Tag Archives: MGA

Fourth Step to a New, Successful Program

This is the latest post in our series on building a new MGA program. The first three steps and an introduction can be found here.

Technology can make or break a program business strategy. As we’ve covered in previous posts, distressed classes only remain distressed for so long until that market need is met. Agencies need a way to bring products to market quickly, or risk losing valuable potential business. Technology is key, but only if you choose your system wisely.

There are four options available when creating a program. You may use the insurance carrier’s system, homegrown software, a new enterprise rollout or a custom modular ISO/NCCI-ready system. Each has its pros and cons. The following is a summary:

As you can tell from the above analysis, the custom modular system is the best fit for programs. Let’s look at the characteristics of a new MGA program and how they match up with this option.

  1. Most programs today are written on an admitted basis. You therefore need a system that supports bureau content like ISO and NCCI. It should provide the latest rules, rates and forms and regular, accurate bureau content updates to remain in compliance.
  2. New programs are typically available in all 50 states. You may start off selling regionally, but you’ll need the ability to move quickly into all 50 states when you’re ready to expand. If your system doesn’t give you this flexibility, you’ll end up losing valuable market share in states you can’t enter fast enough.
  3. It is typical for a program writer to provide one-stop shopping for the industry it targets. Loyal agents prefer this because it is easy to access all that is needed for an account in one spot. So, you need a system that supports all or most business lines, including BOP and worker’s compensation.
  4. A custom product is key for success in the specialty insurance marketplace. But you shouldn’t need to reinvent the wheel every time you create a program. Typically, 80% of the product can be straight ISO or NCCI and 20% customized. For the 80%, you need an ISO- or NCCI-supported product. For the 20%, you need a system that makes it easy to build customizations, such as endorsements, forms and rating equations.
  5. Program opportunities don’t last long. If you spot one, chances are one of your competitors has seen it, too. A system that supports programs needs to be implemented quickly – ready to write business in all 50 states in as little as 90 days. A large, enterprise-based system will simply take too long to implement; by the time it’s in production, it may be too late.
  6. Your program system should also be modular. You should be able to implement or change the functionality you need with no effect on the rest of your programs.
  7. You also want a system that is easy to understand and quick to learn. Underwriting and rating staff are expensive and hard to find, so you will most likely draw on existing staff for your new program. Your system should have a short learning curve that makes it easy for new users to come up to speed, and your vendor should provide adequate on-site training when you need it.
  8. Your program solution should easily integrate with other systems and components in your insurance environment, like agency management systems, underwriting workflow solutions and billing. Your technology provider should have proven APIs to make this connectivity seamless, fast and cost-effective.
  9. Your system should come at a cost that aligns with the scale of your business. You’ve done your homework, but new programs still come with a level of uncertainty. You want a price based on premium volume, not a large, fixed upfront cost.
  10. Make sure that your technology provider has robust reporting capabilities and that program data is easily accessible. Big data is the name of the game today. The more data you have at your fingertips, the better you can demonstrate to your carrier partner your ability to identify and react to trends in the market.

A final critical characteristic is the need for a well-established tech firm with a superior track record. Your vendor should have adequate resources to deliver what it promises, and a management team that supports a long-term approach to your success.

See also: How Technology Drives a ‘New Normal’  

There is a lot to consider when approaching the technology challenges of program business, and picking the right partner can mean the difference between business growth and stagnation. When it comes to program business, technology can deliver a critical competitive advantage.

First Step to a New, Successful Program

Editor’s Note: This is the second in a series of posts in which CJ Lotter, a 15-year industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful program. The first post is here.

The trend in insurance today is toward large volumes of policies with very little human intervention. Although the cost benefits may be attractive, this movement is leading us toward a commoditization of the industry where the only differentiator is price. Any business-minded person will tell you this is not a good position to be in. Ideally, you want to sell unique solutions that are difficult to replicate, raising the barrier to entry.

There is an alternative to commodity products. It’s called programs. The best program business is difficult to understand, labor-intensive and hard to automate. Unique underwriting expertise is required, and it should be hard to find and difficult to train. The role of technology in this market is to assist the process and provide the flexibility to adapt to unique risks, not to replace human ingenuity with mass automation.

For an MGA seeking to launch a new program, there are three types of opportunity that provide the greatest potential: a distressed class, a perceived distressed class and an underserved class.

A distressed class is one that most underwriters don’t understand or for which losses are difficult to predict. To underwrite this business, you need unique underwriting skills – an understanding of the nuances of the class and of the characteristics of the risk that could produce significant losses. Clever underwriting and careful selection of risks is key to remaining profitable in this niche. Heavy loss control may be required here, too. Your ability to make this riskier class safer is your competitive advantage.

See also: 10 Steps to Successful Insurance Program  

Nuclear plants are one example of a distressed business class. The dynamics of radioactive materials and the consequences of their incorrect handling are complicated. Losses are catastrophic and will most likely include loss of life, millions of dollars of property losses and loss of business income. Underwriting this class calls for highly trained underwriters who know a good risk from a bad one. These are specialists who can assess, for example, whether safety manuals and procedures are sufficient to minimize the potential for losses.

A perceived distressed class refers to business that potential competitors shy away from because their underwriters perceive it as too risky. By careful analysis, a clever underwriter can discover that what others thought were drivers of claims were indeed not so.

Ski resorts are one example of perceived distress. Underwriters may avoid this class because of the downhill ski exposure, while the real claims drivers are slips and falls in the restaurant. This is an extreme example, but it illustrates the point.

The underserved class is another spin on program opportunities. The less competition in a class, the better the chances for a successful program. There are many reasons markets avoid certain classes. It may be that the specific geographic territory is overly litigious or that the universe for this specific class is small. Whatever the reason, once you identify the issue and find a solution or compromise, you will have uncovered a program opportunity with little competition.

The class may also be underserved because a traditional “old school” risk taker with archaic systems is the only alternative for this specific class of risk. By providing modern technology with automation that makes it easy to do business, you can outperform the competition and capture your fair share of the market.

An example of this kind of risk may be trash truck operators in the boroughs of New York City. It’s a tough jurisdiction to write trash hauling insurance. A longtime traditional insurance company may have locked up the market. But at the same time, pricing may have crept up over the years, and customer service and loss control may be stale.

There is no meaningful competition in this space, and it’s ripe for the introduction of an MGA program. Start with an updated product offering that includes new coverages like data destruction and privacy, and dynamic pricing tuned to the characteristics of each individual risk. Round off the offering with quick quote turnaround, killer personalized service and fast and fair claims handling, and you’ve got a program that will attract business from the incumbents.

See also: Is There a Future for MGAs?  

So, there you have it – three scenarios that provide the first ingredients for building a new insurance program. Whichever you choose, when you create your program, ask the following question: “Will my program be so different that it will be difficult to duplicate, and so appreciated by buyers that price will not be the focus?” If your answer is “yes,” you have taken the first step to a successful program.

Excerpted with permission from Instec. A complete collection of Instec’s insurance industry insights can be found here.

10 Steps to Successful Insurance Program

This is the first in a series of posts in which CJ Lotter, a 15-year industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful program.

Creating a successful insurance program requires the execution of 10 essential steps that take advantage of market conditions, skills, partnerships and technologies.

Spinning up an insurance program is a lot like baking a cake. A good cake requires the right ingredients, the right amount of time to bake and meticulous crafting to ensure it looks and tastes great. Creating an insurance program is similar. It takes a combination of ripe market conditions, the right amount of time to grow and the skills to execute. In this post, we introduce the 10 steps to creating a successful program.

1. Size the Market

Prior to starting any program, it’s important to size the entire market. How many companies make up the market? How much premium is floating around your target market segment? How many agencies serve this segment? Spare no expense to gather the most current and accurate data you can find. And tap underwriting experts to find adjacent markets you may be able to enter quickly.

2. Analyze the Competitive Environment

Scan the competitive landscape to determine how easily you can enter the market. How is the market segment being served today? What kind of programs are already in the space? What other MGAs serve this market? To continue making a viable case for your program, you need to ensure there’s enough space for your solution. Ideally, you want to compete against an old school company that can’t rapidly adjust.

See also: Insurance Innovation’s Growth Challenge  

3. Profile the Industry’s Characteristics

Establishing the industry’s characteristics is much like Step One but at a much more granular level. Analyze the perceived threats and challenges. Examine as many dimensions as you can. How will the economy affect this market? Is climate change a key a factor? Is technology a potential catalyst for disruption? You’re looking for clues that suggest an industry with unique needs. You don’t want to create an insurance program for a commodity that is easy to insure. This would only lead to competition on price rather than service.

4. Spot and Attack ‘Perceived Distress’

Good, profitable programs are generally made up of difficult-to-insure business challenges. Ideally, you are looking for a distressed industry to serve, specifically a distressed class code. Perceived distress is the key here. Perceived distress essentially boils down to a gap in the insurance offerings available to your market that can be exploited by technology, underwriting advantage or better customer service.

5. Assemble Relevant Expertise

Identifying a strategic direction for your program establishes your road map. You hope you can bolster that through agency expertise. Your analysis of industry characteristics will give you the background you need to staff your program through internal or external hires. Assigning or hiring the right expertise can make or break a program. Ideally, you want underwriters with direct experience in the industry you are targeting.

6. Select the Right Technology

Of the many dimensions a company can compete on, technology may offer the biggest opportunity to differentiate in the Darwinian economy. Partnering with companies that do what you want to do and do it well is crucial. Competing on better technology can reduce your time to market so you can capitalize on perceived distress sooner than your competition – especially if the competition is a big, slow-moving, legacy insurance company.

7. Establish the Distribution Network

You’ve chosen your market, sized the competition, analyzed the industry and determined how to leverage expertise and tech. So, how do you sell this new thing? Start with the competition. How are they selling? Do they use agents? Do they have a dedicated team? Look for gaps in your competitors’ ability to deliver. Do they take three days to provide a quote? Use your superior technology and processes to deliver in one.

8. Build the Product

At this point, you have an idea of what the program offering will look like. But you still have a few critical questions to consider. Foremost is whether the product will be admitted or non-admitted. As a rule, you want to do as much admitted business as possible. If even one competitor provides an admitted option, you have no choice but to offer an admitted product.

9. Set the Pricing

Understanding the price elasticity in your market will help determine what it will take for your potential customers to leave their current provider. What can you offer or give them that is of more value? Can you underwrite more efficiently to lower the price? If you can maintain the customer experience while offering a price reduction from incumbent providers, you are in a sweet spot for program launch.

See also: Is Buying Insurance Like Ordering Food?  

10. Choose a Carrier

As an MGA, choosing the right carrier partner can make or break a program. Recent industry developments have made programs a strategic priority for carriers, and MGAs that underwrite and distribute profitably are in demand. If you can’t find a carrier partner, consider alternative capital sources such as pension funds and hedge funds, coupled with a fronting arrangement. This is a model that is growing in popularity as players along the value chain attempt to engage more directly with the policyholder.

This has been a brief overview of the 10-step process to bake a new insurance program. We will revisit this topic in future posts, providing a deeper look at the steps. Creating profitable programs is a vital skill in the new insurance world, and those that do it well will never have trouble finding work. You may not be able to bake a cake, but, with the profits your successful program delivers, you can just go out and buy one.

Excerpted with permission from Instec. A complete collection of Instec’s insurance industry insights can be found here.

MGAs: The Fast Track to Innovation?

They sit in a hazy nether region between brokers and insurers. Outside of insurance, most people will never hear of them. Even those who know of their existence are often only vaguely aware of the role they play. Yet MGAs (managing general agents) offer one of the best ways for new, and established, companies to enter into insurance and benefit from an existing large customer base or to take advantage of the best emerging technology. Want to generate underwriting income without raising massive amounts of capital or waiting a year or more to get regulated? Setting up an MGA may be the answer.

A number of the headline popping insurtechs start-ups (BoughtbyMany, Slice, Hippo, Trov, Ladder, Lakka, for example) have chosen the MGA model, often finding insurers or reinsurance partners willing to provide capacity and investment. The concept may not be well understood, but it’s no surprise that many emerging companies are curious about how to set up as an MGA.

On April 2, our monthly InsTech London evening event focused on MGAs. The room was packed with close to 300 attendees. We had 13 companies on stage, and everyone of them was different. So what’s going on?

Brokers to the left of you, insurers to the right…

There are five common ways for insurers to connect with their clients: 1) go directly to the consumer 2) use a comparison website, 3) work with a lead generation company (mostly U.S.), 4) work through a broker and 5) use an MGA.

Like a broker, an MGA doesn’t retain any capital. Unlike a traditional broker, an MGA is able to “bind” or underwrite risks using third party capital. The MGA gets access to capital and fulfills its regulatory requirement by reaching an agreement with one or more insurers that are prepared to “delegate” their underwriting authority to the MGA.

The concept is not new, but it is evolving. Traditionally, most MGAs were happy enough occupying a specialist niche, operating as a class of wholesale broker. This enabled insurers to access unusual (“specialty”) lines of business that they found expensive or hard to source on their own or through a traditional broker network.

See also: 3 Steps to Succeed at Open Innovation  

In recent years, a new type of MGA has emerged. There are increasing examples of this “delegated underwriting” model being adopted as a stepping stone for companies that want to act like, or become, a full insurer. The MGA still needs to get regulatory approval but has a choice of options for getting up and running more quickly. Underwriting capital is provided by one or more insurers or reinsurers, but the MGA usually retains responsibility for managing the client and its brand. To the uninitiated, the MGA looks no different than an underwriter, offering much of the benefits with limited downside.

This is already a big market. Over 300 MGAs underwrite in excess of 10% of the UK’s £47 billion general insurance market. MGAs have traditionally been a major source of incoming business for Lloyd’s, representing over one third of its £32 billion capacity. In excess of 4,000 MGAs (also known as “coverholders”) from around the world are backed by Lloyd’s syndicates. Insurance is provided for property, airlines, motor, livestock and much more. The role of Lloyd’s as the “insurer of last resort” is particularly suited to complex or non-standard business sourced through MGAs. This has made London one of the major underwriters of the U.S. excess and surplus market, covering risks that the major carriers don’t want to take on (for example, beachfront homes in Florida).

John Rowlands, formerly at reinsurance broker Guy Carpenter, explained the appeal of the MGA for insurers: “It’s difficult for insurance companies to grow premiums organically. Insurers value MGAs’ specialist product and geographic expertise and distribution, which gives the MGA the ability to underwrite opportunistically and take advantage of market conditions. Insurers are able to strategically grow and diversify with lower execution risk and costs.” John has since joined an MGA himself.

Now it’s no longer only about insurers looking for help with distribution. The new breed of MGAs are pushing the boundaries beyond the original model. They want to be calling the shots, and in some cases are looking for no more than a “fronting insurer” to provide capacity but with less influence in how the business is run. For a transaction-focused insurtech, MGAs not only offer a quick route to market but are also starting to make the insurtechs attractive to VCs. In the slow-moving world of insurance, MGAs may provide one of the best opportunities to build up a business that can be sold in 10 years or less (timelines that are appealing to VCs).

Insurance carriers, brokers and private equity firms have also been getting more active buying into MGAs. Valuation multiples (of EBITDA) are moving beyond the historic range of eight to 12 times up to the high teens. Perhaps not as sparky as the household names in the mainstream tech world, where multiples of 20 or 30 are common, and some in excess of 100 (Amazon, Netflix). There are few (maybe none) analytics or tech companies in insurance with a similar ability to scale exponentially year after year to justify such multiples. MGAs offer a safer, if lower, return.

Who will underwrite my MGA?

London may be providing capacity for thousands of MGAs, but when it comes to supporting the more recently formed insurtech style MGAs, Munich Re is, by a long way, the most active, and adventurous, provider of capital. Ingenie, Wrisk, BoughtByMany, WeFox, Zego, Trov, Slice, Next, Nimbla, Jetty, Drover, Blink, Simplesurance and So-Sure have all received backing from the reinsurance giant. None of these will make any noticeable impact on Munich Re’s results in the next few years, but unlike most other reinsurers or insurers Munich Re can afford to think long-term. It clearly sees the MGA model as a significant way to access new markets and new technology. Furthermore, the company isn’t afraid to double down on its partnerships by also offering investment capital and a trading infrastructure for MGAs. Other insurers, including Lloyd’s syndicates, are offering capacity to the newcomers. Few can match the financial strength or have the willingness to take risks of one of the world’s biggest reinsurers, but we’re starting to see some intriguing new approaches by insurers and investors willing to get more actively involved in the MGA space. I’ll be back in the future with coverage of other capacity and infrastructure providers in this space that we have got to know well through Instech London such as Insurtech Gateway, Beazley, Hiscox, SCOR, MSAmlin, Evari and Xceedance.

Death by data

The growth of MGAs may have provided an efficient way for insurers to access niche markets, but it’s also been something of a free-for-all when it comes to sharing information about the risks. This has resulted in a horrible mish-mash of data formats and means of sharing data that even seemed outdated 25 years ago. Digital may be replacing paper, but pdf files and spreadsheets, exchanged via email, proliferate and create major inefficiencies and potential for errors. Everyone knows the situation needs to change. There is a flourishing community of both start-ups and mature businesses developing solutions to standardize formats, centralize processes and cut through the noise. Some are going directly to source, hoping to link up the information provided by the original policy holder directly with the capital provider and cut out the noise in the middle. At some point, the market will figure it out. In the meantime, any MGA that can suck data in from its clients and deliver essential analytics to the capital provider without the need to re-key anything is worth keeping an eye on.

Technology: Boon or burden?

Not surprisingly, many of the new MGAs have been set up – and received investment – on the premise of using new technology to improve risk selection and gain efficiencies. In established markets, such as property, tools may be provided by and even paid for by insurers. In areas such as emerging risks, most notably cyber, companies such as Zeguro and Envelop Risk offer their proprietary technology as part of the benefit they claim to offer to insurance partners and clients. The value of their IP is built into their proposition (and their valuation).

More traditional MGAs are increasingly being required to use new technology to improve underwriting risk selection and data transfer. This can create more costs and complexity, particularly if they are dealing with more than one capital provider and multiple systems requiring specialist skills. There is still a lot of inertia, particularly among smaller companies. MGAs that can continue to acquire and retain clients, and keep losses below an acceptable level, can still call the shots. Few insurance carriers are willing to risk losing profitable MGAs by imposing new technology on them.

See also: AI and Results-Driven Innovation  

Stuck in the middle with who?

What does the rise of MGAs tell us about the future of insurance? Evolution in most markets tends to squeeze out the people in the middle. Friction and thus cost is removed, the fewer people there are in the chain. Those that possess the capital or own the customer are usually the winners.

The continuing rise of MGAs suggests that we may be seeing the shift moving in the other direction. Is the middle going to squeeze out those on the edges? On the one side, the placing broker is under threat of getting replaced by direct-to-consumer offerings powered by detailed data and advanced analytics. On the other side, traditional providers of insurance capacity are increasingly having to compete on price and strength of security with the more highly diversified global capital markets that can access analytics that once only existed in-house at insurers. Meanwhile, the agile MGA, with multimillion dollars of investment, is able sniff out the best markets and the cheapest capital.

MGAs are growing more powerful, but they are probably not going to become the dominant force in insurance. More likely is that MGAs will continue to evolve as an efficient way to build and launch new and enhanced insurance propositions, tightly linked to excellent analytics and richer sources of data. We may say see the emergence of some mega-MGAs, with income similar to the larger insurers. A few will grow up and decide to become fully fledged insurers. A couple could morph into becoming the analytics platforms of choice for the industry (it still needs one, by the way). Some will fail. But most will cash out, and be folded into their bigger, older, more traditional insurance and broking cousins.

It’s only been possible to dabble lightly in this topic. Whatever the future is for MGAs they are definitely one way of accelerating the impact of innovation. This fascinating and slightly mysterious area of the insurance market deserves more in-depth assessment. Please feel free to comment below with any areas to explore next, and, of course, all additional insights are welcome.

Quest for the Holy Grail in Workers’ Comp

Quotes from only five data points, or even fewer? Name your number, and you can find an insurer looking to transform the sales experience to match. We have seen a great deal of this momentum in personal lines with increasing attention in small commercial lines. And the line of business delivering today is workers’ comp!

Insurers writing workers’ comp – including insurtech startups – are innovating in many areas, including quoting, servicing, claims and the overall customer experience. There is high potential for emerging technologies, including AI and wearable devices, to enable these advancements and tremendous benefits to be gained from external data sources as well as the untapped data already within an insurer’s systems. Together, these circumstances have created fertile ground for innovation.

Both established and greenfield insurers are taking advantage of the possibilities that advanced technologies bring to the workers’ comp sector. This year’s SMA Innovation in Action Awards gave us two excellent examples of how both types of companies are approaching these new opportunities – in the digital MGAs Cake Insure, which was incubated by Pinnacol Assurance, and Pie Insurance, a greenfield venture. They demonstrate two different approaches to the same goal: leveraging new technologies and external data to create a seamless digital experience for customers.

See also: 3-Step Approach to Big Data Analytics  

Pinnacol Assurance is a workers’ comp insurer that is more than 100 years old. They wanted to reinvent the purchasing experience for workers’ comp by emphasizing digital and leveraging new technologies such as AI to condense the entire process into five minutes or less. Cake Insure, a digital MGA, is the result.

Cake’s online platform gives consumers a responsive, mobile-friendly experience that requires only a few data points to generate a quote. An AI-driven policy classification engine uses natural language processing and machine learning to enable straight-through processing for more than 90% of new policies. This technology enables Cake customers to simply enter a description of their business in their own words to get a quote, with no industry jargon or class codes required. Certificates of insurance can be generated and shared immediately via the Cake client portal or email. Cake’s success demonstrates how an established insurance company can embrace greenfield thinking and reinvent the customer experience.

Greenfield insurers and MGAs are also pursuing the transformational possibilities of workers’ comp. Pie Insurance is a full-stack digital MGA for Sirius Group that set out to change the workers’ comp market for small businesses, an underserved and often overcharged business segment.

Pie uses predictive analytics and high-quality data sets in real time to give small business owners a seamless, mobile-friendly way to find the coverage they need at the right price. According to Pie’s proprietary data, 80% of small businesses overpay for workers’ comp, often by as much as 30%. The company provides consumers with a detailed breakdown of the coverage and pricing that is appropriate to their risk and offers an online quoting experience that is as easy as getting an online quote for personal lines insurance. The savvy use of third-party data combined with predictive analytics gives Pie the ability to quote a new workers’ comp policy in minutes.

See also: Predictive Analytics: Now You See It….  

These companies are simply two examples of how the workers’ comp market is transforming. Both established and greenfield insurers and MGAs are making headway in this area. We can expect further changes to come as insurers find even more ways to bring new technologies to bear on the customer experience. So, stay tuned.

For more information on the SMA Innovation in Action Awards program and this year’s winners, please click here.