While insurance penetration in India is below 4%, penetration of the internet in India is at 45%. Nearly half of the 1.37 billion people in India have access to the internet. Not surprisingly, India has an interesting line-up of tech-based unicorns and companies that have successfully created large digital distribution channels, such as Zomato, Oyo, Flipkart, Paytm – to name a few.

The COVID-19 pandemic has changed the way we all buy and has provided a significant boost to online purchasing. The ease of ‘click and buy’ and the increased acceptability of buying online has also impacted the insurance sector and led to increased penetration of insurance coverage. Online insurance market in India is expected to grow to INR 220 Billion by 2024.

Insurance distribution in India through corporate agents (including e-commerce companies with corporate agency registrations) poses a few commercial limitations due to a cap on the amount that can be paid to the agents. An effective way to make distribution commercially viable is through an equity stake in the insurer itself (the model used by banks currently). This, complimented by the ability to provide sustained financial support may put certain e-commerce players/ digital distribution platforms in a favorable position to enter the insurance sector through strategic equity investments in insurance companies. Tech innovation already employed within e-commerce could provide a fillip to Insurtech offerings, given that both sectors are highly end-consumer oriented.

Bancassurance disrupted the insurance industry by allowing insurers to access an established and trusted distribution chain. The big new disruptor could very well be insurance-digital distribution JVs.

Most insurers in India are joint ventures amongst foreign partners who contribute insurance expertise and Indian partners who contribute goodwill and distribution networks. Several such partnerships have been with Indian banks, with the ability to fund insurers and more importantly opportunity to provide bancassurance networks. The Reserve Bank of India (RBI) has been encouraging banks to mitigate their risk from insurance investments through divestment for a while now. In light of the uncertainties posed by COVID 19 and the increased regulatory pressure, there may be banks interested in offloading their insurance shareholding.

Private equity funds and financial investors invested in both insurance and digital distribution platforms/ e-commerce companies may be able to identify synergies amongst investee companies and facilitate collaborations that benefit players from both these sectors.

The icing on the cake is the regulatory environment. The Insurance Regulatory and Development Authority of India (IRDAI) has been proactively addressing the need for development of Insurtech in India. The IRDAI has issued an enabling framework for sandboxes, guidelines on various aspects (such as cyber security, registration as an insurance self-network platform, electronic issuance of policies), that promote reliance on technology by insurers.

Insurance regulations encourage insurers to be self-reliant and to limit outsourcing of key functions. Any Insurance-digital distribution JV would need to be based on a finely crafted twill of roles and responsibilities of each partner. Before permitting entry in the insurance sector (through acquisition of shares of an insurer), the regulator requires parties to commit capital – the ability and appetite to provide sustained capital will be crucial in identifying suitable digital partners. Promoters / investors of e-commerce giants may find it easier to commit capital rather than operating entities.

The recent liberalization of the insurance sector enabling foreign investment of up to 74% (pending notification) opens several doors of opportunity for both strategic investors and financial investors interested in the insurance space. However, given that most Indian tech-unicorns are funded by non-resident investors, direct and indirect foreign shareholding will need to be taken into account while identifying suitable partners for an Insurance-digital distribution JV.

Any cross-sector collaboration requires careful analysis of various factors and market forces. Insurtech M&A would also need to navigate through the complexities and challenges that innovations often pose.

This article was originally published in The Times of India on 28 July 2021 Written by: Roopal Kulsrestha, Partner. Click here for original article

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