We’ve reviewed hundreds of insurance tech businesses since starting Magma Partners in 2014 and have made it a core part of our investment thesis since we started, investing in five companies including Jooycar and ARCA.
Latin America insurance is underdeveloped, with Mexico investing 2.2% of GDP in insurance premiums vs. 11.3% in the US and 8% across the OECD. Chile is the outlier in Latin America with 4.6%, still 40% less than the US, while Mexico comes in at 80% less. Region wide, insurance has grown from 2.3% of GDP in 2008 to 2.9% since 2019.
- USA 11.3%
- OECD Average 8%
- Chile 4.6%
- Brazil 3.1%
- Colombia 2.8%
- Argentina 2.7%
- Mexico 2.2%
Our macro InsurTech thesis is that as Latin America continues to develop, investment in insurance will catch up to more developed countries. Even if countries like Mexico, Colombia, and Brazil only catch up to Chile, there are massive opportunities in the Latin American insurance market.
Some of the disparity can be explained by differences in health insurance by country, as some countries have more private health insurance needs than others. Some of the disparity is likely because many Latin Americans don’t have the resources to buy insurance products, as they’re focused on basic needs, or don’t understand the benefits of insurance.
Another issue is that mandatory insurance policy enforcement in some countries is uneven. For example, Mexico does not require proof of insurance at its biannual vehicle inspection or for registering change of ownership or license plates. Most police officers do not request proof of insurance at traffic stops.
Latin American insurance technology (InsurTech) companies can help Latin America sustainably grow by increasing insurance coverage by:
- Improving digital distribution of traditional products
- Adding new, innovative products that better serve Latin Americans, especially those in the bottom 50% by income
- Educating Latin Americans about why insurance is important
We always look at team first when evaluating startups, but in InsurTech, it’s Team, Team, Team, and Team. Teams that understand insurance well before getting into business will likely have an advantage. Insurance is an extremely technical and regulated industry, so we want to see a team with an unfair advantage, ideally having at least one key team member coming from some insurance background.
InsurTechs have many different business models. Some business models are much more valuable than others, and some models require more compliance and regulation than others. We evaluate where an insurtech is today, and how far along this hierarchy it can advance.
Currently InsurTechs are less than 1% of the whole insurance ecosystem (carriers, brokers, agencies, and agents) but they are the fastest growers in the market, out pacing performances between 5% to 15% of traditional industries where InsurTechs are achieving high double and triple, in some cases, digits in a year to year basis. This outlook shows a lot of room to grow and disrupt the market with new and innovative ideas.
At Magma, we like to think of eight different types of InsurTech companies that founders could build, six of which are insurance policy-related and one related to measuring risk more efficiently, and one that helps insurance companies with claims, loss control, and fraud prevention. All can be great businesses, but we focus on the ones we think will generate the largest VC returns while solving Latin American problems.
Measuring Risk More Efficiently: Fraud detection, Risk Engines, Data Models
InsurTechs can create new algorithms and use new data sources to help lower losses and prevent fraud, and pay out claims without the need for insurance adjusters. These insurtechs are very hard to build, but will be part of the insurance industry’s future.
InsurTechs have an opportunity to better use data for making quicker and better underwriting decisions. The best insurtechs in the US and Asia are finding new and better ways to use data to make better underwriting decisions and also speed up the underwriting process. These models will be even more important in Latin America when introducing new products.
We love to invest in these types of businesses.
Turning Insurance into a platform
Insurance is an industry where people don’t see its value until something goes wrong and insurance companies have struggled to provide a strong end-to-end digital experience, especially, for younger consumers. InsurTechs that create value before they purchase and after purchase, but before the accident, can be very valuable, changing users from “buyers of an insurance product to users of an insurance platform,” according to Juan Manuel Gironella, ARCA’s cofounder.
These businesses are not very valuable as a stand alone product, but when paired with a high value business model in the following big six, they can be part of an extremely valuable business.
The Big 6: Insurance Policy Related InsurTechs
1. Lead Generation
InsurTechs that are lead generators for traditional companies are the least valuable businesses. These businesses are generally comparison engines or online forms where a potential client enters their information and traditional insurance companies have to close the lead, generally using their own call centers. These businesses have very little innovation, rely on inefficient insurance company infrastructure to close deals, and generally have very low commissions, and many times are one time fees, not recurring payments. They also historically pay to play, meaning that most of your investment will go to Facebook and Google, and a startup with a smaller budget may find it hard to compete. Magma will not invest at this stage unless a startup has a clear plan to go up the value chain and the team to do it.
2. Lead Generation: Closing Deals Online
The second level of InsurTech are companies that use comparison engines or online forms to gather client information, but are in charge of closing deals themselves. They may close deals over the phone, via email or take payments online, but still require offline signatures, but they do not rely fully on traditional insurance company infrastructure.
These businesses are almost like tech-enabled insurance agents and may earn 10-30% recurring revenue for as long as a customer remains a policyholder, but are not very efficient and the process isn’t likely to be scalable. Magma will not invest at this stage unless a startup has a clear plan to go up the value chain and the team to do it.
3. 100% Online Sales: Consumer or B2B, Digital Integration
The third level are companies that generate leads online and have digital connections to close deals 100% online. These companies may have comparison engines, online forms, or offer other interesting ways of getting distribution, or could have B2B models. The big difference is that these businesses have integrations, usually via APIs, to insurance companies to make buying insurance online 100% seamless.
These companies no longer rely on insurance company infrastructure to close deals, and generally make 10-30% recurring revenue for as long as a customer remains a policyholder. Although they generate similar commissions, these businesses are more profitable than the previous level because online integrations mean fewer costs like call centers.
Magma rarely invests in companies at this stage, but will do so if the technology integrations are deep enough, and the team has the potential to build higher up the value chain.
These first three models are all distribution plays, which can be very profitable, but are usually not that innovative, and face misaligned incentives with insurance companies when insurance companies realize that these startups are a glorified, more efficient sales force and they think they can copy the startup.
4. Creating a New Product or White Labeling an Existing Product
Insurance companies will write a policy for pretty much anything, if they think they can make money on it. A soccer player’s leg, Uber drivers only while they have a passenger, a singer’s voice, pretty much anything.
Latin America’s traditional insurance products are not solving many potential clients’ problems. The bottom 50-70% in income earners may not find products that meet their needs and are designed for the top 30%. Businesses and the top 30% lack or are priced out of specialty insurance products that are common in the US.
InsurTechs can create new products that may seem like niche products to traditional insurance companies, or that insurance companies are interested in, but don’t have a way to profitably distribute them.
Startups can also take an existing product, put their brand on it, and sell it in a different way. Both creating a new product, ideally exclusive to the startup, and white labeling an existing product under a startup’s brand provide a competitive advantage, and similar economics to the previous business model. Sometimes, they can be even more profitable.
Combined with a technology plan, and ideally an integration to the insurance company so that the startup does not have to rely on the insurance company’s infrastructure and the sales process is 100% seamless. Magma loves investing at this stage, especially in teams that have a vision to continue to build up the value chain. Finding new uses for insurance and new products that better fit the needs of Latin Americans is the sweet spot for building a big business in Latin America.
5. Starting to Take Risk, Backed by Reinsurance
None of the previous InsurTech models require significant regulatory compliance in most jurisdictions, other than potentially being certified as an insurance agent. This model generally requires regulatory compliance in most Latin American countries, but has less requirements than being a fully fledged insurance company. InsurTechs that are bringing insurance-like products to a new industry (outside of Life, Health, Auto, Home), can sometimes go to market without regulatory oversight.
These companies are very rare. They skip traditional insurance companies and make deals directly with reinsurance companies. Startups need more capital to pull off this model, but it is much more profitable than any of the previous models if the startup gets it right.
Magma likes to invest in startups at this stage, and believes that many of the most interesting insurance tech businesses in Latin America will go through this stage.
6. Building a New Insurance Company
To really compete with and win against traditional insurance companies, InsurTechs can get to this stage and start their own company, taking risks, complying with regulation and working with reinsurance companies to manage risk. There are very few InsurTechs in Latin America that have gotten to this stage, as it requires significant regulatory compliance, capital requirements and team experience. Some countries require $1M in capital, others up to $5M, and executives with domain experience just to get started.
We’re always on the lookout for ambitious founders whose endgame is starting the next boutique insurance company in Latin America.
Conclusion
The insurance industry is ripe for new startups to come into the market to help bring insurance to more Latin Americans. We expect to see new startups improving distribution and building new products that solve problems for people who are not buying insurance today.
We’re always excited to meet entrepreneurs trying to make people’s lives better by using insurance products in Latin America. If you’d like feedback on your business or are looking for investment, please reach out to the Magma Partners team, we’d love to hear from you.