InsurTech in Latin America: A regional specialist's view

Latin America post-COVID-19 represents a unique opportunity to close the region's historical protection gap. The pandemic forced consumers and businesses in the region to acquire products and services digitally, accelerating the adoption of FinTech and e-commerce across the region. Per LAVCA (the association for private capital investment in Latin America), venture capital investment rose to $15.7 billion in 2021 — more than the region's start-ups raised from VC in the 10 years prior. Only a limited amount of that capital was raised by InsurTechs.

This is true despite the regional insurance market's progress towards digitalization since InsurTech became "a thing" back in 2016. Perhaps the most promising change in the regional insurance market since then has been the industry's increasing awareness that customer-centric business models are the key to closing the region's chronic protection gap. Unfortunately, achieving customer-centricity remains a challenge for both incumbents and InsurTech start-ups.

Historically, LATAM incumbents evaluating technological improvement opportunities using buy vs. build vs. partner frameworks have had limited buy and partner options coming from the region. As such they have traditionally opted for partner options using technology from outside the region or developed in-house solutions. And as regulated entities, they prioritize data safety over customer centricity.

Customers today expect both things. Data safety is table stakes, while frictionless digital experiences have become the norm across users' digital lives. To varying degrees, carriers in the region have invested in creating branded digital experiences for their customers. Despite their best efforts, however, legacy technology remains a key constraint to offering customers modern user experiences. This technological ballast limits their ability to do much more than roll out branded apps or glossy web applications with limited functionalities. This creates an ongoing opportunity for new entrants to fill the gap and engage with consumers in more delightful — and valuable — ways. Each country has unique competitive and regulatory characteristics, and while the highly fragmented nature of the region must be maneuvered with care, regulators throughout the region have not, for the most part, defined the rules of the road for InsurTechs. This represents a gray area that entrepreneurs can exploit to test new business models. But new entrants should know this opportunity does not exist in a vacuum. As in other regions, opportunities in the insurance space for start-ups or digital platforms will likely require collaboration with incumbents. The two primary reasons for this relate to capital and regulatory requirements. The cost of capitalizing an insurance company is prohibitive, especially for newcomers with no demonstrated historical performance in the insurance market. Likewise, obtaining regulatory approval or licenses to become an insurance company can take years. For this reason, InsurTechs will need to secure alliances or partnerships with carriers to get product to market.

Unfortunately, given the challenges that carriers throughout the region face to modernize their core and ‘APIfy’ their systems, start-ups that engage with carriers to deliver digital services in the region face a high degree of execution risk.

One way to mitigate the risk of engaging technologically with carriers is to stage-gate the digital process. For example, version 1.0 of a digital product launch might be via web application but without API integration with the carrier partner. Version 2.0 could be some form of limited integration, with incremental investment subsequently made to achieve full integration over time as the carrier partner demonstrates its integration and core system capabilities. Likewise, the  carrier will want to see the start-up in action commercially. The inherent drawback of this approach is that start-ups must deliver clients a digital experience while operating manually in the background.

There are additional risks. Some incumbents engage with startups simply to learn about new ways of doing business but do not have a true digital strategy in place. Others may feel compelled by market forces or their board to demonstrate that they are "active" in the digital partnership space, while having no authentic intention to partner with new players. Still others, however, have buy-in from management at the highest levels and engage with purpose and resources. Startups must be disciplined to distinguish the former from the latter, and act decisively when choosing to discard or partner with a carrier.

Having co-founded and led an InsurTech start-up in the region, I would like to share some learnings so future entrepreneurs in the space avoid some of the pitfalls that ultimately caused my start-up to fail.

1. Seek out insurance markets with a wide array of incumbents. Highly concentrated markets have few players with no incentive to change, and all the capital and time in the world to wait you out as an entrepreneur. You will run out of funding before you demonstrate the KPIs required to raise additional capital. Incumbents in competitive markets, on the other hand, must continually seek out new ways to reach customers and grow the pie.

2. Ensure you obtain a signed commitment and resources from carriers for your partnership. This is true for the implementation and production phases. This should look and feel like a Service Level Agreement (known as an SLA) between both parties. Importantly, responsibilities and penalties must go both ways. Pay close attention to securing dedicated resources to your ongoing project after you 'go live'. Carriers often focus resources exclusively on implementation and then expect the project to run itself once in production. Limited integration testing is always carried out prior to product launch. However, underlying issues related to data generated within carrier systems may only become evident once your project is in production.

It will be easy for you to commit and own your side of the deal as the partnership for you is critical for your business. But carriers have dozens of (sometimes competing) projects running in parallel. If you cannot hold your partner accountable, your project has a high risk of failure.

3. Innovate with product, not simply distribution. The original InsurTech innovators in the region were lead generators and digital brokers, and they fulfilled a market need to increase pricing transparency in the market. But to close the protection gap in Latin America, we must build solutions to real-world customer problems. Good distribution is key — and embedded distribution is the holy grail, but none of this matters without products and services that customers truly need.

Ultimately, the only way to reduce the protection gap in Latin America is to serve customers by offering the right product, at the right time and in the right way. This is what customer centricity is all about. This is an ongoing challenge for incumbents, although they are making some progress. Start-ups that want to achieve this state for their customers take note: ensure that your insurance partners can truly deliver on your minimum requirements to delight customers. If the answer is 'no', then move on until you find partners aligned with the future, and with you. 

Originally published in Gallagher Re Global Insurtech Report, Q1, 2022.