June 1, 2021 | By Matthias Weber.
Successful insurance carriers and MGAs are operated from both insurance and technology talent pools. The capital needs of even small insurance companies are extraordinarily high, and funding sources must be evaluated carefully.
In my past experience as Underwriting Officer for Swiss Re and as a current board member for Insurtech companies, I have engaged in countless discussions on the pros and cons of the Managing General Agent (MGA) vs the full-stack insurer model.
A startup MGA working with an established insurance carrier has fewer regulatory hurdles to pass than a new full-stack carrier. That’s how MGA startups create traction faster than insurance carrier startups.
Still, an MGA does not have control over the entire value chain. It depends on an insurance carrier who is comfortable with the MGA’s insurance products and underwriting philosophy. To escape this dependency, some entrepreneurs transition their MGA into a full-stack insurer after reaching a certain level of maturity.
Some of them transition organically after securing carrier licenses. Clearcover and Next Insurance did it that way. Others might acquire fully licensed insurance carriers, as did Metromile, Hippo, and Buckle.
Focus on key team skills & experience
I rarely encounter first-rate people with both deep insurance and strong technology expertise. Instead, I usually see successful insurance and MGA startups operated by a combination of:
- 1. Team members with a strong technology background who have developed a good understanding of insurance, and
- 2. Talent with highly specialized insurance expertise who embrace technology to address insurance related problems.
Co-founders typically come with a strong technology background (see Lemonade’s Executive Management Team). Ideally, they are complemented by board members who positively influence corporate governance and help establish a strong risk management culture across the organization.
Be aware of the nuances of financial growth
Besides profit and sales, I always remain aware of financial metrics unique to the insurance industry. One of them is the loss ratio, which is defined as the total amount of claims paid out to policyholders as a percentage of total premium earned over the same time period.
A successful Insurtech start-up or MGA tries to grow as quickly as possible to achieve economy of scale, subject to an acceptable overall loss ratio. I feel it’s not about choosing between growth vs. acceptable loss ratio; it’s about how to achieve both at the same time. The reason is simple: It’s easy to grow an insurance portfolio by lowering premiums. However, a premium pool that generates too high of a loss ratio leads to corrective portfolio pruning, and hence is not sticky at all.
After ensuring a feasible competitive advantage, the best approach I’ve seen to enter a market looks like this:
- 1. Split the market into segments by geography, line of business, or risk class.
- 2. Enter a small number of these segments at once and grow in each as quickly as possible – but subject to sustainable loss ratios – until economy of scale kicks in.
- 3. Move to the next few segments and start again.
You don’t need money. You need smart money.
While every company requires capital to buy assets and cultivate business operations, the needs of even small insurance companies in startup mode are extraordinarily high. The capital rounds of Clover Health serve as an example:
September 2015 Series A $100MM
December 2015 Series B $35MM
May 2016 Series C $160MM
May 2017 Series D $130MM
January 2019 Series E $500MM
Regulators mandate a sufficient amount of capital which is necessary to get an acceptable agency backed financial strength rating. Still, successful entrepreneurs will partner with investors who bring more than just cash to the table, such as those who master a smart eco-system play.
Any wise Insurtech founder vetting potential VC investors will take a close look at the fund’s current portfolio and/or associated networks. Are there any synergies that may provide an advantage? How proactive is the fund in promoting relationships within its network? How well versed are they in the insurance industry?
Guy Goldstein, CEO and Co-Founder of Next Insurance, sums it up nicely saying, “Investors can help with strategy, recruitment, and other operational matters. When raising capital for Next, I was therefore looking out for operational experience in the insurance industry, and relationships.”
Mighty Capital Partner, Matthias Weber is the former Group Chief Underwriting Officer of Swiss Re and current Board Member of Next Insurance US Company and CyberCube Analytics. With close to 30 years of activity in the insurance sector, his insight and guidance now help emerging brands and entrepreneurs to capitalize on new opportunities in Insurtech.