The insurance sector offers significant growth potential despite challenges like outdated underwriting, trust issues, and complex processes. Opportunities exist in areas such as vehicle underwriting, SMB insurance, and surety bonds, with innovation-driven startups poised to capitalise on these gaps.
Moneycontrol Opinion February 18, 2025 / 11:15 IST BY Mayank Jain
Problems with Medieval Vehicle-Only Underwriting
Motor insurance in India continues to rely heavily on vehicle-only underwriting, where premiums are based solely on the type of vehicle and city. This means that two vehicle owners with the same car in a given city are charged identical premiums, ignoring customer-specific factors like driving behaviour, vehicle usage, demographics, or CIBIL scores.
The reliance on vehicle-only underwriting stems from third-party distribution, where 95% of new car premiums are distributed by OEM brokers (dominating the 0-4-year car market) and individual agents (dominating the 4-8-year market). These third parties withhold personally identifiable information (PII) from insurance providers to avoid disintermediation during renewal, leaving insurers unable to customise premiums.
This has created a scenario where good customer cohorts – such as those with prime CIBIL scores (750+) or middle-aged (35-50 years) customers – end up subsidising high-risk segments. Despite attempts by existing players to address the issue, the complication persists. This creates a clear opportunity for another D2C insurer to emerge, provided they can develop an economically viable direct go-to-market (GTM) strategy.
Alarming Trust Deficit in SMB Insurance
Our conversations with SMB owners across industries and revenue scales revealed a glaring trust deficit in insurance. Businesses with revenues between ₹10-250 crore report severe pain points, particularly for non-health products like fire, marine, liability, and engineering insurance.
This segment views online insurance as a compliance-driven market, where the cheapest policies are purchased solely to meet counterparty or lender requirements. However, SMBs cite a clear unmet need for protection-focused policies. They struggle with unclear policy terms, complex documentation, and surprises at the time of claim, which often result in rejections or reduced payouts. In fact, many SMBs believe insurers lack the intent to honour claims and are designed to reject them.
We see this as a greenfield market, with opportunities for startups to take a full-stack approach – owning underwriting, distribution, and claims – while targeting specific industries or supply chains. For insurance-tech startups targeting SMBs, the key will be identifying specific market segments to target and crafting an economically viable GTM strategy.
Surety Bonds: Unlocking Capital for Infrastructure
In infrastructure and construction, businesses are required to provide guarantees during projects, traditionally through bank guarantees. Bank guarantees require collateral, often in the form of fixed deposits, which ties up valuable liquidity. With high capital costs, freeing this collateral could bring significant economic benefits to these sectors.
Surety bonds, which are an unsecured alternative to bank guarantees and are issued by insurers, help solve this problem. While the commission for surety bonds is higher, they free up working capital for businesses. Although widely adopted in the U.S., this market is nascent in India, with IRDAI introducing the framework only in 2022. Insurers are still exploring how to underwrite these products, and service providers and beneficiaries lack awareness.
Startups can play a key role in enabling adoption by educating the market and building underwriting capabilities. However, the market’s limited size and the complexity of the product mean it remains an emerging opportunity that calls for cautious optimism.
Thinking Ahead
Beyond these opportunities, the insurance sector also grapples with several other problem statements that present scope for innovation. In healthcare insurance, delays in cashless approvals are driven by mistrust between hospitals and insurers, aggravated by a lack of standardised medical coding, which leads to manual inefficiencies. In microinsurance, categories like crop and trip insurance are held back by manual claims processes – there is no automated or parametric claims system in place, even though it is feasible. In life insurance, mis-selling by agents – who prioritise commissions over customer needs – results in poor policies with low coverage and high churn, with over 50% of policies lapsing within five years.
Ultimately, at its core, the insurance industry is burdened by an outdated tech stack and resistance to change. Nevertheless, the sector offers massive opportunities for startups willing to tackle specific pain points. Success in this sector will depend on the founders’ ability to develop economically viable GTM strategies, build trust, and leverage technology to modernise underwriting, distribution, and claims processes.
(Mayank Jain, Principal, Stellaris Venture Partners.)
Views are personal, and do not represent the stand of this publication.
