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Opportunity for Fintech in the Indian Insurance Industry
With India moving towards digitisation and services becoming more customer centric rather than sticking to the conventional strategy of ‘one size fits all’— the number of fintech companies is on the rise. In 2020, India received US$ 2.7 billion in fintech investments across various subsegments including payments, lending, wealth tech and insurtech. Despite a large population, rising incomes and rapid urbanisation, India has a low insurance penetration rate of <4%, making it an appealing subsegment for upcoming start-ups to launch fintech services.
Insurtechs – Technology-driven insurance start-ups have emerged as a major attraction for investors. Between 2015 and 2020, Indian insurtechs have raised >US$ 1 billion and produced two unicorn start-ups—Digit Insurance and PolicyBazaar. In the first half of 2021, several insurtechs raised funding from midsized venture capital firms including Turtlemint (US$ 46 million), RenewBuy (US$ 45 million) and Digit Insurance (US$ 18 million).
Key Trends in the Insurance Industry Supporting Technological Innovations
- Increased digital adoption in insurance and evolution of customer behaviour
Insurance companies have improved their digital platforms by upgrading legacy systems and bringing in virtual assistants. LIC introduced LIC Mitra (a virtual assistant), New India Assurance launched the BIMA Bot, United India Insurance came out with UNI Help and National Insurance launched NYRA.
Favourable online consumer trends:
Payment wallets penetration
Online shopping penetration
Source: RBI, Frost & Sullivan Analysis
Direct online sales by insurance firms and insurance distributors make up the online insurance sector. In India, the online insurance business is underserved, with only 1.0% premiums sold online in FY20 compared with 13.3% in US and 5.5% in China. Further, in FY20, the digital insurance marketplace accounted for 54.3% of the online insurance industry. Owing to increased digital penetration, the share of online insurance is likely to grow significantly in the future.
These days, consumers spend a lot of time on the Internet and demand personalised experience across insurance products, pricing, and claims. In addition, new requirements are emerging because of a shift in lifestyle such as greater leisure travel and pet adoption. These changes encourage clients to try new products such as bite-sized insurance, self-help solutions and packaged services.
- Influx of new technologies across the insurance value chain
In the insurance sector, technological innovations such as connected devices, IoT, AI and Big Data analytics are transforming operations, risk understanding, product development and more. Bajaj Allianz and HDFC Ergo have created IoT-based insurance programmes that use connected devices to monitor client driving behaviour and reward safe driving with cheaper premiums.
- Regulatory bodies supporting innovation and transformation in the insurance industry
The Insurance Regulatory and Development Authority (IRDAI) has played an active role in supporting innovation in the industry. The 2019 regulatory sandbox was a crucial milestone in this regard and saw participation from >22 insurers that submitted >170 proposals. The IRDAI has introduced other key enablers such as allowing life and general insurers to complete KYC via a video-based identification procedure and reward low-risk behaviour. Government institutions such as the health ministry and NITI Aayog have also supported transformation in the insurance industry through the National Digital Health Mission (NDHM), the Digital Information Security in Healthcare Act (DISHA) and the National Health Stack; all these aim to create an integrated digital health infrastructure.
Fintech is Disrupting the Insurance Industry in the Following Ways
- Automating underwriting
Underwriting is a vital part of every insurance firm, but it can be time consuming and frustrating. By automating this process, fintech companies are reducing inefficiencies. A customer's records, reports and related information may be analysed by AI algorithms to evaluate risks and provide quotations faster than human beings. Customers will no longer have to deal with traditional, inefficient underwriting processes, as these solutions will eliminate the obsolete practices. Reduced human involvement in this process can also help remove biases, ensuring customers receive the most equitable rates and payouts possible
- Accelerating the application process
Prior to the fintech revolution, getting approval for insurance products may take weeks or even months, which now typically takes merely hours, if not minutes. This remarkable increase in speed is primarily due to AI and mobile apps. Customers can complete applications from anywhere using simple, user-friendly forms via mobile apps. AI algorithms can examine this data to determine whether an application qualifies for a given policy, allowing providers to serve a larger number of individuals at once.
- Streamlining claim filing
Fintech services can also expedite filing of an insurance claim. Many large insurers now allow clients to file claims through an app, which usually takes only a few minutes. These services simplify the procedure for users and assist the insurer in organising important information. Insurtech systems of the future will be able to combine data from smart devices, satellite imaging and other sources to deliver a complete picture of the incident in a short time. In addition, digital data can enhance the accuracy of insurance reimbursements.
- Appealing to younger customers
Fintechs help insurers appeal to younger customers by meeting the digital needs of a digital-native generation. Offering cutting-edge services can help capture the client base of competitors and younger clients can benefit from selecting the best coverage for them rather than following what suited their parents. Convenience and remote access are important benefits for millennials and younger customers—and both are offered by insurtechs. Providers can attract segments that would not otherwise consider insurance by incorporating fintech offerings. This can also help in customer retention, as younger customers are less loyal to brands.
Key Recent Developments:
August 2021: PhonePe receives IRDA license to serve as direct insurance broker
With >300 million registered users, PhonePe is India's most popular digital payments platform. PhonePe enables users to send and receive money; recharge mobile phones, DTH and data cards; pay for goods & services; purchase gold; and invest.
PhonePe entered the insurtech industry in 2020 with a limited insurance ‘corporate agent’ license, allowing it to work with only three insurance firms per category (health, life and general). On August 30, 2021, the firm stated that the IRDAI had granted it as a direct insurance broking license. PhonePe may now distribute insurance products from all firms in India and start delivering customised product recommendations to users with this new ‘direct broking’ authorisation.
Mr. Gunjan Ghai, Vice President & Head of Insurance, PhonePe, said, “This license is a big milestone in our insurance journey. PhonePe is India’s fastest growing insurtech and this move to broking will give us further momentum and accelerate our growth in this space. We are building a robust, full-service platform for our deeply engaged customer base through innovative products in partnership with high-quality insurers. This move will lead us closer to our goal of becoming a one-stop destination for all insurance needs of our customers.”
August 2021: Gujarat International Finance Tec-City (GIFT City) and India Insurtech Association (IIA) partner to promote fintech in the Indian insurance space
On August 9, 2021, the India Insurtech Association (IIA), a non-profit organisation dedicated to promoting India's tech-driven insurance ecosystems, signed a memorandum of understanding (MoU) with the International Financial Services Centre (IFSC) at GIFT City (a new planned business destination in Gujarat) to collaborate on thought leadership.
In addition, two institutions will explore regulatory sandbox projects for GIFT IFSC, which will benefit insurtech start-ups, reinsurance companies, service providers and individuals. The IIA has agreed to collaborate closely with the GIFT SEZ on several fronts including bringing global insurance companies, Indian insurtech start-ups and insurance players to the GIFT City. This association will promote new digital business models and foster collaboration among start-ups and other insurance industry actors.
Mr. Tapan Ray, Managing Director and Group CEO of GIFT City, said, “We have some major insurance players in GIFT City and now, with this collaboration, we can aspire to be a vibrant hub for world-class insurance products & services and encourage innovation in the segment.”
Mr. Rerak Sethi, Director and Co-founder of IIA, said, “Through this collaboration, our goal is to assist worldwide financial organisations in developing top-notch financial services. The IIA will provide support in bringing various Indian and global insurance, re-insurance and insurtech participants to benefit from the regulatory sandbox initiatives at GIFT City.”
April 2021: IRDAI extended validity of sandbox regulations by another two years
The ‘Regulatory Sandbox Approach’ is used to create a safe and conducive environment for experimenting and testing innovative approaches including fintech solutions; the approach enables easy containment of consequences of failure, if any, while experimenting. The IRDAI issued the Regulatory Sandbox Regulations 2019 to facilitate creation of a regulatory sandbox, a testing environment for new business models, processes & applications and proposals that are not explicitly compliant with the existing statutory & regulatory insurance framework.
In the first cohort of the regulatory sandbox (from September 15 to October 14, 2019), the IRDAI received 173 applications (covering concepts such as wellness, wearables, group insurance, usage-based insurance, loyalty programmes, electronic platforms, and KYC onboarding), of which 67 were approved. It received 185 applications in the second cohort (from 15 September 2020 to 15 October 2020). Due to COVID-19, several proposals in the second cohort could not be completed within the 6-month deadline and only a few proposals in the first cohort were likely to be completed. On January 23, 2021, the IRDAI proposed that sandbox regulations were extended for another two years because many applicants were unable to complete experiments on time due to the pandemic.
On April 21, 2021, the IRDAI notified the Regulatory Sandbox Amendment Regulations (2021) to extend sandbox regulations for another two years (originally scheduled to expire on July 25, 2021) to allow existing sandbox proposals to complete experiments and allow submission of new sandbox proposals.
Some notable product launches through the sandbox include comprehensive app-monitored wellness programmes with wearable devices, especially for lifetime health conditions such as diabetes mellitus; short-term and need-based insurances; and pay-as-you-drive insurance in the private car policy, where cars with limited usage are charged lower premiums than the ones with regular/extensive usage.
IRDAI's move has been welcomed by insurance industry experts who believe it would help bring new ideas to the table.
Mr. Naval Goel, Founder and CEO of PolicyX.com, said, “There is merit in this extension of regulatory sandbox, which is established for live testing of new products or services. This amendment will help drive innovation in the insurance sector as insurance companies will now be able to experiment without taking approval to launch products. Increase in innovative products will further extend penetration of insurance among the masses by offering relevant and useful products required in a particular condition. Hence, adaptability of innovative products will shoot up in lesser time.”
April 2021: India Insurtech Association (IIA) partners with Xceedance
On April 7, 2021, the IIA and Xceedance (global provider of insurance consulting, managed services, and technology) have signed a principal sponsorship agreement to boost the insurtech sector in India. The IIA has joined forces with Xceedance as the principal sponsor to establish global collaborations, develop talent and provide resources to insurtech start-ups.
Mr. Prerak Sethi, Director and Co-founder of the IIA, said, “IIA has been established as a core industry enabler to drive strategic initiatives aimed at benefiting the insurtech community in India and worldwide. The Xceedance sponsorship comes at a very opportune moment for the IIA, as it will help us achieve our core objectives and address the imminent needs of insurtech start-ups, insurance companies and other stakeholders. Further, the IIA has already established alliances with international associations such as Insurtech NY, Global Insurtech Alliance (GITA), Singapore Fintech Association, Tokyo Fintech and Insurtech Israel to help promote collaboration in the global insurtech ecosystem.”
Mr. Arun Balakrishnan, CEO at Xceedance, said, “We are excited to join the IIA and reinforce various networking engagements. The IIA team has meticulously planned for 2021. We firmly support the association’s efforts to promote innovative solutions built by Indian insurtech firms, liaise with the Indian regulator to enact rules and boost collaboration between start-ups and insurance corporations. Our sponsorship is part of an Xceedance commitment to power insurance transformation worldwide.”
The Indian insurance ecosystem is still adjusting to the quick speed of technological change, but insurtech has begun to reshape how the business interacts with consumers, thereby streamlining and speeding up purchasing plans or settling claims. Favourable regulatory environment, emergence of new fintech & insurtech businesses that crystallise creative business models and incumbents leveraging technologies to develop a unique set of differentiated solutions are transforming India's insurtech market in both life and non-life insurance space.