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Industry Analysis

By 2020, the US, China, and Japan together held 58% of the global insurance market in terms of market size. India with a market share of 1.72 % in 2020 stood at eleventh rank in the global insurance business. The Indian insurance market was 280 billion USD in 2020. The industry is further divided into life insurance and non-Life insurance i.e., general insurance, health insurance, and specialized insurers. From the IBEF report Nov 2021, there are 57 insurance companies in India. 24 companies working in the life insurance business whereas 33 companies working in the non-life insurance business. India Life Insurance business with a share of 2.90% in 2020 is ranked 10th in the global Insurance market. whereas non-life insurance businesses rank 14 in the Global insurance market with 0.77% market in 2020.?

The development of the insurance industry in India is measured on two metrics i.e., Insurance penetration (Premium/GDP) and Density (Premium/Total population). In FY2021 the insurance penetration increases to 4.2% compared to 3.8% in FY2020. The major reason could be the digital transformation due to the pandemic.

The major players in the life insurance market are LIC, HDFC Standard Life Insurance, SBI life insurance, etc. LIC dominates the life insurance market with a 52.78% market share (Premium) in FY 2020

The major companies working in non-life insurance can be seen in the below pie chart with their market share (Gross Direct Premium collected (FY21). The total premium collected in FY2021 was the US $ 27.1 billion. Health insurance leads the non-life insurance market 39.87% market share in Premium.

Traditional Insurance vs InsurTech

INSURANCE VALUE CHAIN

1)?????Product Design and Development- Using customer insights to design and deploy products and services

2)?????Pricing and Underwriting- Analysis of the risk profiles of customers. With customers becoming comfortable with sharing data, it helps underwriters evolve their risk analysis mechanisms and set prices

3)?????Sales & Distribution- Understanding the markets and strategically penetrating the products/services to increase revenue

4)?????Post Sales Service-Enables customer retention through customer satisfaction and customer engagement.

5)?????Claims Management-Evaluate and settle claims- including payment, reinsurance, recovery, and payment, whenever applicable

?Traditional sources, typically for life insurance, include agents and bancassurance. Of late, online channels have gained traction, however, the value per customer transaction is very low.

It is better to analyze the issues of the traditional model at both ends of the spectrum- Supply-side and the Demand Side

SUPPLY-SIDE

●??????Customer Acquisition costs- Insurance Companies have lesser control over the agents and third parties- banks, brokers, etc. This leads to higher customer acquisition costs and increases the risks of compliance. This ushers the need for having more cooperation with other channels for acquiring new customers.

●??????Homogenous Products- Product development does not fully take into account the changing customer needs and does not offer differentiated products. There is a need for enriching the insurance service experience.

●???????Low Profitability- With lower levels of automation and high management costs, the profitability is relatively low which restricts the industry development.

?DEMAND-SIDE

●??????Policies are annual in nature and the customers are required to buy cover for the entire year whether it is needed or not

●??????No special customization for different individuals- as far as pricing is concerned

●??????No transparency in the charges- fee charged

●??????Blanket cover for all the insured. No separate coverage as per the requirements of different individuals

●??????Huge data/documentation requirement

●??????The complexity of the Policy Documents

●??????Grievance Redressal is time-consuming

?Value Proposition offered by the products/services of the InsurTech companies-

?●??????Customized Pricing offered based on the hours/miles/time of item possession-Usage Based Insurance

●??????Transparency in pricing with full disclosure of the fee involved

●??????SImplify policy Documents

●??????Improvement in Customer Experience

●??????Flexible Covers

●??????On-Demand Insurance

Indian Startups in the InsurTech space and value proposition offered are enlisted below:

Evolution of Insurtech

?Innovations and technology continue to be differentiating factors for different industries in today’s world. If we look at how Insurtech has evolved from traditional insurance, digital transformation is the answer with the pandemic reiterating the necessity of digitization. Globally, ~2000 Insurtechs have been founded and out of which ~50% have started in the last five years, with products across the value chain ranging from B2B, B2C, life, non-life. According to IDRAI, insurance penetration in India has increased from 3.76% in 19-20 to 4.2% in 20-21, substantial growth of 11.7%. Traditionally, the adoption of the different insurance products in India faced different challenges such as low awareness, low penetration, frauds, etc. With digitization, consumer behavior is also shifting with improved access to data and research. Also, the advent of various digital marketplaces for insurance is helping consumers to make better choices while selecting a relevant product just a few clicks away. Various early-stage companies have started advisory services in this space and are trying to make the traditional push product (Insurance) to a pull.

In times of pandemic, digitization became the new normal in the adoption of insurance including zero contact onboarding digital claim settlement. Adoption of AI, ML, and leveraging data for decision-making will be key trends, which will help to improve the overall customer experience.

In 2020, the Insurtech industry received funding ~$7.5 billion which is 21% more than the previous year. The growing number of startups in the space shows increased investor confidence. If we look at funding at the global level, it has grown to three times from 2016 to 2020, with Asia being the fastest growing geography with funding to India (Insurtech) growing 26 times in the same period. The general insurance segment has been the recipient of more than 70% of the global funding since 2017. India, being dominated by players e.g., Policybazaar, Renewbuy, Coverfox, etc. from 2014 to 2017, new-age startups such as Acko and Digit Insurance have taken the game with a higher share of funding.

?Insurance, Insurtech, and Technology Partnerships:

?With the rise in digitization, there is a huge opportunity for partnerships and collaboration in the Insurtech industry, predominantly for the traditional insurers. While developing inhouse capabilities companies (Insurers) are trying to collaborate with external stakeholders such as technology partners, Insurtechs to improve the capabilities, provide newer offerings, and better customer engagement. There are three factors that drive these partnerships:

?1.?????????Limited bandwidth of traditional insurers carriers to invest in recent technology

2.?????????Peer group and the external environment which drives the investment into the sector

3.?????????Increase in data availability, which gives the scope of better decision making

?New offerings: Examples

?Zurich Insurance from Switzerland collaborated with Laka Insurance (Insurtech), London, to sell bicycle insurance to cyclists when there was a growing cycling trend. (The key differentiators for the partnership were the cohort-based pricing and peer to peer transfers)

?In India, Bajaj Allianz collaborates with Toffee Insurance to provide mosquito insurance, recognizing the dangerous diseases such as Dengue and Malaria and thus catering to a niche market segment.

Improved Customer Engagement:

?Munich Re and ONE insurance deployed a lifestyle coach ‘One Coach’ which is incentivizing the customers to make healthier lifestyles by showing how the lifestyle decisions of customers change the risk rating/profile and eventually the premiums

Current Trends in Insurtech

With the changing landscape of both the technology and the insurance domains, customers today expect their products to be both digitized and personalized. This has led to a higher rate of adoption of technology in the financial sector, and insurance has been no exception. With the pandemic and the subsequent recovery, the industry is undergoing, technology has become the forerunner for companies looking to differentiate themselves from their competitors. The following are some of the key trends that are taking over the Insurtech space.

Automated Underwriting and Claims

?Automated Underwriting has risen to prominence during the pandemic, with manual underwriting proving to have multiple logistical challenges. The goals of Automated Underwriting in insurance are chiefly,

Reduction in time: Reduce the amount of time required to provide a customer with details on insurance plans. This can be done by streamlining data collection procedures and including the use of AI and robotic process automation to accurately assess risks associated with a client, thereby providing faster turnaround times on each application.
Minimizing manual touchpoints in the underwriting process: In a world of hyper-personalized services and offerings, automated underwriting can help achieve higher client conversion rates. However, it must be noted that automated underwriting does require significant integration with broad business policies and must allow for human intervention at the slightest hint of an irregularity

?As per a recent McKinsey report, automation currently accounts for over 50% of all claim activities in the world. Automation has resulted in faster processing and a reduction in claim wait times.

Claims processing has been affected by the data-rich ecosystem in which we exist today. Insurers today have access to a variety of data, including weather conditions, live footage of damages in cases of auto insurance, etc., which can all help to substantiate or reject the authenticity of a claim faster. In some cases, data-rich environments with advanced algorithms can also help predict or forewarn potential issues before they arise, thereby furthering the interests of both insurance companies and their customers.

Distribution and Self-Service Philosophy

?Partly due to the pandemic, but also because of many other macro factors, purchasing of insurances has become easier and requires lesser involvement of the insurance organizations as well as their?customers. Clients today are in search of plans that most suit their needs, and insurers have found a quicker avenue to converse with customers in the form of a digital presence. Today, for certain types of insurance, it is possible to get instant quotes, while for others, insurers list out a comprehensive set of plans that customers can avail of. This has given rise to a more self-service mindset among customers, leaving them with a plethora of options and spoilt for choice.

Furthermore, digital distribution has helped hasten purchases while also improving customer satisfaction with the purchase process. Through integration with health records and other APIs, where available, digital distribution has allowed insurers to offer plans tailored to an individual based on specific requirements that could be identified by more advanced algorithms. This has only served to further fuel the self-service mindset.

Embedded Insurance

?Embedded insurance refers to the practice of bundling an insurance plan with a product or service. Enabled by an ecosystem of APIs, embedded insurance is the practice by which any third-party product or service can integrate an insurance solution into their appeal and customer experience. This can be easily seen in cases where complementary or paid-for insurances are available with a service, like the booking of flight tickets, etc. In short, embedded insurances help provide potential customers with more relevant insurances, thereby making not just themselves but also the products they support more attractive to customers. For example, a company like Uber can offer its drivers a variety of insurances related to automobiles, health, life, and many more. At the same time, customers can avail themselves of different types of ride/travel insurance. Customers of Uber Rentals and outstation who are looking at longer journeys may opt for a different type of travel insurance as opposed to those traveling within city limits or over short distances. All of these embedded insurances serve to make the uber offering more attractive while also making distribution of products easier.

Data-Rich Ecosystems

?The availability of a huge amount of data from IoT-based sensors, social media events, and wearable devices presents insurers with the opportunity to provide clients with very unique and hyper-personalized offerings.

It has also promoted the concept of risk mitigation and management. For example, the use of weather data can help with early warning systems to alert policyholders of potential danger to life or property due to extreme weather conditions. This could help policyholders take corrective action in time, thereby minimizing the need for insurance payouts. Similarly, health insurance providers can use health information from either wearable technology or other sources to recommend optimum plans and suggest methods to improve lifestyle to prevent the chances of a medical emergency.

Smart Contracts

?Enabled by blockchain, smart contracts between customers and insurers are becoming more commonplace today. Smart contracts allow the near-instantaneous and automated execution of agreements between insurer and customer. The lack of the requirement of mediators or other methods of authorization help to reduce administrative expenses while also allowing faster processing, higher transparency, and accurate tracking of all transactions. Smart contracts can also enable auto-renewals, with contracts designed to account for a certain degree of price fluctuations, while also being beneficial for workplace and employee insurances.

?Smart contracts can also help more subtly by instantly alerting any insurance provider of a client’s prior insurances and thereby allowing for better pricing models. This being said, due to the availability of alternatives in terms of technology, insurers have been cautious in the widespread adoption of smart contracts in their systems

Major Risks/Threats

Insurance companies are responsible for decreasing the risk associated with the people who are insured. However, there are some risks that are inherent to this industry also. The major risks are as follows-

Cybersecurity risk: Nowadays, everything is digital and all data is available on the internet. With the advancement in technology, cybersecurity practices have evolved and so have the techniques to gain access to unauthorized information. So insurance companies have a high risk from this as they need to protect their data as well as that of the shareholders. As technology develops quickly, new incidents that were previously not specified might be covered under general coverage.
Climate Change: Severe weather-related incidents are occurring nowadays with increasing frequency. Ranging from fires to flooding, these incidents cannot be predicted, and insurance agencies need to carefully access their strategies to mitigate these risks. They might look at readjusting the policy premium, providing new policy types, or looking at their own investment plans.
Aging Infrastructure: With time, infrastructure ages, and due to increasing demand, insurers are exposed to new risks. Sometimes these infrastructures fail much before their up-gradation and maintenance are due, and large-scale destruction can also occur. This risk is very high, especially in places having electrical grids, industrial pipelines, bridges, etc. Continuous assessment of the liability in place and the level of risk being undertaken needs to be done by the insurance company.

4. Regulations and emerging risk: Insurance is a highly regulated industry. Just like IRDAI in India, different countries have their own body that deals with regulations. These regulations change with time and make it difficult for insurers to handle the increased operational and financial risk associated. The resources that need to be spent on compliance increase as well as the chances of failing an audit. Also, different states have different laws that can directly affect policies and cause the emergence of new risks.

5. Changes in interest rates: For ensuring their own profitability, insurers always need to keep an eye on the interest rates. Insurance companies have substantial investments in bonds or other products that are interest sensitive. Any drop in the interest rates can make the policy less lucrative for the customers and can affect sales adversely.

To mitigate these risks, insurance companies need to find the balance between affordability, financial stability, and preparedness

Innovation in InsurTech space

InsurTech players have disrupted the insurance industry by catering to the pain points of the traditional insurance offerings – such as lack of digital footprint, poor user experience, difficulty in claiming the insurance, longer time to process applications. In this section, we will try to analyze the innovations brought forward by the Insurtech players apart from the above-mentioned traits.

1. ?Automation of claim processing: Claim processing in a traditional insurance company was a tiresome process for the consumers. Initially, Insurtech players eased the process by digitalizing the claim processing process, without any manual intervention. On top of that, various Insurtech players are now using Machine Learning algorithms to estimate the extent of loss and required claim through image processing using satellites and drone. For eg. In case of any accident, the consumer has to just upload the vehicle image, and the claim will be processed without any documentation required. It will be highly useful in case of natural disasters such as drought, fire, floods, etc. Below is an example of how ML algorithms are used in Agri Insurance.

?2.?Personalized risk assessment using innovative tools such as IoT, social media: We share loads of data with major service providers, endpoint devices and spend a significant amount of our time on social media apps. Data Analytics can be used to leverage by providing personalized risk assessment and services at cheaper costs – resulting in highly satisfied customers. As per an Accenture study, 3 out of 4 consumers are willing to share their personal data in order to get cheaper insurance and personalized risk assessed services

3. ?Telematics Insurance: Telematics insurance is being leveraged by Insurance players to track speed, location, driving patterns, and other driving-related data and provide tailored insurance plans to improve risk management. It results in insurance players providing cheap insurance plans to consumers who drive safely, don’t overspend, etc., and a high premium for those who are risky drivers.

4.????Peer to Peer (P2P) Insurance: As per Investopedia, Peer to Peer insurance is a risk-sharing network where a group of individuals pool together and create a single pool and agree on covering each other risks. The pool is generally comprised of friends, family, or individuals with similar interests. Every member will eye for including low-risk individuals in their group – thus providing low cost to members of the group. It also mitigates the risk of fraudulent or unnecessary claims, as all the members in a group trust each other.

?5.????Small ticket-size insurance offerings: Insurtech players are providing small ticket-size insurance product offerings. The trend is rising globally and in India as well. For eg. As per a BCG report, Acko has partnered with more than 20 digital players to distribute bite-sized products. Small ticket-sized insurance products include such as ride insurance, travel insurance, rental insurance, hotel stay insurance, etc.

6.????Real-time health insurance: IoT health devices can constantly interact with each other and share health data with insurance players for customized underwriting and pricing. e.g. Smartwatches, Health & Wellness apps, Diabetic/BP monitoring devices.