Private equity, venture capital firms take a bite of the digital insurance pie

Private equity and venture capital firms are opening up their investment kitty to fund a new wave of companies in the insurance sector, particularly those in the digital insurance space.

In the last 12 months, there has been a slew of investments in the online insurance space, be it digital-only insurance companies, online insurance brokers or even web aggregators.

In May 2018, Toffee Insurance, a digital-only insurance platform for millennials, raised $1.5 million (Rs 10 crore approximately) in a round of seed funding led by Kalaari Capital, Omidyar Network and Accion Venture Lab.

Founded by Nishant Jain and Rohan Kumar and launched in beta in December 2017, Toffee is a technology platform aimed at providing contextual and relevant insurance offerings to a younger population.

Talking about the funding, Vani Kola, Managing Director, Kalaari Capital said that the company (Toffee) was on track to create simple and small ticket size insurance products and distribute them in a very contextual way, which has huge potential to drive mass adoption.

Simple, small-ticket insurance drives traffic

Investor companies, both in the PE and VC space, told Moneycontrol that since insurance penetration is still very low, there is a large untapped opportunity in the market.

"Unlike other insurance companies, digital insurance companies have the unique advantage of selling smaller-ticket products to a larger set of customers. They also tend to be cheaper and have the customer pull," said a senior official at a Mumbai-based private equity firm.

Take the example of Acko. Set up by Varun Dua in 2016, Acko General Insurance leverages on data and analytics to provide personalised insurance products through its digital platform.

In May 2018, Acko General Insurance raised a new round of investment of $12 million led by e-commerce giant Amazon. During the investment round, Amit Agarwal, SVP and Country Manager, Amazon India had said that Acko being a young and nimble startup bringing technology and data-led innovation to the insurance sector, it will deliver a better insurance experience for customers.

The company said that Ashish Dhawan, founder of leading private equity fund ChrysCapital, also made an investment in this round, which also saw participation by existing investor Narayana Murthy’s Catamaran Ventures. The latest infusion takes Acko’s total equity funding to nearly USD 42 million and that too within two years.

Push versus pull

Insurance is traditionally considered a push product rather than a pull product. Hence, the time taken to sell a policy is much higher than other products that customers buy themselves.

Online insurance players have tried to bridge that gap. By simplifying the products and services, these platforms aim to minimise the time taken to buy a policy or resolve a query.

For areas like travel and motor insurance, customers tend to buy a product when they are nearing a deadline. Here, the quickest website is the most popular. And that is what attracts investors too.

Digital insurance broker Coverfox.com raised $22 million in Series C funding in April. The round was led by IFC, which is a member of the World Bank Group, and other existing investors.

The company had previously raised $17 million in all in Series A and Series B funding, from SAIF Partners, Accel and NR Narayana Murthy's private investment arm Catamaran Ventures. The funds will be used to expand to smaller towns and also, specifically address women's needs.

Jun Zhang, IFC Country Head for India said that this investment is a part of IFC's push to drive insurance beyond metros and to women who are currently under-served.

A unicorn is born

In June 2018, insurance web aggregator PolicyBazaar entered the unicorn club with a $1 billion valuation after its parents ETechAces Marketing & Consulting (ETechAces) said that it has raised $200 million in a Series-F investment round led by SoftBank Vision Fund. Existing investors, including InfoEdge (Naukri.com), also participated in the round.

Existing investors told Moneycontrol that the reach of PolicyBazaar and the strong brand recall were the two main reasons behind the funding.

Insurance web aggregator PolicyBazaar helps consumers compare insurance products and aims at offering them ease of buying.

Munish Varma, Partner at SoftBank Investment Advisers, said that over the last decade, PolicyBazaar has become synonymous with online insurance shopping in India. This is at a time when the insurance sector still faces issues of trust deficit and only the top 3-4 insurance companies in the life and general insurance sectors write meaningful business.

Invest and go

While PE/VC investors have an option to directly invest into insurance companies, a lot of stringent rules follow. Not only are they require to have a lock-in period of five years, additional capital has to be provided as and when required.

On the other hand, digital companies offer the advantage of a smaller tenure investment opportunity. Since several of these marquee investors follow an 'entry and exit' strategy, online insurance companies who are on an aggressive expansion mode, have low costs and higher volumes are the perfect fit.