Should startups begin as MGAs? The road to market is faster, but there are complications.
The insurance industry is a $4.6 trillion market worldwide that lags when it comes to digitization and providing consumers with a great experience and service. We are looking at the five main challenges that startups face. We have covered Challenge No. 1 here
and Challenge No. 2 here
. In this article, we will look at Challenge No. 3.
Challenge No. 3: How do you create an insurance structure that supports disruption, dynamic operations, high-quality service and the relationship with (re)insurers.
Most startups will begin as a broker or, more likely, a managing general agent (MGA), acting like an insurer without having a fully licensed underwriting insurance vehicle. MGAs are the fastest way to start, but they can quickly become constraining.
See also: 5 Challenges Facing Startups (Part 1)
Some of the issues that may arise and, therefore, need to be managed as an MGA include:
- Cultural challenges: Insurers that are established organizations are used to working on different timelines than startups, and this could slow the innovation. In addition, having an outside partner may restrict the flexibility to innovate or differentiate over time.
- Challenges of product innovation: Startups need to get to market as soon as possible and test their value proposition and customer engagement. Starting as a MGA means they will rely on third-party insurers or reinsurers for support in the product development process. This, by definition, will be time-consuming (how time-consuming will depend on the in-house expertise of the startup.) This approach may ultimately result in limited differentiation because products or variations will need to be available to multiple startups.
- Restrictions in the speed to learn and adjust: Most critically for innovation, scaling, operating flexibility and profitability are the people capacity and IT systems. It is very important to be able to adjust the product, pricing and marketing from actual operational experience and performance in a dynamic way. This is more challenging when the startup does not control the complete value chain and decision-making and when expertise is external to the organization.
- Challenges of meeting service standards: With key elements of the insured service resting with outsourced parties (including traditional insurers), the challenge of ensuring timely, fully automated and friendly service will be great. For example, buying or changing an insurance policy with a startup provider is one thing, but receiving a poor claims experience from a third party partner could hurt the brand and reputation of the startup.
The alternative to an MGA is creating a fully licensed insurance carrier, which is cumbersome. This involves regulatory approval, up-front committed capital from investors, assurance that the processes are in place for compliance (e.g Solvency II), that there are funds to absorb initial startup losses and that there is a detailed business plan. In addition, while becoming a fully licensed insurer gives more options and flexibility to address the issues for MGAs, it does not remove the problems entirely.
The greater danger is that this process will distract from the startups' focus on customer testing and on providing a compelling minimum viable product.
Getting to market and focusing on customer testing is key — and an MGA allows this. An MGA setup ensures speed to market at minimal regulatory hurdles and low capital needs.
Reinsurers and large insurers are increasingly open to offering products and underwriting capacity directly to startup MGAs, as well as policy administration, renewals and claims services and access to a network of claims partners.
Do not forget to talk also to small insurance companies. There are some players that could be very helpful in product development and when it comes time to market.
See also: Startups: How to Find the Right Partner
Long-term scaling and profitability require a company to set up its own insurer — plus build a full-stack platform and service capability. We believe that, to be a really successful startup, you will quickly need to employ specialists in pricing, claims and marketing as well as have a full-stack technology platform.
In addition, you will need to assess whether the MGA or licensed insurer route gives you the right structure over time to achieve your goals.
The benefits of being a fully fledged insurer are full control of product manufacturing and operational flexibility, as well as greater access to reinsurance capital and protection.
We are curious about your perspective.