Just over five years ago, the insurance industry entered the crosshairs of the tech world. Despite serving as the backbone of global growth, insurance lagged the pace of technology adoption enjoyed by other industries.
Entrepreneurs saw this as an opportunity to disrupt incumbents, and soon there were lofty claims that everything about the industry was about to change. With tech’s embrace, people were about to soon “love their insurance!” Venture capitalists noticed, and startups closed large rounds of capital.
Fast-forward to today, and it’s safe to say that none of us have found an intimate connection with our insurers. That said, the industry is in a transformational moment as it races to keep pace with technology.
Many like to refute the underlying disruption by pointing to public valuations of insurtech firms, some of which are down as much as 85%-90%. But we are experiencing a typical phenomenon that occurs in industries transformed by technology: Early challengers often lack appreciation for the complexities of the market and sometimes overpromise short-term visions.
We learned that it’s hard to change a highly regulated industry with a disinterested customer base who rarely shops the competition.
Now, a new crop of challengers is learning from their predecessors’ mistakes. As we enter “insurtech 2.0,” the lessons learned are becoming the new best practices, and nowhere is this more evident than at the startups building an MGA (a managing general agent).
The MGA (R)evolution
An MGA is a hybrid between an insurance agency (policy sales) and insurance carrier (underwriting and assumption of the risk). MGAs started off during the U.S.’ frontier years. East coast carriers pursued the emerging westward market by granting remote agents unique underwriting and servicing authorities. In return for their added responsibilities, these MGAs received higher sales commissions from their carrier partners.
When they arrived on the scene, insurtech challengers revived the dormant MGA structure to monetize their more scalable solutions. Founders pitched carriers a tech-forward relationship with the customer, focusing on:
- Customer experience: Slick interfaces replaced lengthy forms and complex questionnaires to lower application times and give the customer an experience more aligned with other online experiences.
- Enhanced data: Insurtechs tapped new online data sources to eliminate much of the traditional data capture process. No longer did customers need to know how far they lived from a fire hydrant or when a roof was last replaced. Removing these inputs also improved quoting accuracy.
- Engagement: While incumbents focused on “being there when you need us,” insurtechs strove for a regular cadence of communication. Beyond good UX, insurtechs knew engagement would be key for tapping upselling opportunities.
Armed with large pools of venture capital, fun and whimsical brand names, and armies of T-shirt and sneaker-clad engineers, the MGAs set off to disrupt a trillion-dollar industry.
Lessons learned and the new best practices
The roadmap was obvious for this early crop of disruptors, but as it turns out, it wasn’t all straightforward. We learned that it’s hard to change a highly regulated industry with a disinterested customer base who rarely shops the competition.
With five years of experience behind us, we can reflect on the highs and lows:
- Friction can be your friend: We’ve learned that making insurance interactions too easy can open the door to bad actors. Fraud has always been a significant issue in insurance, and the “friction-free” best practices of online sales sometimes further enables those behaviors. Requiring a little work can help filter out those who are better avoided.
- Customers are hard to shake: The long-standing mantra of tech, “Grow first, worry about profit later,” proved challenging for insurtech. The regulated nature of the insurance industry makes it hard to roll off customers who don’t fit your long-term objectives. Even raising rates to accommodate underpriced risk is heavily regulated. Choose your customers wisely; they will be with you for some time.
- Winning on price is risky: While there is a lot of fat in the insurance value chain, winning the low-cost game requires a greater level of underwriting sophistication. Few startups have the historical data to support this level of accuracy. Insurance contracts are “aleatory” — in other words, a customer who makes even only one payment is eligible for a full payout. Mispricing how much risk the insurer has can lead to significant losses.
All this isn’t shocking in hindsight, but the strategy is clearer now. MGAs are correcting course, and the new crop of challengers are going in with new principles based on this knowledge.
Industry best practices now revolve around technology differentiation in addition to:
- Focus on creating an underwriting advantage: Better analytics built on bigger and more accurate datasets is key. While incumbents still struggle to upgrade their core systems, insurtechs are rapidly ingesting and analyzing emerging datasets, looking for a distinct advantage. Gain an advantage by leveraging real-time data versus relying solely on historical models the industry has long relied on. Never sacrifice quality of the book for rapid growth.
- Provide solutions, not insurance: Embedded insurance is the talk of the industry, but many confuse this concept as only an advancement in a distribution. Startups are looking at hybrid products that combine the offering with the coverage, giving the customer a unique product experience. Coverage now includes deeply embedded risk-control technology and proactive engagement with the insured.
- It’s a long game: MGAs demonstrated that rapidly building a customer base can be messy. Insurance is about understanding and pricing risk correctly. Tech-forward challengers have a level of scale and efficiency that will differentiate them in the long run but grow your book of business with discipline. In insurance, speed can kill.
Tech challenger MGAs are stepping back and re-charting their roadmaps as they prepare for the next round of new market entrants. Just like in other industries, this pullback is natural and allows for reflection on a new approach to the market.
Maybe this time around, we’ll start to “love” our insurance.