Fintech Deep Dive - Digit Insurance | Edition #37 - 19th Sept, 2021

Fintech Deep Dive is back! This time I discuss Digit Insurance' business model and financials. There's also details on RBI's regulatory sandbox.

Sep 19, 2021

Hi Insiders, Osborne here.

Welcome to the 37th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

Digit Insurance is an exciting non-life insurer in India launched only in 2017. This week I dive deep into its founder, business model, financials and future outlook. I'm very excited about the potential of Digit Insurance. After all, how many insurance companies publish a Transparency Report, much less, quote the Joker in it.

Since the Fintech Deep Dive on Digit went a little longer than expected, the other insights were trimmed down (besides there was not much of note that happened this week). There's coverage on RBI's regulatory sandbox too - if you're building in SMB lending, good time to apply to be a part of the sandbox.

Founders want to attract great talent and want to offer ESOP but there's no standardised way to design it. This leads to complications. Index Ventures created this very handy ESOP Plan designer. It's based on Index Venture's analysis of 1,600+ startups in US and EU but gives a decent ballpark for Indian companies too.

If you’re an early-stage fintech startup founder raising equity or debt, I may be able to help - reach out to connect@osborne.vc

🤔 One Big Thought

Fintech Deep Dive - Digit Insurance

Insurance, put plainly, is that "unsexy" industry that capitalises on fear. Because it's unsexy, few people are really interested in it and even fewer truly understand it. Further, building products that protect one's fear is actually doing a lot of good but is easy to missell, which is what happened in Indian insurance for a bit. India's insurance industry is fairly young - only in 1994 were private companies were allowed to participate. However, it wasn't until 2008 when government imposed insurance tariffs were lifted, that India's insurance industry really started to take off. (as mentioned in the 32nd Edition).

Given this, we have come a long way in insuring India in a very short time (easy to forget), but we're still scratching the surface. non-life insurance penetration (premium as a % of GDP) is only 0.9% (US - 9.0%, China - 1.9%) and non-life insurance density (premium per capita) is only $19 (US - $5,754, China - $214). There's clearly a lot of work to be done and that's where the opportunity lies.

This is where Digit Insurance (Go Digit General Insurance) comes in. Digit (previously Oben General Insurance) received its license to operate as a general insurer in 2017. Kamesh Goyal, founder and chairperson of Digit, is a legend among legends in the insurance industry. Few people understand insurance better than Kamesh in India or globally. As per this profile on Kamesh by Forbes, "The insurance veteran, with over 32 years in the industry [...] “I had spent 16 wonderful years with Allianz,” recalls Goyal, who joined the German insurer in November 1999 as general manager at the Allianz India Liaison office. From heading Bajaj Allianz General Insurance in India to moving to Singapore as regional chief executive officer of Allianz Asia Pacific to heading the group’s planning and controlling for the German insurer at Munich, Goyal had an impressive professional stint [...]". Under Kamesh, Bajaj Allianz was well known across the industry of having combined ratios below 100% - unheard of in the industry at the time. The opportunity that Kamesh was going after was so compelling that Prem Watsa's Fairfax sold off entire stake in ICICI Lombard between 2017 to 2019 to be able to invest in Digit. FYI: ICICI Lombard started as a JV between ICICI Bank and Fairfax in 2001. Obviously, Kamesh knows insurance but what I love more about him is his humility, rational thinking and his ability to reply to a text/email within minutes (how does he do that?!). FYI: Another absolute legend in financial services is one Mr. Sandeep Bakhshi - an ICICI group veteran who headed ICICI Lombard General Insurance, ICICI Prudential Life Insurance and now ICICI Bank. How many people you know of have that breadth of experience let alone have that humility?

Ok, ok, I know what you're thinking, today's post is not about Kamesh-fanboying. I'll focus, I promise.

Before we dive in, here are some useful definitions: Gross Premiums Written: gross value of premiums collected (before reinsurance and others). Claims/Loss ratio (usually less than 70-75%, lower the better) - total value of claims paid out over gross/net premiums written. Combined Ratio (should be less than 100%, lower the better) - total value of claims paid out, marketing/commissions expenses and operating expenses over net premiums written.

This image has an empty alt attribute; its file name is image-1024x151.png

How large is the non-life (general) insurance market? 27 non-life insurers (21 private insurers) in India earned $26.85 bn in gross written premiums as of FY21,growing at a CAGR of 15.8% between 2008 to 2021. Motor insurance is mandatory as per regulations and so forms the largest piece of the general insurance pie accounting for 32.6% of total premiums (for FY21, until Nov, 2020). During the same period, Health insurance accounted for 28.9%, followed by fire insurance (11.2%) and Personal Accident (2.5%). If you've been following Fintech Inside for a bit you'd know that motor insurance is the oldest embedded insurance sold (bundled at purchase).

How is Digit any different from other insurers? Insurance is built on trust - trust/hope/belief that the insurer will honor claims. Digit's the new kid on the block, it did not have the brand/backing of a large bank. The average Joe didn't know Digit, Kamesh or Fairfax and so, it had to do things differently. Digit's entire offering is based on one thing - Simplicity. Digit was founded to "simplify insurance". Simplicity runs through its DNA from even before it started. When you invest in insurance through Digit, you get a 2-pager explaining the policy, what's covered what's not and everything you need to know in simple English. Two pages that's it! What's even more interesting is that these two pages are designed with feedback from 15 year olds! Not kidding - Digit's team actually brings a group of 15 year olds to their office and fine tunes this document to make it jargon-free. Talk about ELI15 (Explain Like I'm 15).

Jargon-free insurance is great, but then what? Digit doesn't stop at simplifying insurance by making it jargon-free. Ask any tech bro and they'll tell you that product-led growth is the holy grail for any business. Digit simplifies insurance through a product-led growth. The thing about insurance is that it's thought of as a commodity which makes pricing king - lower pricing gets adopted. But cheaper pricing is a race to the bottom. Digit's products have enhanced coverage (without the baggage of traditional insurance models and data) and is often better priced, making it a compelling investment. Digit goes a step further and doubles down on service-led growth as well. In its 7th transparency report, Digit reported "average approval time for healthcashless claims in March 2021 was 1 hour and 8 minutes and for reimbursement claims was 2 hours and 1 minute. Our overall Claim Closure Rate for health was 96%.". It settled 95+% of insurance claims across most products.

How is Digit faring financially? Pretty good actually. Within almost four short years since selling its first policy, Digit sold 17+mm policies and processed 374K claims. In FY21 (ended Mar-21), Digit earned about $ 441mm in gross premiums after selling 5.5+mm policies (majority in motor). The most fascinating thing is that Digit already accounts for 3.54% of the motor insurance market! That's huge! In the quarter ended Jun-21, Digit earned $106mm in gross premiums growing 51.5% YoY. During the same period, it reported a net claims ratio of 76.2% (Bajaj - 75.9%, ICICI Lombard - 91%) and a combined ratio of 107.9% (Bajaj - 103.4%, ICICI Lombard - 121%). Sure, Digit's combined ratio could be lower but it's not bad at all for a 4 year old insurer. Digit also reported profit after tax of ~$3.44mm for the quarter. In quarter ended Jun-21, 26.4% of Digit's premium was earned directly (customers signing up directly) decreasing from 39.0% in the quarter ended Jun-20. Comparatively, Bajaj earned 11.9% of premiums directly and ICICI Lombard was at 2.9% as on quarter ended Jun-21.

Kamesh was instrumental in attracting the right senior management from the industry and that has trickled down to attract some strong individuals to the team. LinkedIn shows Digit has ~1,000 people in the team. Apparently the marketing team was hired entirely outside the insurance industry. This probably gives it the leverage in simplifying insurance. What's more, in one of Digit's more recent fund raises, employees invested ~$6mm cash in the company! Incredible ownership and belief in the company.

What does the future look like for Digit? Within 4 years since launch, Digit is already a $3.5bn company. It raised a total of $442mm since 2017 till Jul-21. With Insurance FDI increased to 74% earlier this year, we will most likely see more investment from global companies in India and in Digit as well. As with most fintech startups, valuation will need to catch up - ICICI Lombard, the largest private sector non-life insurer is valued at $~10bn with $~504mm in gross premium written (ended Jun-21), whereas Digit reported $106.5mm in gross premiums written (ended Jun-21). Digit is also keen on reinsurance business - in 2018 acquired a ITI Reinsurance (the only other domestic reinsurer other than GIC) but then IRDAI (insurance regulator) cancelled its reinsurance license in 2019. Aside from that, Digit also has geographic expansion plans as soon as it becomes profitable. Will we see the first Indian insurer to expand globally?

If you've been following Fintech Inside for a bit, you'd know I don't do these deep dives very often - the only other deep dive I did was on CRED in Feb-21. It is still the most read edition so far. I'd appreciate your feedback to improve these. Which company would you like me to dive deep into next? Let me know via Email, Twitter or LinkedIn.

Disclaimer: This post is not intended to be investment advice nor insurance purchase advice and should not be construed as such. Digit is not a portfolio company (I wish it was).

Liked this post? It would mean a lot if you shared it with your colleagues and friends.

1-min Anonymous Feedback: Your feedback helps me improve this newsletter. Click UPVOTE 👍🏽 or DOWNVOTE 👎🏽

💼 Work at a Fintech

workatafintech.com: Search from ~180 open positions at 50+ fintech startups in India and South East Asia.

Fleek, a retail subscription payments startup, is hiring for 3 positions across HR, Tech and Engineering. Apply here.
Fello, a game based savings startup, is hiring 4 positions across Design and Engineering. Apply here.
Basis*, a wealth management and community for women, is hiring a product manager. Apply here.

Work at a Fintech is a community effort by EMVC. If you’re a Fintech who’s hiring I’d like to help. Write to me and I’ll put your requirement here. 2.5K+ people view these open positions.

3️⃣ Fintech Top Three

There wasn't any big news worth discussing this week so I covered just one top news. Have I missed out on something? Let me know.

1️⃣ RBI Regulatory Sandbox announcements

RBI (central bank) has been running its regulatory sandbox since 2020 and this week it announced three things:

1st Cohort - Retail Payments: Exit of six companies from the payments use case sandbox.
2nd Cohort - Cross Border Payments: Accepted six companies in the cross order payments "Test Phase"
3rd Cohort - SMB lending: Invited applications for its 3rd cohort for SMB lending.

Takeaways: What's the outcome of a product passing a regulatory sandbox? Products and use cases that get developed and pass RBI's test phase can be adopted by banks and other regulated entities. RBI has been smart enough to accept varied, edge use cases by each of the applicants. These use cases are innovative and regulated entities are usually skeptical to adopt them fearing regulatory scrutiny. It's another question altogether whether end customers will adopt it, but one step at a time.

In the first cohort - products like NFC/Bluetooth Low Energy offline payments, sound-based payments, voice-based payments and more were accepted. In the second cohort for cross border payments products like outward bank remittance through debit cards, cross border asset purchase (e.g. stocks), blockchain based cross border payments system and more are being proposed. The cross border payments use cases are very compelling and unique in their own ways. Two fintech startups i.e. CashFree and Open, are part of this cohort.

If you're building in SMB lending sector and have an edge case you'd like to test out, apply between 01st Oct, 21 to 14th Nov, 21. There could not be a better platform.

FYI: Razorpay became the first Indian payment platform to launch an Address Verification System (AVS) for cross border payments.

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.

🏷️ Notable Nuggets

👋🏾 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.

1-min Anonymous Feedback: Your feedback helps me improve this newsletter. Click UPVOTE 👍🏽 or DOWNVOTE 👎🏽

Found a broken link or incorrect information? Report it.

See you in the next edition.

Fintech Inside