Insurtechs across the globe raised $7.5billion last year, as the Covid pandemic accelerated the need for digital transformation in insurance. Data-enabled full-stack insurtechs now have the potential to transform the market and redefine the insurance landscape in Southeast Asia.
That’s according to Cole Sirucek, co-founder and CEO of patient intelligent company DocDoc and managing director of secondary investment firm Founders Equity Partners, who believes the Southeast Asian insurance industry is at a crossroads.
Here the entrepreneur, who has more than 20 years of experience founding, investing into and supporting entrepreneurial ventures, discusses insurtech opportunities and why Southeast Asia is the place where innovation is most likely to thrive.
Southeast Asia is one of the most exciting markets for insurance. Yet the rapidly emerging digitally savvy middle class has developed very different consumer expectations than what the traditional insurer provides. The question remains – ‘Who will capitalise on this enormous opportunity?’. Will it be the existing insurers or new entrants?
The insurance penetration rate – premiums as a percentage of gross domestic product – in 2019 for non-life business (health insurance is included under non-life business) was less than one per cent in Indonesia, Philippines and Vietnam and less than two per cent in Thailand, Singapore and Malaysia. When compared to the global average of 3.88 per cent, the low insurance penetration in Southeast Asia is a clear sign of growth potential.
Fueled by rising incomes, a huge middle class is emerging throughout Southeast Asia. By this time next year, another 50 million consumers will join the middle class in the region. This will bring Southeast Asia’s middle class to 350 million consumers, with $300billion in disposable income.
Moreover, the region has reached its digital inflexion point. The total number of people connected to the internet hit 400 million in 2020, with 70 per cent of Southeast Asia’s population now online. An underpenetrated insurance market combined with a digitally savvy and rapidly growing middle class make the region one of the world’s most attractive markets for insurance.
Health insurance, in particular, presents an extraordinary opportunity. Simply put, Southeast Asia is in desperate need of affordable healthcare financing solutions. Medical expenses are already the region’s single largest cause of personal bankruptcy. What’s more, the region leads the world in medical inflation. This year, medical expenses are expected to grow 10 times faster than the global average. The health protection gap in Southeast Asia represents over $226billion and is growing rapidly.
The insurtech opportunity
The opportunity and industry pain points are clear but the value propositions on offer are found lacking.
Millennials represent the most underinsured generation and are set to overtake baby boomers as the insurers’ biggest customer base, with Asia leading the way. Asia has six times more millennials than the United States and Europe combined. However, 69 per cent of millennials are fully disengaged or indifferent to their insurer.
As Bain & Company recently highlighted: “Insurers are falling short on providing value to customers of all ages, but the gap is most pronounced among digitally active millennials – people who expect instant, personalised service on their smartphones and tablets.”
Globally, investors have recognised similar unmet needs and have funded technology enabled insurers to the tune of $7.5billion in 2020 , with companies like Oscar Health, Devoted Health and Clover Health leading the way. In Southeast Asia, investment into insurance technology companies has thus far played a more limited role but is poised to accelerate in 2021.
Insurance technology companies, also known as insurtechs, usually fall under three categories: insurtech enablers, insurtech marketplaces, and full-stack insurtechs.
- Insurtech enablers partner with incumbent insurers to help them tackle the critical needs of policyholders. They are usually technology companies and often start out by targeting a specific portion of the insurance value chain. The most effective ones have a strong case for impacting the insurers’ bottom or top line.
- Insurtech marketplaces are at their essence e-commerce for insurance. These platforms act as aggregators which facilitate policy comparison and ease of purchase.
- Full-stack insurtechs are data-driven companies that use technology to underwrite and sell insurance while simultaneously delivering a fundamentally better customer experience.
When will insurers in Southeast Asia recognise the true cost of innovation theatre?
Partnerships between incumbents and insurtech enablers often start with significant public relations fanfare only to result in limited operational impact. There is plenty of blame to go around as to why this occurs. In short, the juxtaposition of legacy mindsets, legacy systems, and organisational inertia on the insurance side has led to systematic underinvestment in organic and partnership-driven innovation.
Innovation labs in the insurance industry are a perfect example of the practice of ‘innovation theatre’. Insurers set up innovation labs with the aim of identifying cool new projects. These labs are purposefully designed to mimic the vibe of a tech startup – ping pong tables, craft beer stocked refrigerators, co-working style spaces – all intended to scream one thing: ‘we do things differently than our parent company’. In reality, these labs have limited ability to contract with or impact the operations workflow of the parent company. Eventually, the public relations benefit of the labs run their course and they become defunct.
Research from The Economist further substantiates this observation. In a bold article titled The future of insurance is happening without insurance firms, The Economist points out that no insurer ranks among the world’s top 1,000 public companies by amount invested in R&D. In fact, insurers allocate an average of 3.6 per cent of their revenue to computing technology — about half the share that is typical for banks.
According to BCG’s innovation ranking, the insurance sector comes second to last globally.
It’s common practice to vastly underappreciate the cost of stagnation and/or failed innovative partnerships, accounting only for the actual out of pocket expense. In reality, the cost is far more profound for the incumbent insurers. The true cost of failure to innovate organically or through partnerships is best measured by the resulting impact which the next generation of disruptors will have on the incumbent’s existing business lines.
The future of insurtech in Southeast Asia
The Southeast Asian insurance industry is at a crossroads. On one hand, the market is set to grow rapidly. On the other, the benefits of that growth will only anew to the organisations that modernise their value propositions.
The longer the industry engages in innovation theatre, the higher the propensity for disruption. As Jeff Bezos famously said: “Your margin is my opportunity.”
Starting an insurance company is difficult you say? It requires large amounts of capital and presents significant regulatory requirements. Fair enough, but the reinsurance, private equity, and insurance brokerage industries all see the opportunity to enable innovation in the system. Moreover, there is now a clear track record of insurtech enablers in the US and Europe that have successfully migrated to become full-stack insurtechs, offering a blueprint for Asia.
Who will win will largely depend on the actions the incumbent insurers take in Southeast Asia over the next 24 months. If they embrace innovative partnerships with a portfolio approach and invest significant resources, they will begin to close the gaps in the market and their susceptibility to disruption.
If they do not and the glacial pace of innovation continues, many insurtech entrepreneurs will conclude as Elon Musk did in founding SpaceX and dealing with NASA: “It may literally be easier to just land Starship on the moon than try to convince NASA that we can.”
Many insurtech enablers in Southeast Asia are surprisingly well positioned to transform into full-stack insurtechs. They started out with a core area of focus and a deep understanding of the customers’ pain points. They are led by founders who are most often tech-savvy innovators, open to taking risks and learning from failures. Their teams are comprised of employees who are experienced in building and scaling digital products. Domain expertise in tandem with nimble operational structures and lack of legacy baggage provide them a fundamental competitive advantage over incumbents.
Powered by technology from end-to-end and built on first principle thinking, data-enabled full-stack insurtechs have the potential to transform the market and redefine the insurance landscape in Southeast Asia. In a 2017 report – Insurtech—the threat that inspires – McKinsey advised incumbents to keep their eyes out for new entrants that use technology to create a strategic advantage. The market share of incumbents is at stake, the report concluded. Fast forward to 2021, the threat is more evident than ever. And Southeast Asia may just be the place where full-stack insurtech led innovation most acutely materialises.