Fintech Inside #32 - 8th Aug, 2021 | Microinsurance

Detailed coverage on microinsurance, e-RUPI, fintech IPO's in SEA and Accredit Investor concept in India. Also, 20+ fintech startups funded in Asia.

Aug 08, 2021

Hi Insiders, Osborne here.

Welcome to the 32nd edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

It's been one of the busier week's in fintech, despite an action packed year in fintech. This week I cover the promise of microinsurance in India. There's also details on e-RUPI's launch, SEA's fintech IPO frenzy and the introduction of the Accredited Investor concept in India.

In addition to the above, 10 fintech startups in India raised funding (including 2 new unicorns), 9 and raised funding in rest of Asia.

By now you would have read the news of Square acquiring Afterpay for $ 29bn but have you read Paytm Money's annual report?

Please enjoy all the details in today’s edition. If you feel Fintech Inside brings you value, please share it with your friends (and maybe suggest they subscribe too).

🤔 One Big Thought

The Promise of Microinsurance

India's insurance industry really started to take off in 1994 when private players were allowed to form insurance companies. Over the past three decades, the insurance industry matured to where it is today. However, we're still a low insurance buying country. A huge part of that is India's households simply do not have the buying power.

It's common knowledge that insurance in India is woefully under-penetrated. As of FY20, life insurance penetration was at 2.82% and non-life (general) insurance was at 0.94%. Lack of information and trust, misselling by agents, high price of insurance driven by complex product design, terrible user experience during purchase and claims, expense mindset among users vs. protection and several more are reasons why insurance is still a high-touch push product.

Enter microinsurance. Microinsurance is the breaking up of a comprehensive, complex insurance product into bite-sized protection coverage. Think buying a dental insurance product as opposed to a comprehensive health insurance coverage. Think buying a flight delay product as opposed to buying a comprehensive travel insurance. Think buying a TV insurance product as opposed to a comprehensive home insurance product.

These microinsurance products are intended for specific use cases but more importantly, they drastically reduce the cost of buying insurance. That's the huge benefit, aside from giving the user the power to protect themselves the way they deem fit. The other major benefit of microinsurance is being able to distribute it as an "attachment product" (pull) as opposed to buying insurance (push) standalone. For example, when you buy a smartphone, your smartphone "warranty" cost is bundled with the cost of the smartphone. The insurance is attached at point of sale and the cost is included. Users could pay less than a hundred rupees in 95% of the cases for that insurance coverage. The most famous microinsurance product was Acko's trip Insurance with Ola. The insurance product cost INR 1 ($0.014) on top of the ride cost and Acko was able to cover 23 mm rides in just 10 months!

Why hasn't microinsurance taken off yet? The thing about microinsurance though, it that Insurers think of it as a distraction. Motor insurance (mandatory in India) forms the largest product in their portfolio at 32.6% (as on FY21), followed by health (28.9%) and fire (11.2%).

Secondly, microinsurance products are very low value, which means one needs to build incredible distribution capabilities. Insurer's have invested years of time and money in building an offline distribution capability largely for its motor and health products.

Thirdly, an insurer needs data. Data to design (what's covered), underwrite risk (what's the probability, frequency and size of claims arising) and price a microinsurance product. This data is tough to come by. For example, how do you price a dental insurance product? Technically, there's no institutional data around it.

Which startups are building microinsurance products? There are two types of startups working building in the microinsurance sector. 1 - those that create products, and 2 - those that are building the insurance API infrastructure for anyone to create their microinsurance products. On the product creation side, there's Acko (a non-life insurer carrier) and Toffee (co-creates products with its insurance partners). On the API infrastructure side there's Riskcovry and Assurekit. This is not an exhaustive list.

The big opportunity for microinsurance is to increase the number of insured in India by dramatically reducing the cost of insurance while making the population more familiar with insurance as a concept for protection. It's one of the reasons why IRDAI (insurance regulator) introduced the microinsurance regulation in 2005 and in Oct, 2020 proposed a framework to set up micro insurers with one fifth the minimum capital requirement of a regular insurer. However, the challenge for such a micro insurer is that the avg. ticket size is very low and micro insurance becomes a volume game that's yet to be solve for.

There's a lot more detail that I don't have space to cover here (600+ words already) for example regulation, risks around microinsurance, future, product types and more. Will leave that for another edition.

Until then, let me know what you think about this edition? If you're building in the insurance stack, I'd love to learn from your experience. Email me here.

FYI: Insurance Penetration is the ratio of the total, industry-wide premium underwritten to the GDP of the country. It indicates the development of a country's insurance market.

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💼 Work at a Fintech

workatafintech.com: Search from 150+ open positions at ~50 fintech startups in India and South East Asia.

Flip.id, an Indonesian payments company, is hiring several remote roles for tech and engineering. Apply here.
Strata, an Indian commercial real estate investment platform, is hiring a Senior Backend Developer. Apply here.
Finzy, a P2P lending company, is hiring an Application Developer. Apply here.
MyShubhLife, a digital lending and savings platform, is hiring a Product Manager. Apply here.

If you’re hiring for your fintech startup, I’d like to help. Write to me and I’ll put your requirement here.

3️⃣ Fintech Top Three

1️⃣ NPCI launched e-RUPI, a prepaid voucher system for direct benefits

e-RUPI is a cashless and contactless digital payments system, which will be delivered to mobile phones of beneficiaries in form of an SMS-string or a QR code. The users of this one-time payment mechanism will be able to redeem the voucher without a card, digital payments app or internet banking access, at the service provider. e-RUPI was developed by NPCI on top of the UPI platform, in collaboration with the Department of Financial Services, Ministry of Health & Family Welfare and National Health Authority.

How it works: "Any corporate or government agency will have to approach the partner banks, which are both private and public-sector lenders, with the details of specific persons and the purpose for which payments have to be made. The beneficiaries will be identified using their mobile number and a voucher allocated by a bank to the service provider in the name of a given person would only be delivered to that person".

Takeaways: Impressive vision and collaboration between government bodies. e-RUPI will essentially be like a prepaid gift-voucher that will be redeemable at specific accepting centers. It will also be person-specific and for one time use. This could go a long way in ensure there is little to no leakage of benefits transfer between source (e.g. government) to destination (beneficiary). For the moment, it seems the benefits are largely for government schemes.

The challenge though, is that e-RUPI is linked to an individuals phone number. Phone numbers are changed by people and sometimes those numbers are recycled. However, a person's "Account" is linked to that phone number. Receiving benefits after number changes can be a problem and could be availed by the wrong beneficiary. Another thing that could happen is that brokers or middle men could give their own phone numbers to avail these benefits. A few years ago, this practice was common even in insurance distribution, so that the insurer doesn't get the customer details and the insurer cannot contact the customer directly resulting in the broker owning the relationship.

Lastly, will be interesting to see if the private sector uses this system for a digital, prepaid voucher system. Companies like Sodexo issuing food vouchers for use. Rewards and food voucher companies make their revenue through breakage i.e. rewards amounts that are not redeemed by users. But if the system is digital, trackable and easily accessible, users may use it all and reduce the breakage revenue for the rewards and voucher companies.

2️⃣ Fintech IPO's in South East Asia

Kredivo, Indonesia's largest buy now pay later (BNPL) company is going public via the SPAC route that could value the company at $ 2.5bn. Over in the South Korea, Kakao Bank, owned largely by Kakao Corp., witnessed a 79% rally on its stock market debut. It's market value surged to $ 29bn becoming the largest bank in South Korea by market value. KB Financial, the country's largest traditional financial group, is valued at $ 19bn.

Highlights on Kredivo: Finaccel-owned Kredivo, founded in 2015, is Indonesia's largest BNPL company and claims 4+mm customers in Indonesia. It offers two main types of products: zero-interest 30-day “buy now, pay later” financing for e-commerce and offline purchases, and three-, six- and 12-month installment loans. Kredivo has 50% BNPL wallet share among major Indonesian ecommerce firms. An average user transacts 25x per year with Kredivo! It represents 2.5% to 3% share of the GMV of the top ecommerce merchants in Indonesia. As of May, 2021, Kredivo had an annualised revenue run rate of $ 180mm growing 150% YoY. For a majority of its merchants, Kredivo helps them increase average basket size by 2X, transaction frequency by 3X, and cart conversion rate by 50%! Its loss ratio has been reducing from 10% in 2017 to 4% in 2020 and 3-3.5% in May, 2021.

Highlights on Kakao Bank: Kakao Corp. operates South Korea's largest chat app and through that built and owns Kakao Pay and Kakao Bank. Kakao Bank was launched in 2016, became profitable by 2019 and today has 13.5mm active users (the largest financial user base in South Korea) - all without any physical branches. It's probably the only digital bank in the world to have $~25 bn in assets and $18bn in credit assets within 5 years! Kakao Bank's IPO was the fourth largest in South Korea at $2.2bn and was the most oversubscribed one with institutional demand reaching $2.2tn! The total IPO was oversubscribed 1,700 times! Kakao Corp. is also expected to take its payment arm, Kakao Pay, public.

If you're interested, definitely check out Kakao Corp.'s investor presentation from Feb, 2021. It's sort of like the Alibaba of South Korea.

3️⃣ SEBI introduced the concept of Accredited Investors in India

SEBI, India's securities regulator, introduced the concept of Accredited Investors (AI) for Indian securities market. SEBI proposed the framework in Feb, 2021, released its draft framework in June, 2021 and now has made references to the concept in its latest Board Meeting release. An AI will be identified on the basis of their net worth or income and will receive the certification from depositories or stock exchanges. AI generally have access to a wider range of investment products than non-AI, and at the same time require less regulatory protection. This concept is common in US and Singapore among other countries.

Who can qualify as an AI? An individual, HUF, family trust or sole proprietorship, can be an AI if their:

Annual income is at least INR 2cr ($0.27mm), or
Net worth is at least INR 7.50cr ($1mm), with at least half of it in financial assets, or
Combination of annual income of INR 1cr ($0.14mm) and net worth of INR 5cr ($0.68mm), with at least half in financial assets.

Takeaways: Oddly, every news article I've read regarding this introduction seems to be from the same wire feed (PTI) and there's no real notification (that I could find) from SEBI, other than a mention in its latest Board Meeting. Make what you wish of that.

However, this is an important development for the "wealth-tech" sector and for angel investing in India. We can expect AI requirements to become part of the KYC process when signing up on various investment platforms. The rules of AI seem to be limited to Alternate Investment Funds (AIF) and Portfolio Management Services (PMS). It's also not clear whether this will be an "opt-in" or automatic process where the depository or stock exchange will issue it.

I'm still learning how this affects platforms like Grip, Strata and WintWealth that are creating their own fixed income wealth products. They are not using an AIF or NBFC structure just yet, but they'll have to as they scale. AI will have significant implications on Angel investing platforms and micro-VC Funds. Most of the platforms have loosely adhered to the AI guidelines in the past and were largely self-regulated. Currently, there is no mandate that only an AI can invest in AIF/PMS' but it can be expected to happen. If and when that happens, we can expect the number of "angel investors" reducing drastically. Will update you on this as I learn more about its impact.

🌏 International

Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition. You can also find our US, Global and European coverage.

👋🏾 That's all Folks

If you’ve made it this far - thanks! As always, you can always reach me at connect@osborne.vc. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.

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Fintech Inside