InsurTech startups — What makes them interesting?
As a generalist VC, I often get asked about my thoughts around InsurTech — the trends and insights. I would like to share with you my base understanding and expectations of InsurTech. Taking it back to basics and revealing what really gets me excited.
As I emphasise in my contribution to The InsurTech Book, InsurTech is about solving the problems of the insurance industry and innovating for the future of the industry — it is a big universe. Global cumulative InsurTech venture capital funding surpassed $3 billion in 2018. Now let’s put these “problem solver” InsurTech companies into categories. In the first category, let’s consider only those who directly participants in the insurance industry by selling, providing or underwriting insurance products. I call them first-order InsurTechs. In the second category, let’s consider those who support incumbents or other providers in their insurance activity through their data, software, service or otherwise. Let’s label them second-order InsurTechs.
Other than the creation of strong brands in the non-life insurance sector, at the start innovation that really changed insurance was less about insurance as a product and more about giving insurance a space on the growing consumer internet in the early 2000s. Comparison websites made it simpler and easier to purchase insurance online. I would call this a wave of second-order InsurTech. Even at the beginning of what we now identify as the InsurTech movement, a lot of the first logos we saw were redefining the purchasing journey, creating a more user-friendly front-end and even dabbling with making it an app (irrespective of whether this is value-add to the customer or not). These are first-order InsurTechs as they directly impact the insurance purchasing journey. These were also predominantly lead generation agents for incumbents or they were digital brokers. If these were underwhelming, then what kind of first-order InsurTech is interesting? What business model gets the insurance industry, customers and indeed the venture capital universe excited?
My favourite first-order InsurTech business models are Managing General Agents (MGAs). An MGA is more than a traditional broker or agent because it has underwriting authority from an insurer. It can design an insurance product, underwrite, price, and also process and payout its own claims. It can also interact with third-party agents and brokers who may distribute on their behalf. The UK Managing General Agents’ Association (MGAA) says: “An MGA underwrites an insurance risk on behalf of a capacity provider (an insurance company or Lloyd’s syndicate) but is not a party to the resulting insurance contract.” The capacity provider and the MGA will form a contract that delegates authority from the capacity provider to the MGA which empowers the MGA to accept, bind and control insurance products. Their contract will define key business terms like product types and their parameters, duration of their agreement, and premium, commission and profit share agreements. They will also decide on the obligation to pay claims. This is the part where the perhaps an MGA wins over the capacity provider’s trust the most, by taking ownership of claims pay-outs and needing to reserve appropriately to do so — a comfort blanket when outsourcing the assessment of risk.
I believe that being able to form your own coverage, to shape your own product and have the necessary data and models to price is paramount to be a successful first-order InsurTech and therefore the MGA model is preferred. It immediately strikes as more defensible than a broker-model, because we can appreciate that there must be something proprietary there — either a risk model, data set or product type — to be able to price a product independently of the partner capacity provider, or insurance carrier. The “tech” side of InsurTech will likely enable this unique or proprietary model, data set or product type.
You might be asking why the capacity provider wouldn’t just do it themselves: Is an MGA defensible versus the incumbents? Why appoint or engage with an MGA? An MGA might have expertise beyond what the insurer can provide through more sophisticated data, analysis and models or a brand value or policy type. The MGA might even operate in a different geography. Either way on some form of cost-benefit it wouldn’t be efficient to set up the MGA’s product line in-house for the underlying insurer. An aspiring MGA ought to be sure that their business model or product line would not be something that the carrier would produce, underwrite and distribute independently.
When could it be appropriate not to be an MGA and therefore focus more on distribution rather than product? I’m not saying that the MGA is always the best answer for a first-order InsurTech or newcomer solution. There could be instances where it makes sense to be a broker more than it does to be an MGA (at least in the earlier stages). Where product penetration is low, there exists an opportunity to be a better broker, to market and distribute the product in a more targeted manner. Take for example commercial insurance products for SMEs. It may not be cost-efficient for large insurance incumbents to allocate resources towards direct selling to SMEs. The unit economics might not make sense. Equally, if product penetration is low, it could be due to the product not being relevant for the target audience, in which case going upstream sooner and being an MGA would be a sound opportunity to redefine the shape of the product or market.
Emerging markets also present a similar opportunity to the low product penetration example. Typically, emerging markets have low insurance penetration because of low awareness of insurance availability and the benefits of having an insurance product. Some might be priced out of the market. A broker model could help improve penetration by better accessing the customer base, much like the prior example of sales to SMEs. Insurance products might get bundled with more a ubiquitous product such as mobile phone tariffs and top-ups. A broker might be distributing microinsurance on behalf of a carrier if microinsurance is perceived to be more relevant to the market concerned. There may be an opportunity to become an MGA in an emerging market, it most likely comes down to the partner insurance provider. They would need to be authorised to be a carrier in the given market but not have the intent or infrastructure to go it alone and create a presence in this market. It might be non-core to their business strategy and they might not have knowledge of the market concerned.
In the other direction, why not take it further up the chain beyond being an MGA? Why not also have solvency capital and be “full stack” insurance carrier? Plus-points include fully owning the product and opportunity for wider product breadth. This would be subject to the confines of regulation, managing a more complex P&L and balance sheet and managing relationships with re-insurers and any intermediaries or brokers that might be distributing for you. Bottom line: it is a complicated place for an InsurTech to start, not impossible but perhaps the toughest starting path.
I’ve focused on first-order InsurTechs largely because they get talked about the most and most InsurTech questions that get directed to me are about them — they are often B2C and have more visibility than second-order InsurTechs. This does often result in perception of InsurTech being a narrow field of innovation. In fact, there exists a large universe of second-order InsurTechs that are making waves: these companies empower incumbents (and indeed first-order InsurTechs) — most B2B insurance software plays. There’s also perhaps a third-order InsurTech definition worth mentioning: those companies that can empower insurance companies, but their capabilities are not limited to insurance or financial services-I’m thinking about cybersecurity and digital health companies. If I had to pick what the ideal first-order InsurTech were to look like, I would opt for an MGA model nine times out of ten.
For broader reading on the InsurTech space, it’s now been one year since the release of The InsurTech Book and I’m proud to be a part of it. For further reading on MGAs I highly recommend this post by Matthew Grant and for more insights on the InsurTech scene in London, I’d point you in the direction of the InsTech London community.
 Microinsurance is a more affordable, low-frills insurance product aimed at a low-income target market