Insurance- a subject matter of solicitation?

Insurance is a subject matter of solicitation.

Whether or not one understand this disclaimer, it is an expression most would have heard endlessly relayed on television commercials. To break it down, insurance offers a financial cushion against a possibly rough future and the above disclaimer seeks to tell customers that irrespective of who sold it to them, the onus of buying an insurance policy lies entirely with them.  

Let’s Understand Insurance Market of India:

Insurance as a concept, is not a new thing in this world. It’s been in existence for centuries. The world is full of randomness. However, humans hate randomness and bad surprises and would prefer more of predictability. Insurance companies help level the risk across an entire population and reduce the number of surprises. This reduces life's randomness and enables us to be less stressed.

Let us take the case of an auto insurance that pays for the damages when you are in an accident.  Assume that one in1000 will get into an accident in a year. If you get into an accident you have to pay 100,000 rupees in damages and if you don't get into an accident you don't pay anything. You never know whether you will be that one who gets into an accident this year. There are a lot of random events that could happen. If you get into an accident, you won't have that 100,000 to pay. Everyone is worried that they could be that one. To reduce the risk, you start pooling your money with 999 other people and each of you decide to pay 100 rupees every year. The pool now has 1000 * 100 =100,000. Statistically, one of the 1000 will get into an accident and whoever gets into that accident will that pool money. You have now bought peace of money with 100 rupees. Now, your best case and worst case is losing 100 rupees. In other words, you can do your activities without worrying about random events. Since, it is not easy to form a pool of money with that large a number of people, specialized companies come into play. Insurance companies are just companies that pool the money and make sure the right people get the money. They have two primary jobs:

1.  To evaluate the risk (evaluating whether 1 in 1000 or 1 in 300 will get into an accident this year)

2.  Fraud detection- making sure that the guy who gets the pool money is really in an accident. 

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For doing these two activities, they get a profit. Instead of collecting 100 rupees from each person, they will collect 110 rupees.

Here is a brilliant explanation by Jago Investor:

Beginning of Acko Insurance:

Varun Dua Co-founder was already a known name in the Indian Start-up ecosystem when he decided that he was going to work on Acko. With the track record of building Cover fox, raising seed money wasn’t a big issue for him.  Thanks to this reputation, he along with co-founder Ruchi Deepak ended raising the largest Pre-Revenue Seed Round for an Indian start up (till date) from Accel and SAIF Partners and a bunch of marquee angel investors. In fact, they closed the seed before the team had even acquired a license to offer insurance. This alone speaks volumes about the cred Varun carries in the India.

Acko got licensed in October 2017 and went live with the first products in February 2018. The idea is to simplify insurance end to end with technology—from pricing a product based on individual risk profiles, to buying a policy, to claims.

Business Model of Acko:

The company operates in two segments:

1.    Automobile insurance(cars and two-wheelers) and

2.    Micro insurance, which includes rider insurance, mobile and appliance protection and ticket cancellations.

Some of the companies with which it has partnered for such products include ride-hailing platform Ola, Amazon, bus ticketing platform red Bus, food-tech start up Zomato and hyperlocal services provider Urban Clap.

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According to Sachin Seth, partner-digital, fintech and innovation leader, advisory service, EY India, India accounts for less than 1.5 percent of the world’s insurance premiums and about 2 percent of life insurance premiums, despite being the second-most populous nation. India’s $60billion insurance market is expected to quadruple over the next 10 years.

Acko Insurance plans to make general insurance (car, bike, Mobile, Appliances and health) transparent and simple for consumers and minimize their dependency on others for advice.

Here are few products offered by the companies ranging from Car Insurance to TV and Appliance repair cost:

Acko has adopted a different path when it comes to their business and strategies. As a divergence from the conventional method of selling insurance, Acko carries out all their procedures online.  This allows for direct selling over the internet and collaborating with other online businesses.

For example, their partnership with Amazon helped to create suiting items for their clients and better growth for the company. With the help of Acko, clients can purchase vehicle or bicycle protection on Amazon Pay with zero administrative work. 

Key Benefits from being Digital Insurance Provider:

1.    Attractive Prices due to lower operational cost.

2.    Automation of Claim Process.

3.    Improved customer experience.

Growth of Acko:

The number and scale of partnerships clearly show the speed at which the company have gone about executing its plans.

Some stats:

·   Acko underwrites ~20M micro-trip policies per month via its partnership with Ola Cabs.

·   The company is supporting Amazon in its insurance distribution foray via Amazon Pay. ( a super app?)

It is fair to interpret Gross Premiums as a top-line revenue metric i.e. since it began selling policies in November 2017, Acko has reached ~$4.4M in monthly revenue.

For FY19-20, Acko’s revenue was ~ $55.44M; which is very impressive for a company that has been trading for just under 2.5 years!

Digital Insurance Industry:

As the chart below shows, the new age digital insurance companies were able to leverage this significant growth in their product portfolio, and expansion through their channels (Including Digital and Traditional Retail) to grow their premiums by~4x in short period of 6 months from Oct’18 to Mar’19.

Final Thoughts

Personally, Acko is doing a fantastic job. At a lower-end of the valuation spectrum in the upcoming round, Acko would be valued at 7-9x trailing annual gross premiums (i.e. top-line revenue). Well getting to profitability is a concern as Insurance companies take average 5-7 years to reach a Net profit positive and it will be interesting to see the pace for Acko to achieve the same.

Hopefully you find this read to be informative and interesting. If it was, please do leave a comment down below and don’t forget to share it with everyone else!