Commentary

PolicyBazaar IPO Comes Amid Move By Dominant Insurance Players To Delist All Their Products From Online Insurance Marketplace

Sourav Datta

Aug 04, 2021, 12:26 PM | Updated 12:26 PM IST


Policy Bazaar IPO
Policy Bazaar IPO
  • PolicyBazaar, among the oldest online insurance portals in India, has filed for an IPO (initial public offering) of Rs 6,017 crore.
  • Online portals like PolicyBazaar save customers the hassle of logging in into the digital channels of multiple insurance companies in order to find the cheapest policy. But the exclusive focus on prices has become a point of contention between online portals and heavyweight insurers like HDFC Ergo, LIC and ICICI Lombard.
  • The company faces several risks including heavily dependence on internet search traffic and insurance/lending partners, IRDAI regulatory moves and Intense competition from newly established web aggregators, traditional insurance agents, direct sales from online and offline channels etc.
  • PB Fintech Limited, the parent company of PolicyBazaar is the latest unicorn to file a Draft Red Herring Prospectus (DRHP) for an IPO(initial public offering). The company plans to raise money through a fresh issue of shares worth Rs 3750 crores and an offer-for-sale up to Rs 2267 crores.

    PB Fintech runs PolicyBazaar and PaisaBazaar, online portals that offer insurance products and credit products respectively.

    PolicyBazaar is among the oldest online insurance portals in India. It started off as a price-comparison platform but later pivoted into an online insurance broker – a trend observed in insurance web-aggregators worldwide. However, for all online portals that sell insurance, price comparison and the ease of buying a policy remains their central unique selling proposition.

    Online portals save customers the hassle of logging in into the digital channels of multiple insurance companies in order to find the cheapest policy. But the exclusive focus on prices has become a point of contention between online portals and heavyweight insurers like HDFC Ergo, LIC and ICICI Lombard. HDFC Ergo recently announced that it will delist all its products from online portals like PolicyBazaar. ICICI Lombard and LIC have only a few products listed on third-party web aggregators.

    The insurance heavyweights believe that solely ranking policies on the basis of price does a disservice to the buyers because the rankings do not consider other factors like settlement ratios, sum assured, hospital network strength, financial strength etc. These companies hope to leverage their brand power and existing distribution networks to grow their sales, rather than letting smaller players under-price them. While the partial-listing or delisting might not hurt large insurers, it will certainly hurt PolicyBazaar as it is dependent on these insurers and their products. Moreover, PolicyBazaar’s highest sales come from motor insurance policies which are sold by general insurance firms. Motor insurance is mandated by law and is generally not a voluntarily-bought product.

    While revenues have increased at a healthy rate so far, it remains to be seen if PolicyBazaar can still continue producing the same volume of business if incumbents keep walking away from third-party online channels. In most markets, insurance players choose to cooperate and compete with web-aggregators rather than only competing with them.

    Policies sold through web aggregators are minuscule when compared to the overall insurance pie. For example, in the life insurance business of the private sector, web aggregators contributed to 0.54 per cent of new policies while the majority came from Banks (52.7 per cent) and Individual Agents (24.63 per cent). With this in mind, PolicyBazaar has begun establishing a physical presence and creating an on-ground sales force. It also plans to use a part of the IPO proceeds to further strengthen its branch network, moving away from the “digital” narrative.

    A study by McKinsey highlighted that in the European markets, the top web aggregators have two strong features – strong brands and customer loyalty. The data shared in the DRHP shows that PolicyBazaar has managed to create both. According to Frost & Sullivan, in Fiscal 2020, PolicyBazaar was India’s largest digital insurance marketplace with a 93.4 per cent market share based on the number of policies sold.

    Furthermore, in Fiscal 2020, 65.3 per cent of all digital insurance sales in India by volume was transacted through PolicyBazaar. The DRHP also says that 83 per cent of the premiums that PolicyBazaar earned for its insurer partners came from customer who had directly searched for PolicyBazaar’s website or direct online brand searches. Consumers who purchased health insurance through PolicyBazaar in Fiscal 2014 for the first time made repeated health insurance purchases worth 5.9 times the 2014 premium. The similar multiplier for motor insurance is 3.4 times. However, building brand power requires heavy investments in brand building exercises. Therefore, unlike other digital start-ups like Paytm or Zomato, that have cut marketing expenses to lower their burn rates, PolicyBazaar must continue investing in advertising and marketing.

    Other Services:

    PaisaBazaar is the credit platform of PB Fintech. Paisabazaar was India's largest consumer credit marketplace with a 51.4% market share based on disbursals in Fiscal 2020, as per Frost & Sullivan. However, the space remains quite competitive with multiple digital start-ups partnering with NBFCs and Banks and sourcing loans.

    PaisaBazaar also faced issues during the Covid crisis due to the lending constraints on its lending partners. During the last fiscal, PaisaBazaar laid off 2000 employees. PaisaBazaar has however regained its footing and loan disbursals are climbing back to pre-covid levels.

    PB Fintech generates revenues from online marketing and consulting services provided to Insurer and Lending Partners, and technology services provided to Insurer and Lending Partners. Despite a drastic fall in revenue from PaisaBazaar, revenues from Other Services grew by 9.5 per cent for fiscal 2020, implying a strong growth and contribution of PB Fintech.

    In the current scenario, it is unlikely that the cost structure would change drastically. A back-of-the-envelope calculation indicates that if the company manages to grow at a rate of fifteen per cent, it can become profitable within the next one or two years. However, with incumbent players delisting from third party platforms it remains to be seen whether PolicyBazaar can achieve this rate of growth. Further if its expansion plans change its cost structure drastically, the company will take longer to reach profitability. If it manages to maintain its rate of growth while maintaining costs at the current level, it is likely to be among the first listed start-ups to reach profitability or at least break-even.

    Risks

    The business continues facing several risks.

    • It is heavily dependent on internet search traffic, making it vulnerable to changes in ranking algorithms or changes in search engine policies. A Google search for “insurance” shows PolicyBazaar among the first five organic searches – a lower rank will affect the traffic and resultantly conversions.

    • The entire insurance sector is governed by the Insurance regulatory and Development Authority of India (IRDAI). Any adverse changes in regulations by IRDAI can prove detrimental for PolicyBazaar.

    • Intense competition from newly established web aggregators, traditional insurance agents, direct sales from online and offline channels etc.

    • Dependence on Insurance and Lending partners - HDFC Ergo has already decided to leave, with other incumbents having partial product listings on the platform. Banking partners have also abandoned start-ups in the past, however, its diverse lending partner base, does provide comfort to investors. If more partners decide to leave its platform, the company is likely to face financial problems in the future.

    Conclusion

    The price-based “bazaar” that PolicyBazaar and other web-aggregators strived to create has created the current problems for the sector. While the loss of a single incumbent might not make a big difference, the loss of multiple insurance partners would certainly cause problems for these aggregators. The launch of physical branches might help solve these issues for PolicyBazaar, while also allowing them to compete against individual agents.

    In terms of valuation, it is reported that the company expects a valuation of $3.5 billion, implying a price to sales ratio of thirty. Profitable web-aggregators in Europe’s private markets command valuations of around three time revenue. Time will tell whether these valuations are justified.

    Given the current IPO craze, investors might make listing gains, but long term investors can wait till the valuations are justified by revenues, growth or earnings.


    Get Swarajya in your inbox.


    Magazine


    image
    States