The Insurance Product and Players
Welcome back to our series on InsurTech. In our last article, we discussed the origin of modern insurance, provided a brief overview of the regulatory landscape, and explored recent innovations in the space.
Before considering the future of InsurTech innovation, it’s important to understand what insurance products are and the players who make insurance products available to consumers. Below, we’ll describe the entities involved in bringing an insurance product to market as consumers seek to purchase auto, health, renter’s insurance, and more.
TL;DR:
- It’s complicated: Insurance is a nuanced space with entrenched interdependencies and varying levels of legal, industry, and regulatory oversight.
- Informed consumer choices can lead to better outcomes: As insurance is increasingly sold to consumers directly and/or in embedded channels, it’s important for consumers to understand how insurance products function in order to make informed choices.
- There are heightened risks in the business of mitigating against risks: It’s important for investors to understand how the industry operates in order to more accurately understand the player interdependencies, macroeconomic/systemic risks, and partnership risks one should consider when evaluating investment opportunities in the space.
Defining a Consumer Insurance Product
At its core, insurance is a contract, encapsulated in a policy, that provides financial protection or reimbursement to policyholders against costs or losses. When consumers purchase policies, insurance companies pool clients’ risks, aiming to ensure that the income from premiums surpasses the losses from insurance payouts and reimbursements.
This financial safeguard is crucial for mitigating various types of emergencies, such as adverse health events, property damage, or loss of income, and offers consumers greater stability and peace of mind. Insurance plays an indispensable role in our society, especially considering that most Americans today have more debt than savings, and unexpected expenses can often be financially devastating. Insurance helps bridge this gap, offering a buffer against the cost of adverse events.
We, as consumers, typically only see and directly interact with certain players and structures that allow insurance products to exist. A look underneath the hood, however, reveals several interconnected partners and intermediaries behind the policies facilitating health, auto, pet insurance, and more.
Takeaway: Despite being a critical part of a social safety net, insurance is not well understood by consumers. This can prevent them from purchasing appropriate coverage and it can impact customer experiences as policyholders.
Defining the Players in Insurance
Several key players operate within the InsurTech space: lead generators, brokers and agents, Managing General Agents (MGAs), Third Party Administrators (TPAs), carriers, and reinsurers. Each plays a distinct role, and has different revenue models, risks and reward structures, and regulations they must follow. Together, their partnerships form the insurance industry and allow the industry to operate with stability. By design, it is impossible to be entirely vertically integrated. Below, we will provide an overview and examples of these principal players.
While there are nuances between insurance types, such as health versus auto insurance, the section below will focus on high-level similarities among the players that engage within insurance as a broad, consumer-facing category.
The image above provides a visual representation of key players and their interconnected dependencies. Similarly, we will start with lead generators and work our way up to reinsurers.
Lead Generators:
While the processes for obtaining insurance may differ — looking for healthcare on the Marketplace, or a Google search for auto insurance — most insurance begins with some type of discovery, typically provided by digital lead generators who pass prospective customers to insurers. Notable examples include online advertising platforms, comparison tools, and aggregators like NerdWallet, The Zebra, BankRate, and Google Ads sponsored by insurance companies.
All forms of insurance have heavily regulated advertising compliance guidelines set by industry standards, state regulations, and federal regulations. In general, advertising must be truthful, not describe policy limitations as “benefits,” use genuine testimonials, and insurance companies are ultimately liable for advertisements regardless of who creates them.
Takeaway: For consumers, the prevalence of online comparison tools and marketplaces have made it easier to take control of discovery and insurance product selection. When evaluating early-stage venture opportunities within InsurTech businesses that facilitate or rely on lead generation, investors should understand the caveats around compliant yet efficient customer acquisition.
Brokers/Agents:
While purchasing insurance directly is an option, consumers may also use brokers or agents to buy insurance policies. These intermediaries help navigate between options, explain terms, and aid in making informed decisions regarding adequate coverage. Agents can work exclusively with one insurance company or they can operate as independent brokers who work with multiple carriers and product lines. These are typically small brick and mortar shops, insurer-specific agents, and independent insurance brokers.
Despite technological advancements making direct purchases easier, brokers and agents still exist and provide personalized guidance, particularly for nuanced cases or buyers who prefer human experiences to self-serve tools.
Takeaway: Lines are blurring between brokers, agents, and digital lead generation providers. It’s possible to foresee a future where lead generators and online marketplaces provide personalized guidance regarding adequate coverage at scale.
Most, if not all, venture-backed insurance companies operating as Managing General Agents or Full Stack Insurers choose to go directly to consumers and opt out of accessing customers through traditional brokers or agents. This may pose a challenge to current brokers and agents, along with consumers who prefer working with an agent or broker to understand their insurance options.
Managing General Agents (MGAs):
Managing General Agents (MGAs) are specialized insurance agents or brokers with underwriting authority from an insurer. They handle all aspects of an insurance policy and often serve as the sole point of contact for the customer, managing most activities of a traditional insurer. They partner with a third-party risk carrier, named in the insurance policy, who is ultimately responsible for the customers’ insurance claims. MGAs may work with multiple carriers and often specialize in a niche industry or line of insurance. Insurers partner with MGAs because it is more effective than developing niche expertise in-house. Some MGAs include Sigo Seguros, Jetty, Johnson & Johnson Insurance and Monarch E&S.
MGAs earn income from commissions on policies they underwrite and sell, and from part of the premium as a policy fee. They usually do not hold policy risk, but they can earn profits by managing risk selection and pricing well. MGAs must meet regulatory requirements, including holding specific licenses and fulfilling state regulations regarding reporting on financial solvency and consumer protection procedures. They must also provide detailed financial reports to authorities and follow contract provisions with insurers.
Takeaway: Over the past decade, several Managing General Agents (MGAs) with specialized underwriting have received venture funding. They face less complex regulations than carriers and their tech-enabled operations can improve business margins. However, all MGAs rely on relationships with carriers in order to sell policies. In order to secure carrier partners, they must demonstrate unique underwriting insights and compelling loss ratios.
Venture-backed MGAs and full-stack insurers have been able to compete with established insurance companies on customer acquisition strategies and tech-enabled consumer experiences. For consumers, the growth of these firms has helped introduce greater choice and better user interfaces in the insurance product market.
Third Party Administrators (TPAs):
Third-Party Administrators (TPAs) provide operational services such as claims processing and employee benefits management for insurance companies. They generate revenue through the delivery of various services, including policy administration, billing, and customer support. However, they face risks like data breaches, operational disruptions, and regulatory changes. Despite these risks, TPAs benefit from long-term contracts and diversified revenue streams. Examples include Sedgewick, Crawford, and Gallagher Bassett.
TPAs must comply with a complex set of regulations to maintain industry integrity and protect policyholders. These include state-specific insurance regulations, robust cybersecurity measures to protect sensitive information, and adherence to laws like HIPAA for health insurance. They must also meet financial solvency requirements, undergo periodic audits, and maintain transparency through regular reporting on operations and financial status.
Takeaway: The operational services required for administering insurance policies are intricate and nuanced. There are specialty service providers called TPAs that firms like MGAs, carriers, and self-insured companies can outsource the operational oversight of policies to. These firms must operate compliantly but effectively and have not faced disruption by startups to date, likely due to the services-based nature of their work. However, there may be an opportunity for these firms to leverage operational-efficiency-focused software solutions internally.
Carriers:
Insurance carriers, also known as insurers, provide policies to policyholders, assuming responsibility for paying claims as outlined in the policies. Carriers manage and mitigate financial risk for individuals and businesses by pooling premiums and providing coverage against various types of losses. Examples of carriers include Geico, United Healthcare, MetLife, Progressive, and Allstate.
Insurance carriers generate revenue primarily by collecting and investing premiums from policyholders. After deducting claims and operating expenses, the remaining funds constitute their profit. However, they face several risks, including underwriting profitability, investment performance of premium reserves, catastrophic events impacting claims payouts, regulatory changes, and competitive market pressures. Despite these risks, carriers have the opportunity to generate substantial revenue by leveraging their actuarial expertise to price risk effectively and maintain financial stability. Additionally, insurance carriers are subject to various regulations to ensure their financial stability, fair practices, and protection of policyholders.
Takeaway: Carriers are critical partners to MGAs because they grant underwriting authority to MGAs and hold most/all of the policy risk. Additionally, being a carrier is advantageous because it allows for greater flexiblity in product design and scaling insurance product programs.
It’s also important to note that insurance players can act as insurance agents and carriers, referred to as “full-stack” insurers. This dual role allows them to have complete control over insurance terms, pricing, underwriting, and compliance, giving them more control over the entire process and increased responsibility and risk.
Several venture-backed companies like Lemonade, Hippo, and Root Insurance began or eventually became “full-stack” insurers, often upon reaching scale. Being a full-stack insurer allows for greater control over growth but is capital-intensive and typically requires more capital reserves than an MGA would need to hold. Companies like Hippo, Lemonade, and Root have successfully gone public, demonstrating the potential viability of venture-backed MGA models.
Reinsurers
Reinsurers provide financial protection to primary insurance companies by insuring their risk exposure. These entities help insurance companies manage their liabilities by transferring a portion of their potential claims to the reinsurer. This arrangement allows insurance companies to remain solvent and continue operations even after significant claims events. Notable examples of reinsurers include Swiss Re, Hannover RE, RGA, and Munich Re.
Reinsurers earn revenue by charging premiums to insurance companies for taking on the risk of large claims. This premium income helps reinsurers maintain their operations and cover the costs associated with underwriting risks. However, they are exposed to several risks, including underwriting risk, catastrophic event losses, regulatory changes, and general market conditions. Regulations for reinsurers require licenses, minimum capital adequacy, regular financial reporting, and compliance with solvency standards to ensure they can cover claims and honor obligations.
Takeaway: Reinsurers are the backbone of the insurance industry. Given the number of insurers and other players they work with, there could be interesting partnership opportunities between InsurTechs and reinsurers, particularly in new product development or distribution opportunities.
Summary and Preview for Part III
In summary, an insurance policy is a contract between an individual or entity and an insurance company that outlines the terms of coverage, premiums, and conditions under which the insurer will provide financial protection against specified risks in exchange for premium payments.
Insurance companies operate on a business model where they collect premiums from policyholders to build a pool of funds. They use actuarial science to assess risks, determine appropriate premiums, and invest these funds to generate returns. In return, they provide financial protection to policyholders against covered risks. The profitability of insurance companies depends on accurately assessing risks, managing claims efficiently, and investing funds prudently.
Behind the scenes, there are many different players working together to compliantly connect with and ensure consumers, underwriting risk and creating investment products, managing active policies, and insuring the ecosystem against systemic risk.
Understanding the roles, risks, revenue models, and operating environments of the players is important for consumers’ education regarding their everyday financial wellness and for venture investors to better understand the opportunities and risks within the insurance ecosystem and its investable opportunities.
We hope this Part II has provided a better understanding of the key players within the insurance space. Together, these entities form a complex, interconnected ecosystem that offers a variety of products while prioritizing consumer protections and market stability.
That’s all for now! Stay tuned for our next post highlighting the consumer’s experience and current challenges.
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