After being in the insurance industry for several decades in a variety of roles, I frequently get asked which insurtechs I think are going to be successful. In sum, I believe the insurtechs best positioned for success are those that are unlocking entirely new markets, thinking past the standard producer model, adding additional revenue streams, and utilizing distribution channels that allow them to efficiently reach more customers. Here are some of the topics our panel discussion focused on at InsureTech Connect 2017.
Unlocking New Markets With Innovative Products
The insurance market is largely split into two segments. There is admitted coverage, which includes the vast majority of all personal lines insurance (e.g., homeowners, auto, and life), and then there is non-admitted or surplus lines coverage, which includes specialty risks (e.g., professional liability insurance).
An admitted insurance company is one that is “admitted” by a particular state to do business as an insurance company. To offer admitted coverage (e.g., personal lines), an insurance company must conform to the regulations of a particular state’s Department of Insurance. In addition to meeting minimum regulations for admission, admitted carriers must also file their rates with the state, and the state must approve. In contrast, a non-admitted insurance company is one that doesn’t operate under an individual state’s insurance laws. As a result, a non-admitted insurance company doesn’t enjoy the benefit of having its claims resolved in the event of a bankruptcy. However, non-admitted companies also have much more pricing flexibility, as they don’t have to submit their rates to the individual states for review.
No matter how many ways personal lines insurance is sold, sliced, or repackaged, it is so closely regulated with respect to coverage and price that it is basically impossible for an insurtech to do anything outside the strict rules and regulations that constrain the personal lines market. While I admire insurtechs that have decided to tackle the personal lines insurance market, I am keenly aware of the regulatory restraints those insurtechs face when it comes to product innovation and pricing. Regulators are particularly protective of individual consumers in the personal lines insurance market. Therefore, when it comes to innovation, regulators are instinctively cautious and often require lengthy investigations and studies—if the innovation will be approved at all.1 Those limitations, which exist no matter what form personal lines insurance takes, will always make larger profit margins more difficult to obtain because the regulators will have something to say about it.2 Also, product approval and speed to market will continue to challenge innovation in the personal lines insurance market.
In contrast, new insurance products that fall outside of the personal lines and admitted insurance market arena (i.e., non-admitted or surplus lines insurance) are significantly less regulated, allowing for greater creativity and having the potential to unlock entirely new markets and obtain wider profit margins. Unlike admitted insurance products, surplus lines insurance products have very little restraint, if any, on the coverages offered or their profit margins. Surplus lines insurance covers risks for which coverage is not available or that carriers in the standard market have declined to underwrite. Therefore, insurtechs in this market are arguably at a distinct advantage, as they are able to offer innovative products in a largely deregulated environment, which is often critical where a given business model conflicts with governing state regulation.
When looking across the growing insurtech landscape, there are a few companies that stand out as having the capability to unlock entirely new markets. Rather than entering into an overcrowded personal lines market, they are reaching an entirely new customer base with products where there is very little or no competition. For example, some of the more innovative emerging insurance products comes out of the explosion in demand for alternative energy. Companies like Energetic Insurance are developing entirely new insurance products to address the needs in the solar market. Likewise, there is a growing market for commercial and recreational purpose drones. Flying drones, however, present the risks of bodily injury, property damage, and invasion of privacy, among others. Companies such as Acend are creating entirely new insurance products to address these risks and, therefore, a new market for the purchase of drone insurance to serve the drone-flying community. These are just a few examples of companies having the flexibility to create entirely new products and gain the benefit of larger profit margins without the constraints of state regulation.
Generally speaking, there are primarily four business models to consider when starting an insurtech company:
1. Producer: A producer is an insurance intermediary whose primary responsibility is selling insurance. This is the most “user-friendly” option, allowing for those who are not as familiar with the insurance industry to gain experience and knowledge. Many insurtech companies will start out as a producer and may restructure the company as it grows and gains expertise.
2. Managing General Agent (MGA): An MGA is a more specialized producer that is specifically vested with underwriting authority from an insurer. There are varying levels of MGAs, with many performing additional tasks traditionally handled by the insurers themselves, such as binding coverage, appointing retail agents, and settling claims. By the nature of their responsibilities, MGAs typically have a greater level of expertise than traditional producers and are often subject to additional regulations. If an MGA model is chosen, there are a few things to keep in mind: (i) emphasize some unique selling point to differentiate from more well-established MGAs; (ii) ensure that agreements with carriers clearly set forth the scope of authority, rights to compensation, and other benefits, including customer information and renewals; (iii) consider whether the MGA will be best served by outsourcing certain “back office” tasks to a third-party provider; and (iv) remember that whether the long-term goal is to keep the MGA or to sell it, it is important to build brand value and brand loyalty.
3. Captive: A captive insurer is an insurer whose insureds are limited to those who own or participate in the captive, and as a result, allows the captive to assume more predictable risk. The regulations governing captives, though more robust than the regulations applicable to MGAs, are much less onerous than those governing traditional insurance companies. Accordingly, a captive insurer can provide coverage for certain risks that traditional insurers may be unwilling to cover. However, the captive, by its very nature, is limited in that its model will only insure certain policyholders and will not be open to the general market of policyholders.
4. Traditional Insurer: To establish a company as a traditional insurer, not only will the company need a substantial amount of insurance expertise, but it will be required to meet significant capital requirements. Additionally, there are complex rules and regulations that the company will need to be familiar with and adept at navigating—regulations which are largely avoided in the captive model. Another way to bypass many of the stringent regulations applicable to traditional insurers is to establish the business as a surplus lines insurer, as discussed above. However, even as a surplus lines insurer, significant capital requirements will continue to be required.
Each model offers its own benefits and its own risks. Understanding what kind of insurtech you want to build—the levels of expertise and the service it is capable of offering at the outset—is essential to determining which model will initially work best and provide the best opportunity for growth and success.
Think Big: Identifying Additional Revenue Streams
In addition to operating structure, there often are opportunities for an insurtech to increase profitability by leveraging revenue streams permitted under the insurance regulatory framework. Strategic considerations during the product development phase—such as application of commissions and fees—can have a significant positive impact on a business plan and return on the overall investment. Although most insurtech producers will base their revenue on the commissions that various regulators will allow them to keep, there may also be a number of additional fees for services that can be rolled into the premium charge as a potential source of maximizing revenue.
Whether products are selling in the admitted or non-admitted market, all states will regulate, in some fashion, fees that producers (e.g., brokers and agents) may charge on top of the actual premium. In some states, such as California, brokers are permitted to charge fees in excess of the filed rate, while agents are not. This regulation, however, appears to apply only to personal lines business. In comparison, New York permits all producers to charge fees and, generally, there is no limit to the amount of the service fee allowed to be charged. However, any such fee should be “reasonable” and must be based on a written agreement between the broker and the insured. Moreover, states that allow fees to be charged generally require that the same amount be charged to all insureds for the same services provided.
With that said, below is a list of potential services that a producer may consider charging for, so long as they are offered in a fair and nondiscriminatory manner:
- Risk assessment related services
- Insurance consulting services or other insurance-related advice
- Insurance-related regulatory and legislative updates
- 24-hour claims payment services
- Claims advocacy services
- One-stop shopping, convenience, and efficiency
- Technology fees
The above services may or may not fit an insurtech’s business model. However, when considering an operating structure and designing a product, an eye should be on what services may increase the product’s value while at the same time providing beneficial services to customers.
Innovative Distribution Channels
Historically, insurance was sold by carriers through brick and mortar agencies. You would walk in to your local agent’s store and buy your auto, home, and life policy. Insurtechs and entrepreneurs, however, are revolutionizing the way we purchase insurance by streamlining the sales process, seamlessly embedding it into our everyday activities. The result is that it is easier than ever for a consumer to buy insurance, without the need to visit a local agent.
A great example of this is in the real estate market. There are insurtechs, like LeaseLock, that are increasingly partnering up with management companies, and it is the management company that is suggesting—or in some cases requiring—that a policy be purchased. LeaseLock, through their innovative rental payment insurance product, is helping real estate management companies fill vacancies by eliminating the need for an extra security deposit and lease guarantor. The renters purchase insurance and sign the lease in the same fluid transaction. Another example is Sure. Company CEO Wayne Slavin announced a new rideshare product during the Insured Tech Connect 2017 conference that provides first of its kind comprehensive coverage for passengers riding in Ubers and Lyfts.
Interestingly, we are now working with several different manufacturers that are considering becoming licensed as insurance agents to sell insurance products complementary of the principal product sold by the company. These manufacturers are looking to leverage their relationship with an existing client base by adding an insurance product into the mix. The manufacturer, now a licensed producer, receives a commission—thereby tapping into a new revenue stream—and customers are satisfied by the efficiency of the one-stop shopping experience. The manufacturer is thus able to deepen the existing relationship.
There are a lot of ways to maximize profits. So before you launch your insurtech, think about the following questions: What kind of product do you want to sell? Will your profit margins be constrained by regulation? Is your business model right for the business you want to grow? Have you overlooked additional revenue streams? How can you best reach your potential customers efficiently and effectively? These are all questions you should be asking as you work to find ways to create value for your company, your investors, and your customers.
* Contributions to this article made by Mintz Levin attorneys Greg Hoffnagle, Jacque Burke and Danny Harary.
1 Consider a recent bulletin from the National Association of Insurance Commissioners (NAIC) regarding the use of “price optimization” tools by carriers in determining the premium to be charged to policyholders. The NAIC bulletin acknowledges that price optimization “is not a new concept” and “is a practice that has been used in many industries for years.” Nevertheless, the bulletin notes the following: “State insurance regulators around the country continue to actively monitor the issue. State insurance regulators are concerned that price optimization may be a departure from traditional cost-based ratemaking and toward ratemaking based in part on consumers’ price sensitivity. A number of states issued bulletins prohibiting or restricting the use of price optimization, or the concept of rating based on price elasticity, in personal lines ratemaking, while others states issued requests for information.” Price Optimization, National Association of Insurance Commissioners, http://www.naic.org/cipr_topics/topic_price_optimization.htm (last updated Sept. 14, 2017) (emphasis added).
2 “From a regulatory standpoint, departments of insurance are much more critical with personal lines rate filings. The majority of states require prior approval for rate filings and the required documentation can be significant. Depending on the number of objections related to a filing, the amount of time to get one approved can vary significantly.” Nicholas A. Merollo, Commercial vs. Personal Lines Pricing: What’s the Difference?, Future Fellows: Casualty Actuarial Society at 5 (June 2009), http://www.casact.org/newsletter/pdfUpload/ff/FF_2009_June_Single_pages.pdf.