Asia’s digital path needs hybrid approach

December 15 2022 by

While several Asian regulators have been encouraging the entrance of new digital players to cover critical protection gaps or meet the expectations of customers, so far the digital-only model has not proven to be self-sustainable.

Digital still requires a hybrid form: either a niche company tied up to a bigger player, a partnership with a tech-savvy corporate outlet, or an embedded model.

In November 2022, the regulators in India, Korea and Malaysia issued proposals to facilitate the entrance of digital-only insurers or to encourage the use of digital channels.

The Insurance Regulatory and Development Authority of India (IRDAI) has been in favour of issuing composite licences to increase insurance penetration and motivate small players to take care of niche segments, such as motor and homes. It has recently approved a new licence for an agriculture insurer Kshema, allowed non-life insurer’s Go Digit IPO to proceed and is processing 18 more digital-related applications for approval.

And in November Malaysian regulator Bank Negara Malaysia issued an exposure draft on licensing to facilitate the entry of digital operators to make insurance protection more inclusive, competitive and cost-efficient. New players will go through three-to-five years of a foundational phase with lower capital requirements and regulatory flexibilities.

Also in November, Korea’s Financial Services Commission announced a reform promoting digital sales through mobile and online marketing.

The regulators hope to close protection gaps and enhance customer experience by facilitating the entrance of the digital players to the market. Many markets in Asia have already been experiencing the advantage of regulatory sandboxes allowing them to test new models without immediate capital injections.

Path to profits?
However, the reality is that pure digital players are struggling to achieve self-sustainability.

Without the flexibility of looking from a broader perspective or customer lifetime value and support from larger parent, they are forced to become profitable as soon as possible, which has not been the case yet.

A case in point, insurtechs Lemonade and Hippo, that listed in the US, have seen their valuations fall by 80-90%.

“Many listed insurtechs (whether full-stack insurers or MGAs) have seen steep drops in their valuation over the past years. While these players often boost better digital customer experience and faster innovation cycles, profitability has generally been an issue. The targeted better margins compared to incumbent insurers from the use of new technologies and data, such as AI for risk selection and underwriting, have yet to materialise”, said Christoph Krieg, head of strategy at ZA Tech.

Digital-only players’ strong assets are data and technology that allow them to generate leads for the bigger partners through smaller scale products and eventually help to sell higher value products. In that case, they are allowed to be the loss leader.

In the last few years, insurtechs have been focusing on distribution and marketing efficiency to increase conversions.

Violet Chung, partner at McKinsey, predicts investment increasing: “Distribution is the key part of the value chain for Asia insurance, and that’s where incumbent insurers invest in tech capability.”

“In that way, they help agents, bancassurance, or third-party to enable their distributions and to be much savvier as advisors,” Chung added.

Increasing online distribution, especially within the personal motor policies, is one of the arising trends in South Korea, according to Richard Moon, CEO of Korean digital insurer Carrot.

Korea’s motor market, which takes up about 70% of non-life sector, grew to KRW20 trillion (around US$18 billion) by 2021, with online distribution becoming the most dominant channel of purchase with 40.7% of overall sales. By 2024, online sales will surpass 50% level and continue to expand.

“Distribution is the key part of the value chain for Asia insurance, and that’s where incumbent insurers invest in tech capability.” Violet Chung, McKinsey 

However, when it comes to funding, both investors and regulators tend to prefer businesses already supported by established companies, rather than standalone start-ups.

“The companies now really need to show the investors that they can achieve profitable business that can scale,” said Carrot’s Moon.

There is less interest from investors unless in corporate or larger scale deals with digital insurer tied back to the main business. In that sense, a conglomerate looking for diversification or partnerships with niche insurers or tech companies would normally be favoured.

In Hong Kong, the regulator did not hand out licenses to start-ups that had no connection to the industry. ZA Tech, for example, is backed by Chinese insurer ZhongAn.

Large players backing insurers up do not necessarily have to be from the same industry, but they need customer reach, a large network and a digital ecosystem.

“We want to empower the new players or even the incumbents who have interest. In Korea and Taiwan, companies looking into digital are not necessarily start-ups. Many of them are already established, and [are] looking to build a second brand that focus on digital distribution,” said Alvin Kwock, CEO of Hong Kong digital insurer One Degree.

While in Korea big tech players such as Kakao and Naver embed policies in apps, in Japan the insurers are looking forward to partnerships with tech. This is where ZA Tech links big players such as Tokio Marine and Sompo with e-commerce platforms Yahoo Japan and PayPay.

An example is parametric claims for earthquakes processed through a direct connection with the national meteorological association and paid to a PayPay wallet.

Kazy Hata, CEO of Japanese digital insurer and SaaS provider justInCase, confirms that in the last few years, Tokio Marine, Nippon Life, Sompo Japan and MS&AD have been trying to cultivate digital channels, looking for partnerships with big tech companies such as Amazon.

Hata notes typically embedded insurance classes, such as e-commerce, have grown in the last few years and says the reason for that is it is not necessary to file these products to FSA, because the filing is product-based, not channel-based. However, they often require partnerships with platforms with more advanced IT legacy systems.

Embedded insurance 
High insurance penetration and mature regulatory development help keep Japan as one of the largest markets in Asia with a premium volume of ¥50 trillion (¥40 trillion for life, ¥10 trillion for non-life). Still, with the population shrinking, the language barrier and less penetration of super apps, only a handful of players have entered the market in the last few years.

At the same time, South-East Asia and India’s population and the corresponding middle class growth will be the main driver for insurance purchases in the emerging markets. The middle class in these countries and China will reach 1.2 billion people or 14% of global population by 2030, according to McKinsey, and their customer habits are already shaping the market.

“We expect an evolution from standalone insurance products to those products being embedded into other services and product.” Cristoph Krieg, ZA Tech

Although the concept of embedded insurance is not a new phenomenon, it has become a hot market topic as it is viewed integral to improving customer experience, as well as distribution performance. Carrot’s Moon calls embedded insurance a good solution for Asia, either in sliced size to cover one-off risks, or as an option to cover mandatory requirements, such as motor cover.

Embedded insurance is growing in more mature markets as well, but in South-East Asia it is one of the key classes with a high penetration of mobile, lower income and understanding of insurance, forcing insurers to embed their services into apps.

Normally these partnerships take the form of low-priced stackable policies and build up premium covers that allow customers to get used to an experimental offer and later develop an interest in more expensive products.

“In the South-East Asian markets, there is room for insurance penetration rates to grow considerably. Partnerships between insurers, digital ecosystems and insurtechs, offering low ticket-sized embedded insurance products, lowers the barrier to entry into insurance for emerging mass customers”  said Ashton David, Director of Marketing at ZA Tech.

ZA Tech’s joint venture with super app Grab sells embedded insurance through its insurance intermediary business "Grabinsure" in six Asean markets. Examples of insurance policies from these partnerships are pay-per-trip critical illness and personal accident insurance and trip/food delay insurance – all fully integrated from purchase to claims in the Grab app.

This micro-policy based model, according to ZA Tech’s Krieg, was popularised in China – for example ZhongAn sold almost 8 billion such policies in China in the last year.

“We expect an evolution from standalone insurance products to those products being embedded into other services and product. For example, a one-year travel insurance policy being fractionalized and embedded into individual bookings,” explained Krieg.

Malaysia-based insurer Tune Protect uses embedded insurance within its partnerships with airlines, e-commerce players and telcos. Parametric travel where “claims can be paid before the plane lands”, baggage and gadget protection and extended warranty are examples of its policies. The company’s digital partnership business which is largely embedded business has grown 3.2 times in a year.

Rohit Nambiar, Tune Protect’s chief executive, predicts that embedded and frictionless insurance will take the form of pure digital partnerships where API is used to embed it.

“Standalone and low involvement insurance such as motor will move to aggregators or directly to the consumer and will stay within traditional models just as part of relationship sales,” he said.

There is plenty of room for the evolution of digital insurance in Asia in 2023 with a multitude of models set to succeed, but some will prove less fruitful.

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