Investing In LatAm Insuretech: A Venture Capitalist’s Perspective

Do you want to invest in insuretech in Latin America (LatAm)?

That was the question I and a few other venture capitalists were asked last week at the first Insuretech Connect LatAm. The panel’s responses ranged from cautious optimism to a systematic strategy of ongoing investment.

First, some context: insuretech (insurance technology) has scaled globally from a small fintech (financial technology) sideshow to its own massive sector. Globally, almost 30 unicorns have appeared in space in the US alone. The global insuretech market is expected to reach $170 billion during this decade. Latin America is poised to become an important player. According to a report by Digital Insurance LatAm, the LatAm ecosystem grew by +18% in 2022, reaching a record 464 insurance companies.

Still, the backdrop is not pretty. Insuretech’s public market performance has been miserable (eg Hippo is down >90% since their IPO and Lemonade is down >80%). This is within a broader retreat in the technology market and a tsunami-sized shift toward capital efficiency—a shift that has been particularly challenging for insurers-turned-de facto carriers with balance sheet needs.

So where do investor interests align? Coming out of this discussion and several meetings with ecosystem players in the space, five investor priorities emerged.

1. Competence is important

Fintech is, after all, “financial services” technology. The same applies to 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 technology. Foundation teams in InsurTech ideally have deep expertise in both insurance and technology … The talent pool of 30-year insurance veterans is not that deep in LatAm as in mature markets. The key is to find ways to bring together youth and experience.”

When insuretech entrepreneurs don’t have deep expertise directly, they can augment it with strategic senior hires – especially on the actuarial side.

One of the exciting developments happening in LatAm (and more generally in emerging ecosystems) is the emergence of entrepreneurial mafias – founders who spin off larger rapidly scaled players. Endeavor calls this the multiplier effect. In LatAm, companies such as Rappi, Nubank and Mercado Libre have created a number of new entrepreneurs across categories, including insuretech.

2. Capital efficiency is key

Gone are the days of growth at any cost. Investors are looking for capital efficient growth. For insuretech, this means solid, replicable and sustainable unit economics. Loss rates must be handled carefully.

In short, camels are in, unicorns are out.

In 2021, many insuretechs started by becoming a carrier immediately. This worked when the capital was free. But in this new environment, investors are looking for more proven business models before switching to a carrier (there are of course exceptions to this when the type of insurance requires a carrier to even operate or build a new category). For most insuretechs, it is possible to show proof points of product launch, distribution and customer demand before becoming a carrier (eg using a broker or MGA structure).

3. Distribution is key

LatAm is a massive market, with a cumulative GPD of over $5t. Nevertheless, 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 a lack of enthusiasm from established operators to provide the service. Rather, it is the same challenge that has plagued financial inclusion globally: unitary economics. The cost of serving the bottom of the pyramid, and even the wider mass market, is high. Small policies are often uneconomical in relation to the costs of reaching and serving customers.

Consequently, the distribution is at the center.

Investors look for startups with unique advantages to reach customers. As Javier Sanchez of Mundi Ventures explained: “The insurance industry in emerging markets has huge untapped potential for innovative distribution models – companies that can successfully exploit these models will have a significant advantage in reaching underserved customers and driving growth.”

That’s one of the reasons why embedded insurance was such a hot topic in several conference panels. Built-in insurance provides the opportunity to scale distribution by leveraging an existing customer base. A source of inspiration here is the super apps that have come from Asia. WeSure, for example, within the WeChat ecosystem has over 55 million customers. Of course, this excludes all the other major players that leverage 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 exploit life insurance executives like Oscar and Alan in the US. Azos, a life insurance company, does the same in its category.

This learning is of course not unidirectional. Increasingly, the best ideas come from anywhere and scale 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 current – it is the status quo. If startups can pull it off, they have the opportunity to create markets.

Incumbents also have an opportunity to grow their distribution exponentially in these important emerging markets.

Some new roads are being paved and demonstrate the possibility of partnerships between incumbents and startups to scale insurance solutions in Latam. This is especially powerful when startups have large customer bases. BNP Paribas Cardif, for example, collaborated with Banco Neon in Brazil and Chubb collaborated with Betterfly.

Ultimately, this is good news for consumers and businesses in the region. Insurance provides an important safety net for underbanks. Increasing investor interest and start-up activity has the potential to drive important impact.

Fortunately, from start-up activity, established interest and investor enthusiasm in the region, Latam insuretech is poised for some exciting developments in the coming years.

And further.

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