Insurance is a notoriously difficult market to enter as a full-stack carrier. This is why many startups choose to go the managing general agent (MGA) route, at least initially. Entering the insurance world as an MGA allows startups to apply their technical knowledge and focus on proving a business model, while leaving risk management and underwriting to the underwriting insurer or reinsurer, i.e., the insurance experts.
Many of these startup MGAs also have the benefit of looking and feeling like a carrier to the end user without having to hold any of the risk. Some startups, like Next Insurance, eventually raise enough capital to become full carriers.
Some startups, on the other hand, have entered the market as full carriers, positioning themselves as competitors to incumbents. These companies have focused their attention on the customer experience, whether through online distribution (like Lemonade and Hippo), niche products (like Buckle targeting gig economy workers), or usage-based/behavior-based coverage (like Metromile or Root).
The High Cost of Growth
Historically, insuretech startups entering the market as full insurers have focused on raising capital and selling as many policies as possible. This approach is partially due to the niche markets in which they often operate. It is also a factor of the Silicon Valley funding that tends to support these companies: The venture capital experts on Sand Hill Road are not necessarily insurance experts and pursue growth in the form of selling business.
However, longevity as an insurer is often dependent on underwriting profit, and therefore effective underwriting. Selling as many policies as possible can often be at odds with this goal, as it can result in adding policies with bad risk to a book of business.
Interestingly, an S&P Global Market Technology report indicates that insuretech startup carriers are beginning to follow in the footsteps of more established carriers by now focusing on profitability as opposed to pure growth. This is a notable development, especially given the poor performances and high losses of many insuretech carriers that went public.
The Move to Profitability
This shift may be based on a greater understanding of underwriting profitability and the insurance landscape. It may also be due to the fact that many of these insurers operated on losses, hoping to prove a business model. Having done so, they are now positioned to focus on profitability.
In the insurance industry, there are three ways to create value: sell more, cost less to operate, and/or manage risk better. Most startups can keep costs low by using their technical expertise to reduce expenses related to customer acquisition and operations. The instinct to sell as much as possible is a natural next step and is aligned with growth expectations from other industries.
In insurance, though, profitability is not dependent on unchecked sales; it’s dependent on intelligently selling to the right risk profiles and pools of policyholders. Expertise in managing risk better, i.e., underwriting profitability, is what sets insurers up for long-term success. Understandably, selling more based on risk selection is what makes insurance a uniquely difficult industry to break into. Yet more insurers are breaking ground in underwriting profit, signaling potential for longevity.
At its foundation, the insurance industry is based on a simple promise: the promise to be there with financial help when the policyholder needs it. The shift toward profitability is ultimately positive. Many startup carriers entered the industry with the hope of iterating on customer experience and gaining traction among a market segment of digitally savvy consumers.
But this front-end experience alone doesn’t necessarily equate to longevity or profit. The combination of underwriting knowledge and technical expertise is a powerful one that stands to have real impact on the industry long term, and it seems to be the way of the future for startups. To learn more about how startup carriers are operating in today’s environment, please read Aite-Novarica Group’s report Engaging with Startup Insurers or reach out to me at [email protected].