Source: Canva — Magic Media Editor — Insurtech future in emerging markets

Understanding the Challenge
Emerging markets, characterized by rapid economic growth and increasing urbanization, often face challenges in providing adequate insurance coverage to their populations. Factors such as regulatory barriers, lack of awareness, financial stability, and outdated distribution channels contribute to a significant gap in coverage.

The Power of Mobile Technology
One of the key drivers behind enabling insurance in emerging markets is the widespread adoption of mobile technology. In many emerging countries a large portion of the population owns smartphones, and Insurtech startups can capitalize on this connectivity to reach previously underserved communities.

Customized Solutions for Diverse Needs
Insurance in emerging markets is not a one-size-fits-all approach. Successful startups recognize the importance of offering customized solutions that cater to the unique needs of each market. Whether it’s micro-insurance for low-income households, weather-based insurance for farmers, or health insurance with flexible terms, Insurtech platforms have to tailor their offerings to address specific challenges faced by local communities.

Financial Inclusion Through Collaboration
Collaboration has been a key strategy for Insurtech startups looking to penetrate emerging markets. By partnering with financial institutions, NGO’s, mobile network providers etc. Insurtech’s can integrate insurance solutions with existing services, making them more accessible to a wider audience. These collaborations not only drive financial inclusion but also contribute to the overall economic resilience of the communities they serve.

Addressing Cultural Nuances
Cultural nuances play a crucial role in the success of Insurtech ventures in emerging markets. Successful startups invest time and resources in understanding local cultures and adapting their products accordingly. This approach builds trust among users and ensures that insurance solutions align with the values and expectations of the communities they serve.

Source: Amir Kabir — Market, Opportunities and Challenges in Emerging Markets

Insurance penetration serves as a metric for assessing the progress of the insurance sector in a country or region — It is computed by determining the ratio of total insurance premiums to the GDP (gross domestic product) in a specific year. Insurance density, coupled with insurance penetration, serves as a crucial metric for evaluating a country’s or region’s insurance sector development. Calculated as the ratio of premiums collected by insurance companies to the population, it is often expressed as the per capita premium in dollar terms.

The insurance density figures on all three continents are notably lower than the global average of $874.

Source: Best’s Review — January 2024 Edition

In terms of Insurtech maturity, Latin America is leading, while Africa and the Middle East are still in their very early stages of innovation, adoption, and disruption. Moreover, insurance and Insurtech penetration vary significantly among countries within each continent. As I highlighted in Part 1 of this series, the evolution of Insurtech in the United States unfolded gradually, spanning a period of more than two decades. Nevertheless, both Africa and the Middle East may have an advantage, as Insurtech’s in these regions can commence operations without the constraints of complex legacy systems. However, these endeavors encounter various other challenges that hinder their rapid scalability.

Latin America — A thriving and rapidly expanding insurance market, presenting significant opportunities for both incumbents and new entrants

Latin America (LATAM) emerges as a dynamic hub for innovation and entrepreneurship, a compelling reason for everyone to take a keen interest in the region’s startup landscape. With a staggering population of ~660 million individuals, almost twice that of the United States, it stands as a colossal force on the global stage. What’s truly striking is the remarkable ascent of the middle class in the region, experiencing a surge of over 50% in the past two decades, according to the OECD. The Latin American populace not only boasts significant numbers but also embodies a tech-savvy and youthful demographic, with a median age of 31 — seven years younger than both China and the United States. These insights underscore the region’s potential as a vibrant and influential player in the global landscape.

The weight of insurance on the LATAM economy accounts for ~3% of GDP, less than half the global average. In general, LATAM is an underdeveloped and underinsured market. In terms of life insurance, only 15% of Latin American adults who can afford such policies hold them, compared to 52% of U.S. adults. Similarly, less than 25% of vehicle fleets are insured in Latin America, whereas in the United States, this figure stands at 70%. What Latin America does have, however, is an over 80 percent digital adoption rate, which enables startups to expand the market.

Latin America has emerged as the region with the highest financial appeal for insurance companies, surpassing the global average that includes North America and Europe.

As per the 2023 Global Insurance Report from McKinsey & Company, the insurance market in LATAM is valued at $174 billion. Despite disparities, insurance penetration in LATAM is on an upward trajectory at a faster pace compared to other global regions.

Source: McKinsey — The Latin American Insurance Market

Over the past decade, the region has consistently outpaced other major insurance markets, boasting an impressive ~11% CAGR from 2018 to 2022 — outstripping North America, Asia, and Europe. Latin America’s insurance sector not only exhibits rapid growth but also proves highly lucrative, with a robust average Return on Equity (ROE) of 16.6% in 2022, surpassing global averages. Despite these promising figures, a substantial protection gap persists compared to more mature markets, with per capita insurance density at a modest $283 in Latin America versus $9,250 in the US. Local insurers dominate the market, commanding 64% of total gross written premiums, while global players carve a stronger presence in non-life insurance.

Efficiency emerges as a critical challenge for Latin American insurers, with higher expense ratios than their European counterparts, presenting significant opportunities for operational improvements.

This points to massive opportunities for Insurtech’s to support and enable the current market players, while expanding product portfolios, digitalizing customer interactions, creating new business models, and contributing to closing inequality gaps.

Key Trend — Progression of Open Insurance

A prominent trend in the region revolves around the emergence of open insurance, a novel business approach that advocates for the sharing of open data among organizations spanning various industries. This entails providing open access to information, including terms and prices, with the overarching goal of enabling providers to deliver products and services within digital ecosystems boasting lower operating costs. Simultaneously, this approach aims to enhance efficiency by reaching a broader audience while maintaining effective customer segmentation.

The convergence of Open Insurance and Open Banking gives rise to Open Finance, forming an ecosystem where an individual’s insurance and banking details are unified. This integration facilitates the development of more tailored products and a more assertive and user-friendly transactional experience.

Brazil, in particular, is at the forefront of adopting this model in Latin America. The insurance regulator, Susep (Brazilian Superintendence of Private Insurance), is already in Phase II of implementing a regulatory framework for open insurance. Moreover, since 2017, Susep has been running a ‘regulatory sandbox’ initiative. This program grants licenses to entities, allowing them to experiment with innovative projects for a specified period. During this time, they must adhere to a specific set of regulatory provisions that facilitate the controlled and delimited execution of their activities.

The Latin American Insurtech ecosystem presents a compelling mix of elements that attract global interest and foster growth. While Brazil leads in terms of investment volume, the number of ventures, user potential, and government interest, other countries like Mexico, Colombia and Chile boast similarly mature ecosystems. Brazil accounts for almost 50% of Insurtech investments in the region, followed by Mexico and Colombia. Currently they are around 500 startups focused on building in and around the insurance and Insurtech sector, with a cumulative funding of more than $1 billion (estimated based on various sources).

Life Insurance — A fundamental component for the rising middle class, playing a pivotal role in bridging portions of the existing protection gap

Life insurance serves as a crucial financial tool that provides individuals and their loved ones with a sense of security and stability. Beyond its primary function of offering a financial safety net in the event of the policyholder’s demise, life insurance plays a pivotal role in long-term financial planning. Additionally, life insurance can serve as an investment vehicle, offering opportunities for wealth accumulation and legacy planning. In this way, life insurance goes beyond a mere financial product, becoming a cornerstone for building and preserving financial well-being.

According to MAPFRE’s estimate, in Latin America, the insurance protection gap reached $267.2 billion, with 60% coming from the Life segment.

During the mid-1990s, numerous countries in the region embarked on reforms to their Social Security Laws, resulting in the transfer of life, disability, health, and retirement risks to the open private market. Within the LATAM region, the life insurance market presents considerable opportunities for new business development across three primary segments:

1. International Life Products — OffShore: This segment, currently valued at over $2 billion for life business premiums, is experiencing continuous growth propelled by the expanding High Net Worth and upper-middle-class demographics in LATAM. Health business premiums are estimated to surpass $600 million.
2. Local Existing Life Market — OnShore: Total premiums for life in the region amount to approximately $80 billion, with about $40 billion attributed to the six target markets (Mexico, Brazil, Colombia, Chile, Argentina, Peru). The historical profitability ratio averages at 19%.
3. Insurance Protection Gap: In 2022, the total premiums for the Insurance Protection Gap in LATAM were estimated at around $270 billion across all lines of business. The Life Insurance Gap alone is approximated at $162 billion, representing potential customers who currently lack life insurance but possess the financial means to afford it. These figures underscore the significant opportunities for market penetration and expansion in the LATAM insurance landscape.

Market Tailwinds

Throughout history, insurance penetration in LATAM has maintained a low trajectory, typically hovering at approximately 0.5% to 1.5% GDP for Life insurance. This trend has predominantly been linked to lower incomes, contributing to a limited awareness of the protective advantages that insurance provides. However, a positive transformation is currently unfolding, driven by the growth of the middle class, enhanced accessibility to competitive insurance products, and a generational shift. These factors collectively have spurred an upswing in insurance penetration within the region.

The primary catalysts for the growth of the insurance sector encompass increasing disposable income, enhanced availability of insurance education, a growing demand for financial stability and inclusion, and technological advancements that streamline the insurance purchasing process.

Prominent global reinsurers foresee a 2x increase in insurance penetration across specific countries in LATAM within the next five years. The advantageous impact of the demographic, with 66% of the population falling within the 15–64 age bracket and less than 10% aged over 65, continues to offer significant prospects in the retail consumption business. This encompasses diverse personal lines within the insurance sector, such as individual life and individual health. The emerging middle class in LATAM has witnessed an impressive growth, now representing approximately 30% of total households, underscoring substantial opportunities for insurers to cater to evolving consumer needs and preferences in the LATAM market.

Brokers and agents dominate distribution and remain highly relevant by adapting to client needs.

As indicated by a 2022 survey conducted by McKinsey and LIMRA, although Latin American consumers show a preference for digital interaction, with 67 percent initiating their life insurance search online, the majority of policies are not ultimately purchased through digital channels. When making purchasing decisions, consumers prioritize the security, trust, and convenience associated with in-person interactions.

At AV8, one of the companies in my portfolio is Olé Life, a full-stack digital insurance carrier operating in Latin America. The entrepreneurial team at Ole brings decades of insurance experience, having taken risks in Latin America and acquiring a comprehensive understanding of diverse risk environments. Leveraging their knowledge and expertise, the team has pioneered a novel AI-backed digital underwriting approach for delivering life insurance through online platforms and mobile applications. Olé has excelled in the recruitment, training, and retention of top life insurance agents in LATAM, equipping them with advanced technological tools to enhance their selling capabilities. Headquartered in Miami, Florida, Olé Life stands out as the first fully digital term life insurance product in Latin America that requires no medical exams for policies up to $1 million.

The core of Olé Life’s technology revolves around incorporating data science into its mobile and web applications, providing users with relevant information for a personalized and streamlined purchasing experience. This technology is accessible through embedded quoting engines and APIs, allowing B2B partners and agents to fully utilize and integrate the innovative platform.

As a fact Olé Life focuses on empowering brokers and agents by providing a streamlined, technology-driven approach, enabling them to sell life insurance more efficiently, effortlessly, and at an accelerated pace.

The cutting-edge AI-powered system utilizes data accumulated from decades of policy underwriting in Latin America to approve customers within minutes, offering same-day coverage. Olé Life currently collaborates with A+ rated international reinsurers, including Partner RE, RGA, Munich RE, and has a presence in 30 countries.

Source: Olé Life Management Presentation

Africa — The most underserved insurance market in the world offering vast growth potential coupled with inherent complexity

Dr. Osagyefo Kwame Nkrumah, Ghana’s inaugural prime minister and president, encapsulated a poignant paradox in his impactful declaration:

“It is Africans who are poor but not Africa.”

This statement resonates profoundly, drawing attention to the stark contrast between the continent’s abundant natural wealth and the widespread poverty experienced by its people. Africa’s vast natural resources are undeniable and could contribute significantly to the well-being of its population.

The African insurance market reflects this potential, reaching a substantial US$ 70.2 billion in 2022 according to Swiss Re Sigma Report, with projections indicating growth to US$ 123.8 billion by 2028, at a CAGR of ~8% during 2023–2028. However, despite its size, insurance penetration across Africa remains at a modest 2.8%. The industry’s value of ~$80 billion in Gross Written Premium (GWP) ranks very low globally, with 83% of premiums concentrated in seven key countries (South Africa, Kenya, Egypt, Nigeria, Algeria, Namibia, and Tunisia).

Source: Swiss RE Institute — African Insurance Market

South Africa dominates as the largest market, accounting for ~65% of premiums, ~80% of which are for life insurance.

Source: The Geneva Papers on Risk and Insurance — Issues and Practice — Institutional determinants of insurance penetration in Africa

The significant opportunity lies in the fact that 97% of the continent remains uninsured, offering a vast untapped market. Technology has the potential to bridge this gap, providing affordable insurance as a formal and efficient financial safety net. However, challenges persist, including low demand due to lack of awareness and trust in traditional insurance companies, as well as regulatory inconsistencies among countries, highlighting the need for innovative solutions in the African insurance landscape. Moreover, distribution continues to pose a significant challenge for the industry, with obstacles stemming from various factors, including cultural habits. Beyond addressing distribution issues, another crucial factor is the generation and access to vital data for underwriting and other purposes.

According to World Economic Forum, the insurance sector is leading Africa’s sustainability push.

African nations have embraced a strategy similar to that of Latin American countries through the initiation of ‘regulatory sandbox’ initiatives. However, the outcomes of these initiatives, designed to foster innovation, have generally fallen short of expectations as of today.

In the realms of healthcare and insurance, insiders in the industry suggest that many individuals still prefer to rely on God as the ultimate — or only — physician, or allocate their financial resources to address other needs first. The tendency among Africans is to neglect their health until it becomes an emergency, at which point they start seeking pharmaceuticals and consulting doctors, hindering the necessary innovation.

As per Brighter Bridges, there are more than 70 startups focused on building in and around the insurance and Insurtech sector. Per PitchBook there are more than 100 startups headquartered in Africa, operating across different verticals, from API development to car and crop insurance, with a cumulative funding of approximately $250 million (estimated based on various sources).

Microinsurance — An opportunity within the thriving African ecosystem

Microinsurance has a concise yet influential history, evolving as a mechanism to offer financial protection to low-income individuals traditionally excluded from conventional insurance services. Rooted in the microfinance movement, the concept of microinsurance gained substantial traction in the late 1990s and early 2000s. This momentum can be attributed largely to the groundbreaking efforts of Muhammad Yunus, the Nobel Prize-winning banker and economist from Bangladesh. The microinsurance landscape, therefore, stands as a testament to the extension and impact of the broader microfinance movement.

The International Association of Insurance Supervisors (IAIS) defines microinsurance as “protection of low income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.”

Microinsurance plays a crucial role in safeguarding low-income populations through the provision of affordable, basic coverage featuring low premiums and policy sums insured. This form of insurance addresses a vital need in emerging markets where government social safety nets are limited, leaving individuals susceptible to income shocks. However, the global market remains largely untapped, with only approximately 230 million people covered, according to recent estimates. Offerings encompass life, accident, health, property, and agriculture lines specifically tailored to the risks and cash flows of the low-income market. Small farmers for example produce up to 80 percent of the food supply in Africa and Asia and face a 90 percent chance of crop loss due to factors outside of their control, such as pest outbreaks and severe drought.

Source: Amir Kabir — Challenges in Insuring Low-Income Customers

Establishing partnerships with governments, aid agencies, microfinance institutions, and cooperatives is pivotal for microinsurers to reach underserved groups while keeping costs low. Technological innovations, including mobile platforms, user interfaces, and payment systems, contribute to premium growth and enhance financial inclusion. However, profitability remains a challenge due to high distribution costs and low persistency rates. Achieving sustainability hinges on effective claims management and achieving scale. Regulatory development, consumer education, and improvements in product distribution and servicing are essential factors that can significantly expand microinsurance markets.

Source: Micro Insurance Network — The Landscape of Microinsurance 2022

Startups building in that space for example are Pula Advisors, an agricultural insurance and tech company that designs and delivers innovative agricultural insurance and digital products to help smallholder farmers endure yield risks, improve their farming practices, and bolster their incomes over time. Pula Advisors, which works across Africa and Asia, has insured more than 15 million farmers so far, and surpassed US$80 million in gross premiums.

Others like Jamii.one operate a digital finance platform intended to transform data into financial opportunities. Jamii’s platform also provides affordable and accessible micro-insurance products to low-income individuals and communities in Ethiopia. The company’s products include crop, livestock, life and health insurance.

OKO brings affordable crop insurance to underserved smallholder farmers, giving them access to the finance that keeps them sustainable and allows them to grow. As of July 2022, OKO has insured more than 18,500 farmers, making OKO the most popular crop insurance product in the country.

Turaco is pioneering microinsurance solutions to make insurance accessible for those living on less than $5 a day. The company offers affordable life and accident coverage, priced at an average of $2 per policy, specifically designed for urban and rural populations. In its first year, Turaco insured more than 40,000 customers, providing peace of mind and coverage in times of greatest need. Since 2019, Turaco has delivered customised policies covering over 1.3 million Africans.

Middle East & North Africa (MENA) — The region with the lowest insurance penetration

The insurance penetration in the Middle East and North Africa (MENA) region is the lowest globally, with less than 1% market penetration for insurance companies. This can primarily be attributed to fragmented market structures, lack of awareness, cultural and religious beliefs in the region that play a significant role in the low insurance penetration rates. Furthermore, impediments to market growth include competitive distribution strategies and a scarcity of talent possessing extensive insurance experience. The primary lessons derived from the initial wave of Insurtech’s in the US, as highlighted in Part II, emphasize that technology alone is not a winning factor; a solid understanding of insurance fundamentals is paramount. Notably, the aggregation model has emerged as the driving force behind Insurtech growth, earning recognition from regulators throughout the region. This underscores the observation that the MENA region is still in the early stages of the insurance innovation cycle, mirroring the efforts discussed in Part I regarding the US market.

The markets of Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar represent the biggest insurance markets in the Gulf Cooperation Council (GCC) region. Non-life insurances are the more significant segment of the insurance industry in this region. Most insurance policies have been adjusted to Islamic law requirements, in the same way as other financial products, to avoid interest-related income.

Source: Swiss RE Institute — Emerging Middle East Insurance Market

Determining the comprehensive market size of insurance in the Middle East poses a challenge. However, according to Swiss Re’s 2022 report, the insurance market for the Emerging Middle East region (United Arab Emirates, Saudi Arabia, Iran, Iraq, Bahrain, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Yemen, Syria) amounted to approximately $43 billion. This amount is divided into 83% for non-life insurance and 17% for life insurance. Considering Morocco (~$3B), Egypt ($3.5B), Algeria ($1.5B), Israel ($11.5B) and Tunisia ($1B), the collective market size for insurance in the MENA region approximates $64 billion.

According to Alpen Capital, the GCC insurance market (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) is projected to grow at a CAGR of 5.3% from $34.3 billion in 2023 to $44.4 billion in 2028. The non-life insurance segment is anticipated to grow at a CAGR of 5.4% between 2023 and 2028 reaching US$ 39.6 billion, comprising 89.2% of the region’s GWP by 2028. However, the GCC insurance market is fragmented and highly competitive. Price competition to secure business in the fiercely competitive motor and medical insurance segments threaten the profit margin of insurers.

Furthermore, the complexity level varies across different insurance segments and regions; for instance, health insurance is highly regulated, while motor insurance has become a prominent focus in MENA due to its growing significance. Health and motor insurance together constitute the majority of written premiums collected by insurance companies in the region.

Source: Best’s Review— February 2024 Edition

In the UAE, which has over 550,000 SMEs, and Abu Dhabi, health insurance is mandatory for its residents and all employers must provide health insurance to employees and their dependents. However, Abu Dhabi and Dubai are the only two emirates of the UAE that have mandatory health insurance laws. Another interesting fact is that motor insurance in Qatar insures the vehicle rather than the driver. Therefore, once a vehicle is insured, anyone with a driving license can drive it.

According to CBInsights there are around 70 companies transforming Insurtech in the Middle East and North Africa. Per PitchBook there are 60 startups headquartered in MENA (excluding Israel), operating across different verticals, with a cumulative funding of approximately $200 million (estimated based on various sources and excluding Israel). Startups such as Dubai-based Yallacompare let consumers compare and buy insurance policies — including auto, life, health, pet, and travel — in 9 markets in the region. Others like Democrance, have a mission to enable partnerships that make insurance accessible and affordable for those who need it most.

The ascent of Takaful as a solution influenced by cultural factors

Access to insurance is further restricted in most countries with sizeable Muslim population as people remain reluctant to buy insurance due to socio-cultural and religious reasons. In general, the conventional insurance mechanism involves elements that are prohibited by Islamic rules and principles.

Takaful is an Arabic word that means assuring each other.

Takaful, as an Islamic insurance concept, resonates with the Islamic heritage of the Middle East, making it a natural choice for individuals seeking insurance without compromising their faith. This cultural and religious alignment has contributed to the remarkable growth of Takaful in the region in recent years. The global Takaful insurance market was valued at $31.7 billion in 2022, and is projected to reach $126.8 billion by 2032, growing at a CAGR of 15.2% from 2023 to 2032. Saudi Arabia remains the largest Takaful market in the GCC with overall GWP of US$ 14.2 billion in 2022.

Takaful and conventional insurance exhibit certain differences. Takaful operates on principles of mutual collaboration, solidarity, and indemnification, where participants protect each other from potential losses or catastrophes by sharing the financial burden. In contrast, conventional insurance involves the transfer of risk from the insured individual to the insurer firm.

Source: The Actuary — Takaful’ models of Islamic insurance

Takaful companies invest in Sharia-compliant instruments, promoting ethical financial practices and alignment with Islamic teachings. Additionally, Takaful’s customization process takes into account the cultural values and beliefs of the target communities, ensuring that the products are not only financially effective but also culturally sensitive. Furthermore, Takaful’s emphasis on community solidarity is well-suited to addressing complex, cross-border challenges, reflecting its cultural adaptability and resilience.

Among the 20 countries that contribute to 90% of the world’s insurance premiums, none are recognized for having significant Takaful market share, and the majority lack notable availability of Takaful products.

It is crucial to emphasize that Takaful is not limited exclusively to Muslims.

It is fascinating to see that such an old model of peer-to-peer insurance has strong relevance today within a society with the lowest insurance penetration.

How Incumbents are leading change with Insurtech

Within the GCC countries, the United Arab Emirates (UAE) and Saudi Arabia stand out as primary hubs for Insurtech innovation. Their robust economies, expanding middle class, and favorable regulatory landscapes make them appealing investment destinations for Insurtech startups.

Saudi Arabia has probably the most developed frameworks as part of its efforts to push insurance forward. The Insurance Authority in Saudi Arabia aims to regulate, supervise and control the insurance sector and provides specific guidelines and rules — here are the guidelines and rules for licensing and supervising Insurtech companies operating in the insurance sector. An interesting highlight is that Insurtechs must have a physical presence in Saudi Arabia and employ Saudi nationals.

In the UAE, Dubai, in particular, has positioned itself as an innovation hub, drawing in a diverse array of startups. It encourages collaborations among Insurtech firms, regulators, and traditional insurance providers. The Dubai International Financial Centre (DIFC) has initiated several programs, such as an innovation hub and accelerator, to nurture Insurtech startups and aid in their development.

Established players have been actively engaging in partnerships with Insurtech startups to cater to their clients. A notable instance is Sukoon Insurance, a prominent multi-award-winning provider of health, travel, and car insurance in the UAE. Founded in 1975 and majority-owned by Mashreq Bank, Sukoon stands as one of the largest publicly listed insurers in the country. Renowned for innovation, it serves over 800,000 customers and offers various digital solutions, including mobile apps, online quoting, and portals for existing clients, as well as its network of agents and brokers. Recently the company entered into a strategic partnership with WAX, one of my portfolio companies here at AV8, to launch the first collector App in the UAE.

Another example is XA’s Group roll out of a Blockchain-based motor insurance platform. The platform facilitates insurance companies in reconciling motor recovery receivables and streamlining the claims recovery process.

The GCC’s emphasis on digitalization opens doors for Insurtech startups to revolutionize the insurance sector through technology, data, and customer-centric strategies. Insurtech facilitates the creation of tailored products by insurers to meet individual needs, contributing to a heightened demand for insurance.

In Part IV of Insurtech and the ongoing expansion of the E&S insurance market, I will cover the opportunities within the E&S sector and how Insurtech’s are playing a pivotal role. Whether you have valuable Insurtech insights or wish to be part of the conversation, feel free to reach out at amir@av8.vc or via Twitter at @AmirKabir99.

Amir is a General Partner at AV8 Ventures where he leads Fintech and Insurtech investing and has been one of the earliest investors in the Insurtech space. https://av8.vc/amir-kabir/

This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future. (I have copied the disclaimer used by Jamin Ball in his great newsletter Clouded Judgment)

Source: Canva — Magic Media Editor — The Future of Insurtech

While there has certainly been disruption in insurance in the past decade, there are still many hard problems to solve in the industry, and incumbents have proven to be more resilient than many initially thought

Source: Amir Kabir — The Evolution of Insurance & Insurtech (Updated)

The rise of Insurtech can partially be attributed to traditional insurance companies’ lack of focus on customer experience. Historically, these companies have classified their clients as “policyholders” instead of “customers”, demonstrating a disregard for their needs and satisfaction. The first wave of Insurtech startups aimed to improve the customer experience by focusing on user-friendly interfaces, advanced data sources, and digital solutions. While these improvements were significant and a great start, there is still a lot of room for growth, particularly in the specialty insurance sector.

Lessons derived from the first wave of Insurtech’s

It’s important to note that the first wave of Insurtech did not completely revolutionize the insurance industry, but rather made incremental advancements towards better serving customers.

However, Insurtech v1.0 companies successfully navigated the intricate task of convincing incumbents, service providers, consumers, regulators, and the broader financial markets that digitization of insurance is inevitable.

Their mission was to underscore the imperative inclusion of advanced technologies in the future of insurance while outlining a viable path for venture backable companies. Despite this, the performance of few Insurtech v1.0 ventures, assessed through exit metrics, might be perceived as underwhelming by the insurance or venture community.

Source: Amir Kabir — Insurtech v1.0 <> Insurtech v2.0 (Updated)

Source: McKinsey Global Insurance Pools

Source: The Geneva Association — The root causes of insurance protection gaps, main areas of relevance

There is also a huge protection gap between the amount of insurance that could have been purchased and the insurance that is actually bought, especially in the risk pools of natural catastrophe, mortality/life, and health care. The value of unprotected risk exposure has risen steadily in the past five years. According to the Swiss Re Institute’s research, the global protection gap is at USD 1.8 trillion in premium equivalent terms for 2022, a cumulative 20% increase on the comparable-terms USD 1.5 trillion estimate for 2018.

While embedded insurance will not fully mitigate the gap, it can act as a catalyst

Source: Swiss Re Institute — Economic Resilience

Speciality Insurance — The next frontier in digitizing business lines, embracing successful strategies from other sectors of insurance

Source: Amir Kabir — Some of AV8’s investment in the speciality insurance category

Here are some other speciality insurance categories that have exiting potential in the future:

Medical Malpractice — An ancient market that needs technological help

Medical malpractice can be dated back to the Mesopotamia time, where the concept of holding medical professionals accountable for deaths or injuries that could have reasonably been prevented. In todays world medical professionals including physicians, clinics, nurses etc. have to carry some sort for medical malpractice insurance that covers them for injury related to medical negligence, resulting in a patient needs to prove that substandard medical care resulted in an injury. Similar to other lines of insurance in the U.S. medical malpractice law has traditionally been under the authority of the individual states and not the federal government, in contrast to many other countries.

Evaluating and underwriting medical malpractice insurance is a highly manual process, requiring considerable time. Hospitals and doctors must complete a PDF application, submit it to an agent along with their resume, credentials, financial projections, etc. An underwriter then manually inputs most of this information into a rating table. The underwriting process commonly considers cost determinants and data such as the frequency of claims, the severity of claims, required coverage amounts, local regulations, and the geographical practice location. Typically, physicians wait around one week for a quote, home healthcare systems take 3–4 days, and hospitals usually face a 2–3 week turnaround time.

Medical malpractice insurance premiums are 1% of national health care costs (Congressional Budget Office)
Medical malpractice insurance premiums are the 3rd largest cost for physicians, after payroll and space costs

Innovative players in this field include Indigo and Now Insurance. Even major established companies like Berkshire Hathaway are actively involved in this sector. For instance, Berxi, a segment of Berkshire Hathaway Specialty Insurance, offers medical malpractice insurance through a direct channel.

NDBI — Catastrophic risk is the hardest risk of all for a business to protect itself against

NDBI, which stands for Non-damage Business Interruption, represents the next wave of innovative insurance solutions that have been in existence for a considerable period. However, the recent pandemic and subsequent shutdowns in various economies have significantly amplified interest in this area.

While traditional Business Interruption (BI) insurance is centered on covering actual physical damage and necessitates evidence linked to that damage, as typically outlined in the policy, NDBI deals with scenarios where there’s no physical damage. These scenarios might encompass business interruptions stemming from factors like political unrest, pandemics, cyber attacks, war, etc., situations that typically result in business interruptions. Most of these events lead to medium to long-term economic repercussions that demand a sophisticated insurance, risk transfer, and resilience solution.

While traditional BI relies on standard, tangible risk identification and assessment methods, NBDI necessitates an entirely different and sophisticated approach. Current NDBI products in the market are more tailored than mass market applicable. For instance Munich Re offers EQuIP (Earnings Quality Insurance Protection), a Non-Damage Business Interruption solution specifically designed for the Pharma industry. This specific solution provides a bespoke risk transfer solution for the Pharma industry covering regulatory related production shutdowns. AON on the other hand has been in the market since 2018 with a more broad NDBI product using data, analytics and parametric triggers to cover a broad range of businesses, including hotels, retailers, pharmaceutical firms and transportation companies.

Source: Swiss Re Institute

Looking at the potential market size of the global insurance industry, it is evident that insurance is here to stay. In fact, the opportunities within the insurance industry will significantly increase in the years to come.

Source: Pitchbook — Insurance Market Size Estimates

However, I am focusing on insurance during the last century and how innovation, technology and adoption have led to an insurance revolution across developing markets, and what the next 10, 20 or 50 years might look like. I am also digging into the ways technology could be a significant driver in improving insurance penetration into several emerging economies.

Source: Amir Kabir — The Evolution of Insurance & Insurtech (Updated)

While the above timeline doesn’t do justice to all the events that occurred during the last century, it highlights some important occasions, incidents, companies, startups, regulations that reflect the growth and transformation of the insurance industry.

The birth of mainstream insurance in the U.S.

While the world’s first automobile insurance policy was issued in Dayton, Ohio in 1897, insurance companies widely known today started in the early 1920s, with State Farm being the first, and Allstate, Geico and Progressive to follow in the coming decade. These insurance companies introduced the concept of direct writers at the beginning of the 20th century and are among the largest auto and home insurers in the US.

All of these insurance incumbents were founded by individuals who once sought solutions for transferring risk by lowering costs through marketing directly to carefully targeted customers.

State Farm started as one man’s plan to offer low-cost automobile insurance to the farmers of Illinois: hence the name State Farm Mutual Automobile Insurance Company. Allstate emerged when Sears, Roebuck & Co. President and Board Chairman, General Robert E. Wood, sparked on the idea to selling auto insurance by mail. GEICO on the other hand started by selling insurance to government employees and military personnel (GEICO — Government Employees Insurance Company).

In 1944, the Supreme Court issued a ruling to federally regulate the insurance industry. The following year, Congress passed the McCarran-Ferguson Act, returning oversight to the state level. To this day, regulatory control remains primarily in the hands of the state. Each state has its own underwriting, rating, and policy regulation, creating a barrier for new insurance and insurance products to emerge.

In the same year, in 1945, acting president Truman made the first proposal for a unified national public health insurance, which however was unsuccessful. It took another 20 years to enact Medicare for Americans 65 and older.

As the population grew within the US and people moved throughout the country, other means of distribution were needed. This started the agency approach to selling insurance, by assigning agents to specific geographic areas, and setting up branch offices managed by general agents, later known as “managing general agents,” or MGAs. Agents’ compensation changed from fees for applications to percentage commissions on premiums collected. To understand more about the distinct role of insurance agents and the exploration of policyholder information ownership in the United States are handled, you can refer to this link.

Source: Amir Kabir — Insurance Actors and Responsibilities — Risk, Authority, Costs, Profit

Within the industry, insurance agents are classified as captive and independent. Independent agents sell more commercial lines insurance than personal lines (auto and home insurance), while the reverse is true for captive agents. One major difference between captive and independent agents is that the independent agent legally owns access to policy renewals, not the insurer.

GEICO, State Farm and Allstate are all insurance companies that will only sell their products through their agents (captive agents). However, most of those agents are independent contractors and are solely responsible for office expenses and hiring decisions within their agency. For example, start-up costs for a new GEICO agency range between $100,000 and $250,000, depending on the market.

In contrast, Progressive works with over 38,000 independent agents across the country as of 2021.

From 1920 through the 70s the incumbents all saw tremendous growth. In 1964, GEICO passed the 1 million policyholder mark and in 1965 it saw $150M in premium earnings. By 1956, Progressive had 40 employees and $2.6 million in written premium, while launching its Safe Driver Plan in Ohio, which offered low rates to drivers without accidents. The plan eventually evolved into what is now known as Snapshot. By 1969, Allstate had property liability written premium of $1.47 billion with 11.4 million active policies and more than 30,000 employees.

Emergence of digital systems & digital penetration within the insurance industry

Starting in the early 1980s software companies that built solutions for the insurance industry emerged. Some are still successful, such as Applied Systems, which specializes in insurance automation software for agency and brokerage management systems that automate the exchange of information and data throughout the insurance life cycle between agencies, brokerages, carriers and their clients.

With the introduction of the internet in the 1990s, insurers began offering policies online and insurance innovation started. Advances were made around distribution among early adapters surrounding price comparison websites and lead generation solutions — such as SelectQuote in the early 1980’s. In fact, Progressive was the first auto insurance company to offer comparison rates and the option to buy by phone starting in 1993. Through the end of the 90’s, more companies emerged with a direct-to-consumer approach, and some innovation emerged around product warranty solutions as an add on (i.e., SquareTrade Inc in 1999).

In the 1990s various court decisions authorizing banks to sell insurance again, culminating in the 1999 Gramm-Leach-Bliley Act, which in part rules cross-selling and affiliate sales of product between banks, insurance companies and securities firms.

Other prominent companies such as Guidewire and Duck Creek started in the early 2000’s, building core solutions for property and casualty insurers. Those solutions have now become widely adopted within the industry.

In the early 2000’ entrepreneurs also started building digital MGA’s, digitizing the insurance distribution model. The MGA model specifically allows for customer experience and data control, while managing no significant balance sheet risk. A prominent startup emerged during that time — Weatherbill later named The Climate Corporation, founded by David Friedberg. While the original thesis of Weatherbill was to sell weather derivatives online to small businesses with weather risk, it eventually transitioned its focus fully on the agricultural side.

Starting in 2007 GEICO was able to add 1 million policies to its book every year, and grew from 8 millon policies in force in 2007 to 16 million policies in force by 2017.

While digital innovation steadily came into view, some traditional insurance companies struggled and emerging cross-selling distribution channels played out poorly. In 2005 for example, Citigroup decided to sell off its Travelers life insurance unit for $11.5B to MetLife, highlighting the tough time banks had cross-selling banking products and insurance. Following that in 2008, the government bailed out AIG through the Federal Reserve Bank acquiring a 79% stake for an $85 billion loan, which was subsequently increased and restructured. At that time AIG had become a major seller of credit default swaps in an attempt to boost its profit margin.

Around 2009, a pseudonymous person named Satoshi Nakamoto published a paper Bitcoin: A Peer-to-Peer Electronic Cash System, setting off the early innings for a newfound technology called blockchain.

Another important regulatory overhaul was signed into law in 2010 — The Dodd-Frank Wall Street Reform and Consumer Protection Act. While retaining state regulation of insurance, Title V in the act established the Federal Insurance Office (FIO), to coordinate the insurance sector nationally and regulate surplus lines insurance and reinsurance through state-based reforms.

The beginning of the Insurtech revolution

The early 2010’s set off a revolution, creating what is now known as Insurtech. Meaningful outcomes sparked the fire of others to build in and around the insurance industry, including Allstate acquiring Esurance in 2011 for $1B, and Guidewire’s $1.5B IPO in 2012. Another major contribution to the ecosytem was when Monsanto acquired David Friedberg’s The Climate Corporation for $1.1B in 2013. His work around selling insurance online and building a digital MGA sparked the interest of the venture community to explore that model even further. In fact, David started MetroMile in 2011, which “prides itself on being pioneers of the pay-per-mile car insurance model, providing a fair and affordable insurance for low-mileage drivers.”

Source: FT Partners — 2021 Insurtech Almanac

Starting in 2015 the Insurtech wave started to take hold and venture capitalists and entrepreneurs, who once shied away from insurance related businesses, went all in. Companies categorized as challengers such as Lemonade, Next Insurance, Hippo, Root and many more materialized in the coming years, mostly choosing MGA as their business model only as an initial Go-To-Market strategy. This allowed them to enter the market quickly and test product-market fit, while mostly focusing on traditional flow-business distribution (home, auto, renter) and some new product innovation (commercial lines, on-demand or micro-duration coverage for smaller or episodic risks).

The strategy was simple yet needed; improving new UI/UX and be digital first, while providing a holistic customer experience. All of this was encouraged and enabled through smartphone penetration and mobile data surge.

These challenger startups that focused on traditional business lines expanded their business from B2C to B2B2C or even transitioned partly to be a carrier. This happened mostly as startups realized that customer acquisition is expensive and that the disintermediation of the traditional brokers and agents will likely not disappear in the near future.

Other business models that enabled insurance companies or aggregators increased in relevance after a slow start in the early 2000’s, with large funding rounds and either M&A or IPO exits. In 2017 for example, Allstate acquired Squaretrade for $1.4B, in 2018 Brown & Brown Insurance acquired Coverhound for an undisclosed amount and Lendingtree acquired QuoteWizard for $320M. Then in 2019, Prudential acquired Assurance IQ for $2.4B making it one of the biggest deals for an Insurtech at that time. Assurance IQ’s revenue at that time totaled more than $300M.

During this period incumbents became more and more involved in the startup ecosystem by either empowering startups through investing, data, insurance or reinsurance capacity, engaging in pilots and POC’s to learn and evolve or actually participating in or starting various incubators (e.g. Insurtech Gateway, InsurtechNY, PlugandPlay, Insurech HuB Munich, OnRamp).

Source: Techcrunch — VCs love insurance even if you don’t (2017)

Source: FT Partners — Most active Insurtech Investors — Strategic/Corporate Investors (Selected)

Other hightech companies also dived into insurance by offering inhouse insurance solutions. In 2019 Tesla launched Tesla Insurance, a competitively priced insurance offering designed to provide Tesla owners with up to 30% lower rates. While incumbents have tried and still offer telematics based insurance solutions at lower rates, Tesla is the first automobile company to have an integrated offering for electric vehicles. Tesla’s pricing reflects the benefits of using Tesla’s active safety and advanced driver assistance features that come standard on all new Tesla vehicles without the need for an external device.

Bitcoin, Blockchain and cryptocurrency surged in 2018, while DEFI and insurance related crypto made their first market debut. B3i, the Blockchain Insurance Industry Initiative started in 2018 and worked on enabling and accelerating the insurance and reinsurance industry with distributed ledger technology. Shareholders include Achmea, Aegon, Africa Re, Ageas, Allianz, AXA, CPIC, Deutsche Ruck, Generali, Hannover Re, IRB Brasil Re, Liberty Mutual, Mapfre Re, Munich Re, SBI Group, SCOR, Swiss Re, Tokio Marine Holdings, VIG Re, Zurich.
The venture community started building in that space with companies such as Risk Harbor, Etherisc, Nayms, Ensuro and Unlashed Finance.

Source: DEFIPULSE — DEFI Market Value as of January 2022

While insurance applications within the DEFI space today represent a minor subset, the opportunities are abundant in the future. That is also more evident as one the most prominent insurance markets and incumbents, Lloyds of London, introduced new cryptocurrency coverage in 2020.

While entrepreneurs dove into decentralized applications within insurance and financial services, the early builders in Insurtech started seeing results by taking their companies public. In 2020 and 2021 some prominent Insurtechs including Lemonade, Root, Hippo, MetroMile and Oscar made their public debut, joined by older Insurtech companies such as SelectQuote. However, the public markets have not been so welcoming to recent startups. In my opinion, the reaction is not surprising because startups realized that insurance is a capital intensive business, including regulatory capital, customer acquisition and operations. As a reference advertising spent, in 2002 GEICO’s spent $1.5B and Allstate about $900M, while in 2019 Progressive spent $1.66B and State Farm spent roughly $1.2B. While the startups were fast in onboarding customers, the results came with a price. Moreover, mediocre fundamental insurance metrics (loss ratios, expense ratios, combined ratio) that require significant maturity, were not substantial enough to navigate public markets at the time of IPO. In insurance, it is important to build an insurance book of business slowly and steadily, as insurance is a get rich slowly business.
It took GEICO 30 years to get to 1 million policies, and a little over 60 years to have 17 million policies in force.

It took Progressive 50 years and Allstate 62 years to go public.

While the race is not over yet, Insurtechs currently playing in the public markets need to rapidly adjust to sustain in the long run. Some of those public Insurtechs are already making a move and have diversified their book of business by adding other lines of business to navigate margins and profits e.g. Lemonade buying MetroMile to offer auto insurance, partnering with Bestow to sell life insurance or selling pet insurance as a bundled product. Other Insurtechs that have raised massive venture funding are sitting on the sidelines waiting for the right time of their public debut e.g. Kin, Next Insurance etc. Others are emerging in the speciality insurance lines and building the next generation of Insurtechs.

In Part II of The next wave of Insurtech, I will cover my predictions for what the next 10 years of insurance will look like. If you have an Insurtech prediction or want to be included, please reach out at amir@av8.vc or on twitter @AmirKabir99
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Amir is a Partner at AV8 Ventures where he leads Fintech and Insurtech investing and has been one of the earliest investors in the Insurtech space. https://av8.vc/amir-kabir/
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This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future. (I have copied the disclaimer used by Jamin Ball in his great newsletter Clouded Judgment)