premium volumes will shrink by 6%) than non-life (‒0.1%).
● Rising unemployment may increase claims from income protection insurance, subject to policy limitations
● In the future, the heightened awareness about mortality and health risks may result in a surge in demand for health and protection products in several markets. During the six months after the SARS outbreak in China, the total health insurance premiums more than doubled.
● In several Asian markets, notably China, Japan, Korea, and Singapore, most of the medical expenses from COVID-related treatment are currently being borne by the governments. The health insurers, as a result of this, would see a limited impact on their business.
● From an InsurTech perspective, the industry has already seen rapid adoption of technology in all processes. Finsall’s processes are completely online and there is hardly any need for physical contact or paperwork. This has drastically improved the turnaround time for product closure. Acceptance of tech solutions is the direct result of the ongoing pandemic.
What does Fedo do and why Unicorn India Ventures invested in it?
Fedo.ai is an AI-enabled Insurtech startup that provides cutting-edge products to the Insurance industry.
The Company runs an AI/ML platform to help insurance companies with seamless onboarding, underwriting, claims settlement, product development, and other allied functions. They are able to deliver this cutting-edge solution by leveraging deep tech and medical research to devise specific products for their customers. Their platform has built using 250+ medical studies, 50 million records, 1 million faces, and 1.5 million claims. Fedo has demonstrated a 30% reduction in underwriting costs and over 50% reduction in turnaround times for retail health insurance business.
India, being one of the most poorly insured countries, presents a big opportunity to address the gaps that tech can help solve. As per their internal research, there is a willingness among people to buy insurance but due to lack of awareness of the kind of products which would suit their needs, a majority of people either buy wrong insurance or less cover — either of which doesn’t address their problems or cover necessary ailments. Fedo’s AI has capabilities to assess an applicant’s health-related risks and help insurance companies devise better products or suggest the most suited one from their current portfolio. With the COVID situation entering into the community stage in India and coming back in the second wave in other countries, the awareness about getting a health cover is on the rise. We believe that Fedo and the Insurtech sector are poised right to leverage this trend and usher in a disruptive change in the insurance industry in India.
What does Finsall do and why we invested in it?
Finsall improves the affordability of insurance policies for customers who are unable to pay the entire insurance premium amount upfront, by providing them with an option for Insurance Premium Financing.
Finsall achieves this goal by providing a technology platform to insurance intermediaries to finance any type of general insurance policy for both retail and SME customers. Finsall’s proprietary platform has tied-up with banks, insurance companies, NBFCs, brokers, and other intermediaries to ensure the customers have a seamless experience in premium financing.
(We at Unicorn India Ventures are always striving to uncover different perspectives in life. We would love to hear your thoughts in the comments below. To hear more from us, follow @unicornIndia on twitter and follow our company page on Linkedin)
