How to choose your insurance model

Mid-month update and special Kin kudos

Photo by Ulises Baga on Unsplash

Hi all - in honor of Kin’s recent announcement that it would go public for over a billion dollars, I figured I would re-share this piece. I originally brainstormed it with Sean Harper (Kin’s CEO) and published it in my Forbes column here. Kin was one of my early investments while at Omidyar Network when we invested in the seed round (see early thesis here). The purpose of this piece was to reflect on the optimal model for an insuretech business. Special kudos to Sean, Lucas and the full Kin team on their huge milestone!

---

Insurtech has become one of the fastest growing segments in fintech. McKinsey & Co. reported that over $10 billion has been invested in insurtech since 2012. Already there are over 2,500 insuretechs around the world, a number that will surely continue to climb.

While there’s no debate over whether insurance is ripe for disruption, there’s still uncertainty over which insurtech distribution model is the most innovative, profitable, and efficient. The core options include: broker, MGA, or carrier.

The answer, like most things, is that it depends.  

The faces of an insurtech

While lead generation plays a key role in distribution and some insurtechs operate solely as lead generation providers, we’ll focus on the three categories most insurtechs that sell insurance fall into: broker, MGA, or full-stack carrier.  

Brokers have re-seller relationships with multiple carrier partners and are licensed to sell their products. Gabi (auto & home insurance), CoverHound (business insurance), and Tomorrow (life insurance) are good examples of digital brokers.

MGAs – or managing general agents – are specialized brokers vested with underwriting authority from an insurer. They may perform key functions insurers would usually control, such as underwriting and pricing, binding coverage, appointing agents, or settling claims. Several insurtechs chose this model, including Corvus (Cyber Insurance), Hippo (home insurance) and Trōv (item by item insurance).

Carriers are full-blown insurance companies. They control all the risk selection, underwriting, profitability, and losses (unless they have a relationship with a reinsurer, in which case, the risk is divided). They are also responsible for licensing and ensuring they have sufficient regulatory capital. Next Insurance (business insurance), Lemonade and Kin Insurance (both home insurance), and Clearcover (auto insurance) have chosen this model.

Considerations for each

Each distribution model has advantages and disadvantages.

Brokers are generally the easiest model to set up. They require less capital and leverage more of their partners’ assets, like regulatory compliance. Because brokers can partner with many insurance companies, they have plenty of capacity for distribution and can offer price transparency for a range of options. And since they have a fixed commission, brokers take the least amount of risk. Of course, the downside is they have less control on the product, get smaller cuts of the profits, and have less underwriting freedom. If a carrier’s appetite changes, they must strategize quickly to still meet sales goals (though having relationships with multiple carriers can mitigate these challenges to some degree).

At the other end of the spectrum, carriers have the most freedom to innovate, customize, and adapt. Because carriers own the entire chain – and can utilize brokers and MGAs themselves – they have a lot of flexibility to develop and sell their own products. Yet nothing is free. Carriers are also responsible for losses, which can be incredibly costly if a widespread disaster strikes. They also face a greater licensing, regulatory, and capital burden. Reinsurance partnerships can help dilute risk to some extent, depending on the arrangement.

MGAs sit at the intersection of these distribution models – they have more underwriting discretion than a broker, but they also take on more risk because of their increased responsibilities. Ultimately, they are still beholden to the carrier, and a change in appetite can impact their entire business. Like brokers, MGAs often get paid commissions and may participate in underwriting profits or losses, depending on the risk or profit sharing agreement.

The right model depends on the solution

Depending on the startup’s situation and goals, different models make sense.

A broker model work better if you’re operating in an established product category with a relatively standardized product. Differentiation in this case comes from leveraging a new channel or customer engagement model (e.g. a better, cleaner, and more engaging UI/UX). Gabi, which resells auto and other types of insurance, is a great example. They have developed a UI that allows users to easily compare their existing policies with equivalent alternatives, and offer personalized solutions.

When you need to control the product development process, MGAs or carriers are the more likely solution. With unique data that gives you an underwriting advantage and where you want to sell a more specialized product, an MGA may be the path forward. It offers you a way to demonstrate your product and underwriting capabilities without having to come up with regulatory capital. That’s how Corvus Insurance got in the game selling cyber insurance. Similarly, they allow more product customization on a variety of factors to differentiate the offering.

Lastly, if you're reinventing the underwriting model or customer experience in a fundamental way, an MGA may not be possible. In that case, the carrier model may be appropriate. Another reason to become a carrier is if at scale your unit economics require you to vertically integrate to properly incentivize the value chain.

Kin Insurance offers a prescient example because they have explored a couple options. Kin started out as a broker and now is a Florida homeowners insurance carrier – a transition that was a year in the making. Though the startup still operates as a broker in other states, it became a reciprocal insurance carrier to better target a customer segment with high catastrophic risk and to control the customer and claims experience. “It’s a model that allows us to maximize efficiency; control cost; and find, analyze, and solve issues quickly,” says Sean Harper, CEO and co-founder of Kin. “Most MGA agreements are pretty one-sided, which makes sense because insurers have a lot to lose. But it puts the MGA in a precarious position – it can’t control its own destiny. That can be an existential risk to the business. Being able to have our own capital and putting it to work it makes the business much more stable.”

What the future holds for insurtech

The choice doesn’t need to be black or white.

This depends on access to talent in the local ecosystem. Insuretech brokers necessitate product design and digital acquisition strategy. MGAs require specialized, and often hard to find underwriting talent. Full-stacks must go further with strong (and expensive) experience spanning legal, regulatory, actuarial, and investments.

Many insuretechs will evolve over time. Becoming a broker can be a cost-effective way to get into the market and prove an ability to distribute. Many choose it as a starting point in existing product categories.

As startups prove customer acquisition and product roll-out, they can grow to become an MGA and take on underwriting and binding. In higher margin businesses, this may be the optimal strategy to scale. In other situations, some may choose it as a starting point depending on the distribution model and product category.

Once insuretechs have meaningful revenue and traction, becoming a carrier can be the natural next step to capture greater economics and continue to improve the product. Some have argued that for standard, lower margin personal lines insurtechs reciprocal structures like Kin are optimal.

Even within these existing models, new approaches are emerging. Boost Insurance, for instance, is an MGA in its own right and is piloting an API-based solution that allows insurtechs to structure a relationship, build a product, and get appointed through its platform.

No matter what the future holds for insurtechs, one thing is certain: there’s going to be more of them. What kind of innovation would you like to see?