Will you invest in insuretech in Latin America?
That was the question I and a few other venture capitalists were posed last week at the inaugural Insuretech Connect LatAm. The answers on the panel ranged from cautious optimism to a systematic strategy of ongoing investment.
First some context: insurance technology, called insuretech, has scaled globally from a small sideshow in fintech to its own massive sector. Globally nearly 30 unicorns have emerged in the space in the US alone. The global insuretech market is expected to reach $170b in this decade. Latin America is poised to be an important player. According to a report by Digital Insurance LatAm, the LatAm ecosystem grew by +18% in 2022, reaching a record level of 464 insuretechs.
Yet, the backdrop is not pretty. Insuretech public market performance has been abysmal (e.g. Hippo is down >90% since their IPO and Lemonade is down >80%). This is within a broader pull back in the technology market and a tsunami-sized shift towards capital efficiency – a shift that has been particularly challenging for insuretechs who became actual carriers with balance sheet needs.
So where is investor interest netting out? Coming out of this discussion and several meetings with ecosystem players in the space, five investor priorities emerged.
1. Expertise Matters
Fintech is after all “financial services” technology. Same goes for insuretech. The domain comes first, and thus domain expertise is critical.
Adrian Jones, a partner with Hudson Structured, said: “The more difficult part of InsurTech is insurance, not tech. Founding teams in InsurTech ideally have deep expertise in both insurance and tech…The talent pool of 30-year insurance veterans isn’t as deep in LatAm as in mature markets. The key is to find ways to bring together youth and experience.”
When insuretech founders do not have deep expertise directly, they can amplify it with strategic senior hires – notably on the actuarial side.
One of the exciting developments happening in LatAm (and more broadly in emerging ecosystems) is the rise of entrepreneurial mafias – founders that are spinning out of larger rapidly scaled players. Endeavor calls this the multiplier effect. In Latin America, companies like Rappi, Nubank and Mercado Libre have spawned a number of new entrepreneurs across categories, including insuretech.
2. Capital Efficiency Is Key
Gone are the days of growth at all costs. Investors are looking for capital efficient growth. For insuretech, this means solid, replicable, and sustainable unit economics. Loss rates need to be managed assiduously.
In short, camels are in, unicorns are out.
In 2021, many insuretechs started by becoming a carrier immediately. This worked when capital was free. But in this new environment, investors are looking for more proven business models before transitioning to a carrier (there are of course exceptions to this when the insurance type requires a carrier to even operate or to build a new category). For most insuretechs, it is possible to show proof points on product launch, distribution and customer demand before becoming a carrier (using a broker or MGA structure for instance).
3. Distribution Is Key
LatAm is a massive market, with a cumulative GPD of over $5t. Yet, insurance penetration is de minimis, ranging from 3.9% in Chile to 1.8% in Ecuador.
The driver is neither a lack of customer demand nor lack of enthusiasm by incumbents to provide the service. Rather, it is the same challenge that has plagued financial inclusion globally: unit economics. The cost to serve the bottom of the pyramid, and even the broader mass market, is high. Small policies are often uneconomical relative to the cost of reaching and serving customers.
Accordingly, distribution is front and center.
Investors are looking for startups with unique advantages to reach customers. As Javier Sanchez of Mundi Ventures explained: “The insurance industry in emerging markets has vast untapped potential for innovative distribution models – companies that can successfully leverage these models will have a significant advantage in reaching underserved customers and driving growth.”
That’s one of the reasons embedded insurance was such a hot topic in multiple conference panels. Embedded insurance offers the possibility of scaling distribution by leveraging an existing customer base. A source of inspiration here are the superapps that have come from Asia. WeSure, for instance, within the WeChat ecosystem has over 55m customers. This of course excludes all the other major players leveraging the WeChat ecosystem for distribution.
4. Proven Models
Models that work in LatAm will not necessarily be invented from scratch. They will adapt and localize proven models elsewhere.
After all, the best ideas today come from anywhere and scale everywhere, via the innovation supply chain.
For example, Sami and Alice are leveraging life insurance leaders like Oscar and Alan in the U.S. Azos, a life insurer, is doing the same in his category.
This learning is of course not unidirectional. Increasingly, the best ideas are coming from anywhere and scaling everywhere.
5. Only Just The Beginning
We are only at the beginning. After all, insurance penetration in emerging ecosystems is very low.
The competition is not incumbents – it is the status quo. If startups are able to get it right, they have the opportunity to create markets.
Incumbents also have an opportunity to exponentially grow distribution in these important emerging markets.
Some new roads are being paved demonstrating the possibility of partnerships between incumbents and startups to scale insurance solutions in Latin America. This is particularly powerful when startups have large customer bases. BNP Paribas Cardif for instance partnered with Banco Neon in Brazil and Chubb partnered with Betterfly.
Ultimately, this is good news for consumers and businesses in the region. Insurance provides a key safety net for the underbanked. Growing investor interest and startup activity has the potential to drive important impact.
Thankfully, from startup activity, incumbent interest and investor enthusiasm in the region, Latin American insuretech is poised for some exciting developments in the years to come.
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