The Evolution of Insurtechs
While some startups are content to follow the agent or MGA model, others are converting to carriers in an effort to gain more control of their businesses.
- Kate Smith
- January 2020
TO BE OR NOT TO BE: (From left to right.) Author Rob Galbraith, Deputy CEO of P&C Partners at Scor Adrian Jones and Kin CEO Sean Harper discuss the pros and cons of insurtech MGAs converting to carriers with AMBestTV.
The Insurtech Special Section is sponsored by Cambridge Mobile Telematics. Click on the microphone icon to listen to the Cambridge Mobile Telematics podcast or go to www.ambest.com/ambradio.
When Dan Preston took over as CEO of Metromile in 2014, he felt like the company didn't fully own its product. And he was right.
Metromile, which offers pay-per-mile auto insurance, was founded as a digital insurance agent. And while it provided the foundational technology for its product and controlled the onboarding and servicing of its customers, that control ended once a claim occurred.
“Customers would try Metromile and have this very digital, seamless experience,” Preston recalled. “They could change their policy really easily. They would avoid parking tickets through our street sweeping feature, and all of the things that come with our app. Then they'd have a claim, and it was a very traditional experience. It was very manual. Customers didn't feel like it was a really cohesive experience.
“So it felt like we were a company selling a product that was really somebody else's underneath. And in some ways, it was.”
That realization was a key driver in Metromile's conversion to a carrier in 2016.
“We went through the process of ultimately becoming a carrier, largely because we want to control the full customer experience,” Preston said. “We got to both a level of scale and a level of sophistication with our technology where we really wanted to focus on that claims experience, which was the last piece of the puzzle for us. Becoming the carrier was about enabling our long-term strategy.”
Metromile is not alone in its evolution from agent/managing general agent to risk-bearing entity. As insurtechs mature and grow, experts say a conversion trend is on the horizon.
“I believe that the vast majority of standard, lower-margin, personal line businesses will eventually become carriers,” Adrian Jones, deputy CEO of P&C Partners for Scor, said. “I think if you are writing a specialty, niche business that is higher margin, it is much easier to continue on as an MGA.”
Several other insurtechs, including Kin and Next, have already made the switch. Next launched in 2016 as a digital agency for small and medium business insurance and became a licensed carrier in 2018. Kin, meanwhile, debuted in 2017 as a managing general agent for homeowners insurance and last year received a license to operate as an insurance carrier in Florida.
“We still do business as an MGA; that has been our business model historically,” Kin CEO Sean Harper said. “We did recently start in our first state, in Florida, as an insurance carrier. We're really excited about it because it gives us a lot more control and it allows us to move faster.”
Rob Galbraith, an insurtech speaker and author of the book The End of Insurance As We Know It, said other insurtech MGAs are likely to follow suit.
“This is a trend,” said Galbraith, who is also AF Group's director of innovation. “Several of the MGAs I've talked to have indicated that this is something they're thinking about doing as a next step.”
If you control your own balance sheet, you can be
much more innovative.
Startups have many reasons for moving away from the MGA model. As a carrier, they can make decisions faster, avoid profit-killing fronting fees and eliminate the risk of fronting contract cancellations.
But more than anything, being a carrier gives startups greater control over the customer experience, the product, the decision-making and, ultimately, their own destiny.
“Most MGA agreements are pretty one-sided with the paper,” Kin's Harper said. “It makes sense that they would be because [carriers] have a lot to lose. If you're letting me do stuff with your license and you become uncomfortable with it, for whatever reason, you should be able to shut me off, change the deal, or whatever.
“But that puts us, as a company that's investing not only our lives and labor but also tens of millions of dollars, in a really uncomfortable situation because now we don't control our own destiny. I know that this was an issue that our board would talk about in every board meeting because it was such an existential risk to the business. Being able to have our own capital and put that to work, it makes it so much more stable.”
Metromile, which launched in 2011, had always thought about eventually becoming a carrier. But first it needed to prove its product and show investors there was market demand for per-mile insurance.
“We had to prove out that product, build the initial technology and launch it,” Preston said. “We didn't have the capital or the operations at that time to make the full-stack carrier work.
“But it was always something we thought about from the beginning. I wouldn't say it was something we anticipated doing as quickly as we did.”
The transition point came after receiving more and more customer feedback about the claims experience.
“As we went deeper and deeper, we found that we had a strategic reason to manage that whole claims experience, because we could offer something vastly different,” Preston said. “Because we're a telematics-based company, we can create this fully automated, seamless experience, where the vast majority of our claims and our customers filing claims can have a one-click experience and instant approval.
“That kind of claims experience is something we can only enable by owning the full experience ourselves. As we identified that as one of the core parts of our strategy, that's what inspired us to then go and buy the carrier and move all of that in-house.”
AF Group's Galbraith said that as insurtech MGAs grow, they often hit a tipping point where they have too many carrier partners to manage effectively.
“At some point, it may make sense to get rid of the middle man—that primary carrier that's providing the paper—and go make the conversion,” Galbraith said. “The MGA model is great starting out. But as some of these MGAs become more and more successful, there is a tipping point. Once you get to a certain size and scale, it becomes very difficult to continue as an MGA.”
There is no magic number on how big is too big, but Jones said margin levels and capital requirements also factor into the decision of whether to convert. And the math can be tricky.
“If you're operating in an industry that has a combined ratio, on average, of 98%, that's a 2% margin,” Jones said. “The cost of fronting is more than 2%, so you've killed any margin.
“So then you have to think: How much capital is going to be required in a carrier? That's not an easy question to answer, either, because it depends on what the states, the rating agencies, and others expect you to have. You often don't know the answer to that question until you've gone through the process.”
As an insurtech, especially if you’re going toward full stack, you need to have thoughtful partners at every step.
There are other challenges to conversion—from operational hurdles like establishing departments in-house to regulatory considerations.
“We could probably list a hundred [challenges], small and big,” Preston said. “You have to set up the entire claims organization. You have to build the regulatory infrastructure in-house to make sure all of that works.”
Preston said having good support makes things easier.
“As an insurtech, especially if you're going toward full stack, you need to have thoughtful partners at every step, and those partners will be different at every stage in the company,” he said. “Our investment around the time when we bought the carrier was led by a group called Intact Financial.
“They, as our series D lead investor, were pretty instrumental in helping us think about the strategy of buying the carrier and going through that process. It's not just about capital. It's about the thoughtful partners that will help you think about how to structure it right and how to make the company successful through that transition.”
For Kin, reinsurance partners play a huge role. Because its first license is in hurricane-prone Florida, Kin relies heavily on reinsurance.
“That's how we want it,” Harper said, noting that Kin plans to expand into other states. “We don't really see ourselves as a balance sheet company. We really wanted to control the license because it makes it easier for us to get reinsurance.”
As a carrier, Kin's interests are also more in sync with its reinsurers, which makes for a better relationship.
“Our interests are inherently aligned with our reinsurers,” Harper said. “A lot of decisions are fast because they trust us, because they know we have money on the line, too. We have incentive to not mess up. In the 100% reinsured, fronted model, that's not true. You end up spending a lot of time making sure you're aligned.”
There's a mindset shift that needs to occur before an MGA becomes a carrier.
“Some of these MGAs have not necessarily been producing the stable, profitable results that would be necessary in order to be really effective as a carrier,” Jones said. “I think that means that companies have to think very carefully. It means more discussions about: How much do I push on growth versus profitability? I think we are increasingly seeing MGAs who are looking to convert into carriers who are much more focused on profitability than they were at this time last year.”
Metromile's Preston said adjusting to the profitability mindset hasn't been particularly difficult, largely because profitability was a focus even before the company converted.
“You bear more responsibility as a carrier, for sure,” he said. “However, even as an MGA, when you're working on behalf of another insurance company, the economics ultimately impact everyone.”
Now that they're on the other side of conversion, both Preston and Harper say being a carrier has enabled greater innovation.
“It's faster to iterate as a carrier because we can see—in our own operation and our own experience—what works and what doesn't,” Preston said.
“If you control your own balance sheet,” Harper added, “you can be much more innovative. That's something venture capitalists also care deeply about.”
The tradeoff is increased oversight.
“You trade one devil for the other,” Jones said. “You have to maintain a rating for that carrier. You have to maintain capitalization. As you grow, your capitalization needs to increase faster than money falls to the bottom line, particularly if you're doing direct distribution and putting a lot of money in at the very start. That said, at some point it makes sense to do what companies like Kin have done.”
The regulatory aspect was easier than Kin expected, according to Harper.
“Here's the thing about regulation: If you're an MGA, you still have to deal with the fact that there are rules,” Harper said. “You still have to follow all the rules. You might need to ask the regulator to do something, but you're doing it through a middle man.
“Actually, it seems much more attractive to us to be able to deal directly with the regulator and explain why what we're doing makes sense, without having somebody else involved. I don't see that as a drawback at all.”