Where Ideas Grow

There’s two primary impacts insurtech MGAs have. The first is they give primary carriers and reinsurers an avenue for R&D, so a way to test new business models like embedded or parametric, or a way to dabble in new lines of business where it doesn’t make sense to invest a ton of money because it’s less than 1% of their book. But if it works out with this hybrid experiment with the MGA, then it makes sense to really double down and expand. It’s almost like a little R&D lab.

The second…is a risk diversification opportunity. So, if your business primarily is on the commercial side of things and you want to test out financial lines, it might be a way to diversify into financial lines without having to restructure your entire book.

We started the MGA Lab three years ago. The idea behind it was we had been running a traditional accelerator in the past, which was focused on matchmaking between carriers and brokers and startups. Many of the success stories that came out of that were software companies—there were a couple MGAs—but one of the things that’s really important to us is to make sure that everyone’s having their needs met in the program and we’re providing the most value.

What we found is the program was great for software companies, but it wasn’t necessarily great for MGAs. Even if you look at any accelerator that exists out there—Y Combinator, Techstars, Gener8tor—they’re not designed to create insurance products. It’s a different animal than almost every other startup because you essentially have to get a balance sheet in place before you can get anything off the ground.

Because of that, there’s so many different disciplines that a founder needs to understand. They have to have expertise in underwriting. They have to have enough understanding of actuarial models that they could manage the process from end to end. They have to know how claims work and, more importantly than anything else, they have to have enough credibility that an insurer or reinsurer is willing to lend their balance sheet to a brand new company. All of those things for a new founder are extremely daunting. The whole purpose of the MGA Lab was to bridge that gap, whether it’s a knowledge gap, it’s a relationship gap, it’s a credibility gap, or it’s an infrastructure gap, to get all of those pieces in place to help the startup to be successful.

I would say the one that probably coming into the lab was one of the most advanced, but solving arguably one of the most difficult problems that we have today in homeowners, is a company called Green Shield Risk Solutions. They were acting as a wholesale broker and focused on high-value homes in wildfire-exposed areas. They went through the program and we helped them get all the pieces in place in order to get capacity and launch their product. They have a very strong team. The founder Pat [Blandford] used to be the CEO of Tokio Marine Highland. They had a wholesale brokerage, they had really strong underwriting expertise, but just like any other MGA, there’s a fair amount of infrastructure that they needed to get into place, and they needed to get capacity. They were able to work with us and refine their value proposition and ultimately go to market.

Another area that’s been rising in popularity recently is pet insurance. We had a company called Fursure join the lab. They had some insurance competence in the team, but ultimately there was a lot they had to learn about creating the right underwriting guidelines and an actuarial model, especially in pets. You make a mistake in pet and you have an over 100% loss ratio with some old dogs and cats very quickly, or some of the breeds that are just not the ideal mix that you want. We helped them to build expertise and knowledge, and they had incredible technology that actually helped an individual to essentially pay at the point of care, which is one of the challenges for millennials without a lot of savings but a lot of love for dogs and cats. They go and get the surgery, and they look at the bill and they’re like, “Oh, I didn’t realize you get reimbursed later.” So they were probably the first to solve that and that’s helped them have a differentiated product that they’ve launched into the market.

Another completely new product area that we’re really proud of is a company called Flora. They offer fertility benefits to women in their 20s and 30s with the idea that whether they are delaying having a family until later in life or they just want to make sure that they’re economically protected, they can pay a monthly fee and it provides them with a benefit if they do have challenges conceiving in the future.

The appeal of the MGA model for startups and investors is really two things. One, it’s a capital-light model, so compared to a carrier you don’t have to fund the balance sheets since you’re leveraging somebody else’s. And then it’s also a very efficient distribution model. So if you compare it to a VC who was going to invest in a software company, the biggest risk is their ability to find a sustainable, cost-effective way to identify customers and sell their software to people. But in an MGA, many times there’s already people or groups that have all of your customers. Like retail agents and brokers or wholesalers already have relationships with all your customers.

All you need to do is build a product that’s differentiated enough, solves the problem in the market in a unique enough way, and be good enough in managing relationships with retail agents and wholesalers to be able to make that work.

The capital provider advantage for MGAs is really two things. One, if you’re a carrier that doesn’t have a strong technology backbone, you can ultimately leapfrog all the limitations of your legacy systems, because the startup has all-new technology and they’re not tethered to whatever system was created for the carrier in the 1980s. You get access to all the capability and power of that technology, and all you have to do is give up your balance sheet. Depending on the line of business, you might end up getting better economics than the startup themselves. The other benefit is back to what I originally shared, which is R&D. It’s a good way to test out a new line or a market, whether it’s for diversification or ultimately it’s something that you want to own in scale and maybe you’ll buy the company later on.

There’s a little over 200 insurtech MGAs. We’re defining those as startups that have underwriting authority and were formed 10 years ago or less. We surveyed 50 of them, so a quarter of the market.

One of the biggest findings was just how involved the startups were with creating the new products. Back in the day, MGAs were essentially brokers that specialized in a specific area; they went to the carrier, got underwriting authority. Today, it’s almost the opposite. It’s like an entrepreneur, it could also be a broker, too, but they’re saying, “I know there’s a market here, an opportunity here.” They’re doing whatever discovery they need, and then they’re actually working with the carrier. If it’s admitted, they’re working on filings; if it’s an E&S product, they’re heavily involved in creating the forms and the underwriting guidelines.

They’re ultimately doing the work up front and are acting more like an underwriter, or even in some cases the risk taker; they’re taking a portion of the risk, when historically they would just be a super distributor that has some underwriting capability.

Another trend, frankly, I was surprised about was the capital efficiencies. Based off our data, roughly a quarter of the startups, 26%, were self-funded, and 74% had private equity or venture capital backing. Compare that to the perception that they all had raised venture capital and raised gobs of money, and that’s not necessarily the case.

In the survey, about 20% [of MGAs] raised zero to $500,000. Of the ones that raised the most money, 5% raised $100 million or more. So, there’s been a ton of capital that’s gone into the space, but there’s been a wide range.

Another data point that’s helpful is how much money they were burning or losing per year. Around 26% were basically profitable or self-funded; 28% were nearly profitable as in they were losing $100,000 a month or less. And then the biggest component, those focused on growth, were burning between $100,000 and $250,000 per month, call it between $1.2 million and $3 million a year. That’s very much in line with what a comparable software company might be spending. It shows it can be a very capital-efficient business.

In terms of lines of business, there was a fair amount more [MGAs] on the commercial side; 36% [of MGAs were in liability lines]; 18% [were in commercial property]. The next biggest category was inland marine, which is very much a catchall. But it’s not something that you would expect; you probably wouldn’t expect many programs in the warranty or jewelry or other specialty inland marine space.

Maybe last, a high-level insight from the survey was MGAs pretty much leveraged all the distribution channels available, whether it’s non-insurance-affiliated partnerships, whether it’s a mortgage company or a bank or an association, direct, wholesalers, or embedded and agents. They’re using all of them. And what’s interesting is many of them are using more than one simultaneously, so they might be using embedded plus agents, and they’re trying to diversify and grow that over time.