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So Your Start-Up Will Sell Insurance?

Selling insurance is complicated. Not impenetrable, but complicated. The sales process is sort of like a tangled piece of string— it’s easy to see the beginning and end but hard to figure out what’s happening in the middle.

When you start untangling, you’ll find prospect lists, telemarketing, direct mail, traditional marketing and web-based lead generators uncovering and enticing potential customers. You’ll also find captive agents, independent agents or brokers, wholesalers, direct telephone sales, the Internet, affiliates, carriers and carrier-like entities selling various products.

Some of these strategies work in coordination or create feedback loops — a customer sees a TV ad, which prompts him to submit a form online, which adds him to a direct mail list, which points him to an online aggregator, which puts him in touch with an independent agent selling insurance on behalf of a managing general agency… as you can see, the number of distribution permutations is considerable.

However, at American Family Ventures, we appreciate simplicity. We classify insurance distribution start-ups using four groupings: lead generation, agency/brokerage, managing general agency (MGA) and carrier.


As pictured above, the primary distinctions between participants in each group arise from the amount of insurance risk they bear and their control over certain aspects of the insurance transaction (for example, the authority to bind and underwrite insurance policies).

However, many other tradeoffs await insurance start-ups navigating among these four groups. If you consider the evolution of digital customer acquisition, including new channels like mobile-first agencies and incidental channels, choosing a niche becomes even more complicated.

In this post, I’ll discuss some of the key attributes of each group, touching on topics relevant for start-ups new to the insurance ecosystem. Please note, in the interest of time and readability, this post is an overview. In addition, any thoughts on regulatory issues are focused on the U.S. and are not legal advice.


Lead generation refers to the marketing process of building and capturing interest in a product to create a sales pipeline. In the insurance context, because of the high-touch sales process, this historically meant passing interested customers to agents or call-center employees. Today, lead-generation operators sell to a variety of third parties, including online agencies and digital sales platforms.

Let’s consider a few key attributes of lead-generation providers:

Revenue model — There are a variety of lead-selling methods, but the most common is “pay per lead,” where the downstream lead buyer (carrier or channel partner) pays a fixed price for each lead received. When pricing leads, quality plays a big role. Things like customer profile, lead content/data, exclusivity, delivery and volume all affect lead quality, which frequently drives the buyer’s price-sensitivity. As a lead-generation provider, you’ll generally make less per customer than others in the distribution chain, but you’ll also assume less responsibility and risk.

Product breadth — With the Internet and enough money, you can generate leads for just about anything. Ask people who buy keywords for class action lawsuits. However, start-ups should consider which insurance products generate leads at acceptable volumes and margins before committing to the lead-generation model. Some products are highly competitive, like auto insurance, and others might be too obscure for the lead model to scale, like alien abduction insurance (which, unbelievably, is a real thing). Start-ups should also consider whether they possess information about customers or have built a trusted relationship with them — the former is often better-suited to lead generation, and the latter can facilitate an easier transition to agency/brokerage.

Required capabilities (partnerships) — Lead-generation providers need companies to buy their data/leads. Their customers are usually the other distribution groups in this post. Sometimes, they sell information to larger data aggregators, like Axciom, that consolidate lead data for larger buyers. Generators need to show lead quality, volume and uniqueness to secure relationships with lead purchasers, but beyond that they don’t typically require any special partnerships or capabilities.

Regulation — While I won’t go into detail here, lead-generation operators are subject to a variety of consumer protection laws.


Entities in the agency/brokerage group (also called “producers”) come in a variety of forms, including independent agents, brokers, captive agents and wholesale brokers. Of note, most of these forms exist online and offline.

Independent agents represent a number of insurance carriers and can sell a variety of products. Brokerages are very similar to independent agents in their ability to sell a variety of products, but with a legal distinction — they represent the buyer’s interests, whereas agents represent the carriers they work for. Captive agents, as the name suggests, sell products for only one insurer. While this might seem limiting, captive agents can have increased knowledge of products and the minutiae of policies. Finally, some brokers provide services to other agents/brokers that sell directly to customers. These “wholesale brokers” place business brought to them by “retail agents” with carriers, often specializing in unique or difficult placements.

An important difference between the lead-generation group and the agency/brokerage group is the ability to sell and bind policies. Unlike the former, the latter sells insurance directly to the consumer, and in some cases issue binders — temporary coverage that provides protection as the actual policy is finalized and issued.

Some attributes of agencies and brokerages:

Revenue model — Agencies and brokerages generally make money through commissions paid for both new business and on a recurring basis for renewals. The amount you earn in commissions depends on the volume and variety of insurance products you sell. Commission rates vary by product, typically based on the difficulty of making a sale and the value (profitability) of the risk to the insurance carrier. Start-ups should expect to start on the lower end of many commission scales before they can provide evidence of volume and risk quality. Agents and brokers can also be fee-only (paid for service directly and receive no commission), but that’s rare.

Product breadth — Agencies and brokerages sell a variety of products. As a rule, the more complex the product, the more likely the intermediary will include a person (rather than only software). Start-ups should also consider tradeoffs between volume and specialization. For example, personal auto insurance is a large product line, but carriers looking to appoint agents (more detail below) in this category usually have numerous options, including brick and mortar and online/mobile entities. Contrast this with a smaller line like cyber insurance, where carriers may find fewer, specialist distributors who understand unique customer needs and coverages.

Required capabilities (partnerships) — Agencies and brokerages are appointed by carriers. This process is often challenging, particularly for start-ups, which are non-traditional applicants. Expect the appointment process to take a while if the carrier isn’t familiar with your acquisition strategy or business model. Start-ups trying to accelerate the appointment process can start in smaller product markets (e.g. non-standard auto) or seek appointment as a sub-producer. Sub-producers leverage the existing appointments of a independent agency or wholesaler in exchange for sharing commissions. You could also apply for membership in an agency network or cluster — a group of agents/brokers forming a joint venture or association to create collective volume and buying power.

Regulation — Agencies and carriers need a license to sell insurance. Each state has its own licensing requirements, but most involve some coursework, an exam and an application. As we’ve recently seen with Zenefits, most states have a minimum number of study hours required. There are typically separate licenses for property, casualty, life and health insurance. Once you have a license, many states have a streamlined non-resident licensing process, allowing agencies to scale more quickly.


A managing general agent (MGA) is a special type of insurance agent/broker. Unlike traditional agents/brokers, MGAs have underwriting authority. This means that MGAs are (to an extent) allowed to select which parties/risks they will insure. They also can perform other functions ordinarily handled by carriers, like appointing producers/sub-producers and settling claims.

Start-ups often consider setting up an MGA when they possess data or analytical expertise that gives them an underwriting advantage vs. traditional carriers. The MGA structure allows the start-up more control over the underwriting process, participation in the upside of selecting good risks and influence over the entire insurance experience, e.g. service and claims.

We’ve recently witnessed MGAs used for two diverging use cases. The first type of MGA exists for a traditional use case — specialty coverages. They are used by carriers that want to insure a specific risk or entity but don’t own the requisite underwriting expertise. For example, if an insurer saw an opportunity in coverage for assisted living facilities but hadn’t written those policies before, it could partner with an MGA that specializes in that category and deeply understands its exposures and risks. These specialist MGAs often partner closely with the carrier to establish underwriting guidelines and roles in the customer experience. Risk and responsibilities for claims, service, etc. are shared between the two parties.

The second type of MGA is a “quasi-carrier,” set up through a fronting program. In this scenario, an insurance carrier (the fronting partner) offers the MGA access to its regulatory licenses and capital reserves to meet the statutory requirements for selling insurance. In exchange, the fronting partner will often take a fee (percentage of premium) and very little (or no) share of the insurance risk. The MGA often has full responsibility for product design and pricing and looks and feels like a carrier. It underwrites, quotes, binds and services policies up to a specific amount of written authority. These MGAs are often set up when a startup wants to control as much of the insurance experience as possible but doesn’t have the time or capital to establish itself as an admitted carrier.

Some important characteristics:

Revenue model: MGAs often get paid commissions, like standard agencies/brokerages, but also participate in the upside or downside of underwriting profit/loss. Participation can come in the form of direct risk sharing (obligation to pay claims) or profit sharing. This risk sharing functions as “skin in the game,” preventing an MGA from relaxing underwriting standards to increase commissions, which are a function of premiums, at the expense of profitability, which is a function of risk quality.

Product breadth: MGAs of either type often provide specialized insurance products, at least at first. The specialization they offer is the reason why customers (and fronting partners) agree to work with them instead of a traditional provider. That said, you might also find an MGA that sells standard products but takes the MGA form because it has a unique channel or customers and wants to share in the resulting profits.

Required capabilities/partnerships: Setting up an MGA generally requires more time and effort than setting up an agency/brokerage. This is because the carrier vests important authority in the MGA, and therefore must work with it to build trust, set guidelines, determine objectives and decide on limits to that authority. Start-ups looking to set up an MGA should be ready to provide evidence they can underwrite uniquely and successfully or have a proprietary channel filled with profitable risks. Fronting often requires a different process, and the setup time required varies based on risk participation or obligations of the program partner. Start-ups should also carefully consider the costs and benefits of being an agency vs. MGA — appointment process difficulty vs. profit sharing, long-term goals for risk assumption, etc.

Regulation: MGAs, like carriers, are regulated by state law. They are often required to be licensed producers. Start-ups should engage experienced legal counsel before attempting to set up an MGA relationship.


Insurance carriers build, sell and service insurance products. To do this, they often vertically integrate a number of business functions, including some we’ve discussed above — product development, underwriting, sales, marketing, claims, finance/investment, etc.

Carriers come in a variety of forms. For example, they can be admitted or non-admitted. Admitted carriers are licensed in each state of operation; non-admitted carriers are not. Often, non-admitted carriers exist to insure complex risks that conventional insurance marketplaces avoid. Carriers can also be “captives” — essentially a form of self-insurance where the insurer is wholly owned by the insured. Explaining captives could fill a separate post, but if you’re interested in the model you can start your research here.

Attributes to consider:

Revenue Model: Insurance carrier economics can be complicated, but the basic concepts are straightforward. Insurers collect premium payments from insureds, which they generally expect to cover the costs of any claims (referred to as “losses”). In doing so, they profit in two ways. The first is pricing coverage so the total premiums received are greater than the amount of claims paid, though there are regulations and market pressures that dictate profitability. The second is investing premiums. Because insurance carriers collect premiums before they pay claims, they often have a large pool of capital available, called the “float,” which they invest for their own benefit. Warren Buffett’s annual letters to Berkshire shareholders are a great source of knowledge for anyone looking to understand insurance economics. Albert Wenger of USV also recently posted an interesting series that breaks down insurance fundamentals.

Product breadth: Carriers have few limitations on which products they can offer. However, the products you sell affect regulatory requirements, required infrastructure and profitability.

Required capabilities/partnerships: Carriers can market and sell their products using any or all of the intermediaries in this post. While carriers are often the primary risk-bearing entity — they absorb the profits and losses from underwriting — in many cases they partner with reinsurers to hedge against unexpected losses or underperformance. There are a variety of reinsurance structures, but two common ones are excess of loss (reinsurer takes over all payment obligations after the carrier pays a certain amount of losses) and quota share (reinsurer pays a fixed percentage of every loss).

Regulation: I’ll touch on a few concepts, but carrier regulation is another complex topic I won’t cover comprehensively in this post. Carriers must secure the appropriate licenses to operate in each country/state (even non-admitted carriers, which still have some regulatory obligations). They also have to ensure any capital requirements issued by regulators are met. This means keeping enough money on the balance sheet (reserves/surplus) to ensure solvency and liquidity, i.e. maintaining an ability to pay claims. Carriers also generally have to prove their pricing is adequate, not excessive, and not unfairly discriminatory by filing rates (their pricing models) with state commissioners. Rate filings can be “file and use” (pre-approval not required to sell policies), or “prior approval” (rates must be approved before you can sell policies).


In this overview, I did not address a number of other interesting topics, including tradeoffs between group choices. For example, you should also consider things like exit/liquidity expectations, barriers to entry and creating unfair advantages before starting an insurance business. Perhaps I’ll address these in a future post. However, I hope this brief summary sparks questions and new considerations for start-ups entering the insurance distribution value chain.

I’m looking forward to watching thoughtful founders create companies in each of the groups above. If you’re one of these founders, please feel free to reach out!

New Products and Combined Approaches

At American Family Ventures, we think advances in product development will have a dramatic impact on the insurance industry. We’re also excited about new insurance experiences that combine “Insurance 2.0” distribution, structural and product innovation. We’ll discuss both subjects below.


Before we dive in, let’s define a few things. We consider an “insurance product” to be the entire financial protection experience. From a whole product perspective, this definition includes processes inherent in the creation and the use of such products, including methods of underwriting and activities like claims and policy administration.

We’re watching two product trends in particular:  behavioral disaggregation and the unbundling of policy time and coverages.

Behavioral Disaggregation

As the world becomes increasingly connected through mobile devices, sensors, networks and information sharing, new context becomes available for managing risk. Dynamic insurance products that react to comprehensive information on behavior will be a direct result of these increases in contextual information.

See Also: Insurance 2.0: How Distribution Evolves

The concept of contextual insurance is not new. In fact, the purpose of insurance underwriting is to segment and accurately price insurance using information about the applicant. Even behavior-based pricing is not a new concept. Since the 1950s, insurers have used access to DMV records to adjust rates in the event of speeding tickets or other traffic violations. However, the innovation we’re seeking goes a few steps further.

An insurance provider that accurately understands the discrete behaviors influencing the safety of an asset and its users could also offer novel and effective ways to protect both. Behavioral data could be generated through connected devices, more robust asset histories and inventory tracking, collaboration with the owner on risk mitigating activities and the like. Using enhanced access to relevant behavioral information, new products would offer increased customization, accessibility, frictionless coverage acquisition and live reconfiguration. Perhaps someday we’ll see dynamic, multi-factor insurance policies that continuously and automatically adjust to choices the policyholder makes.

Consider the following homeowners insurance example: A homeowner replaces an old fireplace with a new model that has important safety features. Of course, this fireplace is “connected.” As soon as the fireplace cloud tells the homeowner’s insurance carrier the new model is installed and active, the homeowner’s premium payment drops by 10%. Impressed with this outcome, the homeowner tells three of her neighbors about the product, and they promptly replace their own rickety fireplaces. As a result of the newly safe cul-de-sac , rates drop an incremental 3% for all residents in the neighborhood. Soon after, one of the neighbors is shocked to discover that his new model was incorrectly installed, creating a small gas leak that would become dangerous over time. Fortunately, his insurer, in coordination with the manufacturer, flags this issue and repairs the unit before it becomes a hazard. A week later, the three homeowners who originally purchased the product, dining out with their insurance savings, all decide to purchase water-leak-detection systems, for which they are promptly rewarded with an additional insurance discount.

We’re still in the early innings of behavior-based insurance, but, as you can see, its impacts are meaningful. Contextual data doesn’t have all the answers, but it will drive new insights and, perhaps more importantly, prevent losses.

Unbundling Policy Time and Coverages

Existing insurance products bundle coverages. For example, consider that a standard homeowners policy consists of four types of coverages:

  1. Coverage for the structure of your home
  2. Coverage for your personal belongings
  3. Liability protection
  4. Additional living expenses if your home is temporarily unlivable

Each of these coverage areas then insures against loss from a number of specific perils (fire, lightning, wind, etc.). Each also has distinct exclusions. These coverages are put together, often in very standard ways, to create homeowner’s insurance.

However, insurers might also unbundle coverages and fragment coverage time periods to create tailored coverage systems that react to the risks present (and absent) in various circumstances. These strategies subdivide coverage profile and duration into more relevant and accurate segments, offering more accurate pricing or supporting new forms of self-insurance.

Fragmenting coverage time can be accomplished with on-demand or transactional insurance. As we all witness large portions of our lives becoming managed services — transportation, home ownership, fitness — paying to be protected against loss only when specific risks are present or a unique event occurs is an increasingly useful option. This could imply securing insurance only when circumstances or behavior indicate need, or using broad, umbrella-type coverage for losses in everyday activities and ratcheting up coverage for specific types of risk.

For example, imagine an insurance service that uses access to a mobile calendar and other apps to offer timely insurance products based on daily activities. If your morning commute is in a Zipcar (that doesn’t drive itself… yet), you might be offered short-term, simplified personal auto insurance options before you leave. If you instead decide to walk to work that morning, you receive credit toward discounted health and life products. If you’re taking a long flight during inclement weather, you’re prompted with an offer to increase your term life insurance amount. If your job requires you to travel to an unsavory place, your employer is reminded to add kidnapping and ransom insurance to its existing commercial policy (yes, that exists).

Unbundling coverage can be done with a la carte policies. In using a la carte features, insurers can offer insureds more control over the assumption or transfer of risk and, in turn, greater capacity to segment and self-insure (alone or in groups) specific parts of an asset, incidents or perils. This allows for the personal assumption of precise risks by excluding them from coverage. This is accomplished today, in part, through the selection of deductible levels, but we think there are ways to push the concept further.

Of note, we believe the inverse of unbundling — “super-bundling”— is also quite powerful. This refers to insurance products that increase the scope of protection until the insured is no longer required to consider insurance at all. In essence, they abstract the idea of insurance from the buyer. Instead, as long as any obligations the customer owes the insurer (payments or data) are fulfilled, everything and anything is covered. Of course, this convenience is likely to carry additional costs.

These contrasting approaches to providing insurance offer distinct benefits. Unbundling offers maximum economic efficiency in exchange for increased engagement and complexity, whereas super-bundling offers maximum simplicity in exchange for decreased control and higher costs.

Additional Considerations and Questions

Balancing the interests of the individual with the interests of society and public policy is a key question surrounding product innovation. For example, assuming unbundling scenarios are economically viable for the individual, how do we ensure the presence of coverage for liability-related incidents and the protection of third parties?

Other questions that need answering as product innovation advances include:

  • How will privacy and data sharing be addressed in mutually beneficial and safe ways? Customers will expect value in exchange for sharing information about behavior, so data recipients must create the right incentives and will have to protect personal data vigilantly.
  • How does the unbundling of insurance consumption affect the way risk is aggregated and spread across large groups of people?
  • Will frequent, accessible and granular self-insurance create adverse selection issues?
  • Can unbundled customers effectively select risks to self-insure, or will people fall victim to the ludic fallacy, applying oversimplified statistical models to complex systems?
  • And, as with any product, what is the appropriate balance between customization and ease of use?


Insurance distribution and structural/product innovation support one another in ways that are both reactive and complex. As a result, they can be used in coordination to create entirely new insurance experiences.

One example we often discuss is the idea of “entire life” insurance. This is not the same as whole life insurance but rather describes a “super-bundled” risk management product offering the maximum amount of simplicity and flexibility to the insured. In short, entire life insurance would offer a single policy that captures information related to all of your daily needs (transportation, housing, health, travel, etc.) and wraps it into a dynamically priced instrument that indemnifies you against loss from anything bad that might happen. In contrast to the on-demand insurance, usage of entire life insurance is abstracted from the buyer. Instead, the policyholder has a single policy that represents the entire cost to insure that individual based on dynamically adjusted, minute-by-minute protection for all activities.

Such a product, if at all feasible, would require a substantial amount of behavioral data and insight. The makers of this product, at least at first, might also need to discover new approaches to capital raising and risk pooling to offer the product within the bounds of state and federal law. Finally, it stands to reason that a product so deeply integrated with other services and data sources might be sold most effectively via some form of digitally enhanced adviser or life concierge service. Think Jarvis for financial security.

See Also: P2P Start-Ups From Around the World

We also think that combinations like entire life create barriers to entry. If we revisit the simple Venn diagram from our first post, you can imagine a defensibility gradient, where increasingly challenging activities — from a technical, regulatory or human capital perspective — build on each other to create complex, difficult-to-replicate models and relationships.

Defensibility across three areas of Insurance 2.0

While the gradient diagram above portrays the center as the most difficult to replicate, it’s not hard to imagine the dark portion of the circle shifting based on the source of competition. In other words, it may be that, when comparing tech startups to insurance incumbents, barriers to entry are shifted toward the product, but when considering incumbent defensibility against market share erosion from incidental channels (competing directly with carriers), the gradient shifts towards distribution.


In the past few posts, we’ve offered some guesses on what the future holds for insurance. However, given the speed of change and complexity of the systems in play, we’ve surely missed things and made mistakes. So, instead of making internal forecasts that are precisely wrong, we opted to share our observations with you, in the hopes you can incorporate or transform these ideas into your own.

If you’re working on changing insurance in these or new ways, let us know!

Is P2P a Realistic Alternative?

At American Family Ventures, we believe “Insurance 2.0.” will be, in part, shaped by structural innovation. The traditional insurance structure of centralized risk-pooling has been around for a long time. Unsurprisingly, it is also subject to heavy regulation. As a result, many entrepreneurs are using new approaches to lower regulatory burdens or unlock value through decentralization.

Two of the approaches we’re excited to watch develop are peer-to-peer (P2P) and private-investor-backed insurance.

Peer-to-Peer Insurance

P2P insurance isn’t a new concept. Mutual insurance companies effectively use a peer-to-peer model today. However, there appear to be a number of emerging approaches altering the dynamics of the risk/insured pool and creating new benefits for policyholders, carriers and investors.

For context, we see P2P as a set of techniques allowing insureds to self-organize, self-administer and pool their capital in a way that protects all the pool members from loss, all while ensuring any capital in the pool not reserved to pay claims (less any fees owed to a facilitator or administrator) is returned directly to the pool members. Of course, there is a great deal of nuance to making that work.

See Also: P2P Start-Ups From Around the World

Here’s a simplified diagram of a P2P insurance model:

We’ve identified a few reasons to think that, by redefining the traditional insurance structure, P2P models can offer unique benefits.

For one, the P2P system could mitigate elements of conflict in traditional, centralized insurance models. Because insurers (for the most part) get to keep the premiums they don’t pay out in claims, occasionally the incentives of policyholders and carriers fall out of alignment. Conversely, in a pure P2P model, because the premiums not needed for claims are refunded to the policyholders, in theory, any conflict with a carrier is diminished.

While that logic is clear, it likely oversimplifies the issue. The insurance system, while not without its flaws, has functioned for some time and has regulations and processes in place to mitigate adversarial circumstances. In addition, if conflict exists in the insurer/insured relationship, it likely remains present in the P2P model but shifts from customer/carrier to peer/peer. In essence, because any pool member’s payout is a function of the claims paid out to others in the pool, members now have personal disincentives to pay claims, similar to carriers in the traditional model. That said, the carrier/customer relationship isn’t perfect, and new variations of P2P could help advance it.

Secondly, P2P organizing models might leverage large networks like Facebook and LinkedIn more effectively than traditional insurance. The nature of self-selection logically fits the use of a social or professional network — it’s easier to imagine a group of Facebook friends deciding to form an “insurance group” than it is to imagine that same group recommending all of their friends purchase individual policies from a large provider. In effect, large networks power the formation of smaller networks.

In addition to organizing benefits, integration with large, network-based platforms can create efficiencies in administration and retention. Increased frequency of engagement as well as preexisting communication and payment infrastructure could power usability advantages, stronger net promoter scores and better retention rates.

Finally, P2P models, by enabling modifications to the size and composition of risk pools, could create differentiated pricing strategies. P2P models are often associated with self-organization, but they don’t necessarily require it. So, if P2P facilitators become involved in pool selection and can use existing or new underwriting criteria to influence or control pool composition, they could construct pools that offer each member the highest possible returns after claims (or, effectively, the lowest possible cost of insurance). In other words, P2P facilitators might algorithmically generate smaller baskets of varying risk profiles, shifting members, when necessary, to intentionally spread expected claims across numerous pools, thereby creating consistently lower average claims volumes per pool (and, consequently, better payouts for members).

Private-Investor-Backed Insurance

Private-investor-backed insurance allows third-party investment capital to pay or backstop claims expenses in exchange for investment return. For example, a private investor, in theory, could agree to receive premium payments from a basket of insureds in exchange for the obligation to pay claims when they arise. In this model, the private investor (or group of private investors) essentially steps into the financial shoes of the insurer, accepting a stream of certain cash flows in exchange for an uncertain future liability (which could exceed those cash flows). The facilitator of such a marketplace would likely take some fees in exchange for customer acquisition, administration, securing reinsurance and performing the functions of an insurer other than providing risk capital.

See Also: Insurance 2.0: How Distribution Evolves

There are a handful of benefits we think the private-investor-backed model offers participants in the insurance relationship.

First, if certain types of insurance risk can be effectively securitized, those securities would (theoretically) offer professional or retail investors diversification through an instrument that is not highly correlated with the general market (low beta). Some investors already have exposure to insurance through reinsurance contracts and catastrophe bonds, but securitized insurance could offer broader access to more familiar risks with different payoff profiles.

Secondly, similar to what Lending Club and Prosper were able to accomplish in personal and small business lending, a private-investor-backed insurance model might offer price-competitive options to customers who have difficulty securing traditional insurance. For example, today, customers who are unable to secure insurance from conventional insurers (standard market) use excess and surplus (E&S) markets to address their insurance needs. If private investors are willing to take on these E&S risks—whether due to the presence of unique underwriting criteria or higher risk appetites—they could create new competitive dynamics in the E&S market and ultimately improve options for buyers.

As a side note, we often hear people combining the notions of P2P and private-investor-backed insurance. In our minds, they are related and can work together but are separate concepts. Private investor backing is not a prerequisite to building a P2P model — a pure P2P model could employ a variety of strategies to guarantee liquidity and solvency. For example, P2P insurers could leverage reinsurance to cover large or aggregate claims beyond the pool balance, eliminating the need for private investment capital. The P2P insurers might also use traditional fronting arrangements to ensure solvency. By comparison, a pure private-investor-backed model doesn’t need P2P features to function. Instead, it might offer investors financial products that look similar to reinsurance contracts without making any changes to risk pooling or centralization of control.

Additional Considerations and Questions

There are various other structural approaches that might be used to create acquisition cost and pricing advantages or lower barriers to entry for start-ups. Often, these are not necessarily new structural ideas but are rather applications of existing legal strategies employed in surplus or specialty lines insurance to broader, bigger lines.

The successful execution of the P2P model relies on a number of assumptions we’re sure someone will figure out, but we don’t fully understand them just yet. For example, will pools self-select, or will they need to be automatically or algorithmically selected? If self-selected, will most pools (financially) perform as expected, or will there be a small subset of high-performance pools (created by information asymmetry) that generate an inverse adverse selection issue for the P2P business, thereby creating disincentives for participation by the majority of potential buyers? Will pools self-administer and self-police to influence lower losses and guarantee payment of claims, or will some centralized entity still need to exist to ensure member compliance? Will there be regulatory hurdles to overcome if small pools are constructed to reduce claims costs? Finally, how will pool facilitators/administrators/members handle float management — will the capital in the pools sit in cash, or will those assets be actively managed until need for claims? If actively managed, by whom?

The issues we’re interested to see addressed in private-investor-backed insurance are also numerous. Can insurance be a desirable or profitable asset class for private investors? Apart from catastrophe bonds, we haven’t seen much securitization of insurance. Which insurance products or coverages might one securitize best? In other words, which magnitudes and patterns of risk exposures will private investors accept, which existing or new data will they demand as third-party underwriters and what terms will be up for negotiation? Can facilitators find a way to make long-tail risk compatible with liquidity expectations for the asset class?

At the end of the day, we’re looking forward to finding out how companies are able to use structural innovation to create unique and differentiated value for customers.


Insurance 2.0: How Distribution Evolves

At American Family Ventures, we believe changes to insurance will happen in three ways: incrementally, discontinuously over the near term and discontinuously over the long term. We refer to each of these changes in the context of a “version’ of insurance,” respectively, “Insurance 1.1,” “Insurance 2.0” and “Insurance 3.0.”

The incremental changes of “Insurance 1.1” will improve the effectiveness or efficiency of existing workflows or will create workflows that are substantially similar to existing ones. In contrast, the long-term discontinuous changes of “Insurance 3.0” will happen in response to changes one sees coming when peering far into the future, i.e. risk management in the age of commercial space travel, human genetic modification and general artificial intelligence (AI). Between those two is “Insurance 2.0,” which represents near-term, step-function advances and significant departures from existing insurance processes and workflows. These changes are a re-imagination or reinvention of some aspect of insurance as we know it.

We believe there are three broad categories of innovation driving the movement toward “Insurance 2.0”: distribution, structure and product. While each category leverages unique tactics to deliver value to the insurance customer, they are best understood in a Venn diagram, because many tactics within the categories overlap or are used in coordination.



In this post, we’ll look into at the first of these categories—distribution—in more detail.


A.M. Best, the insurance rating agency, organizes insurance into two main distribution channels: agency writers and direct writers. Put simply, agency writers distribute products through third parties, and direct writers distribute through their own sales capabilities. For agency writers, these third-party channels include independent agencies/brokerages (terms we will use interchangeably for the purposes of this article) and a variety of hybrid structures. In contrast, direct writer sales capabilities include company websites, in-house sales teams and exclusive agents. This distinction is based on corporate strategy rather than customer preference.

We believe a segment of customers will continue to prefer traditional channels, such as local agents valued for their accessibility, personal attention and expertise. However, we also believe there is an opportunity to redefine distribution strategies to better align with the needs of two developing states of the insurance customer:those who are intent-driven and those who are opportunity-driven. Intent-driven customers seek insurance because they know or have become aware they need it or want it. In contrast, opportunity-driven customers consider purchasing insurance because, in the course of other activities, they have completed some action or provided some information that allows a timely and unique offer of insurance to be presented to them.

There are two specific distribution trends we predict will have a large impact over the coming years, one for each state of the customer described above. These are: 1) the continuing development of online agencies, including “mobile-first” channels and 2) incidental sales platforms.

Online Agencies and Mobile-First Products

Intent-driven customers will continue to be served by a number of response-focused channels, including online/digital agencies. Online insurance agencies operate much like traditional agencies, except they primarily leverage the Internet (instead of brick-and-mortar locations) for operations and customer engagement. Some, like our portfolio company CoverHound, integrate directly with carrier partners to acquire customers and bind policies entirely online.

In addition to moving more of the purchasing process online, we’ve observed a push toward “mobile-first” agencies. By using a mobile device/OS as the primary mode of engagement, the distributor and carrier are able to meet potential customers where they are increasingly likely to be found. Further, mobile-first agencies leverage the smartphone as a platform to enable novel and valuable user experiences. These experiences could be in the application process, notice of loss, servicing of claims, payment and renewal or a variety of other interactions. There are a number of start-up companies, some of which we are partnered with, working on this mobile-first approach to agency.

To illustrate the power of a mobile-first platform, imagine a personal auto insurance mobile app that uses the smartphone camera for policy issuance; authorizes payments via a payment API; processes driving behavior via the phone’s GPS, accelerometer and a connection to the insured vehicle to influence or create an incentive for safe driving behavior; notifies the carrier of a driving signature indicative of an accident; and integrates third-party software into their own app that allows for emergency response and rapid payment of claims.

Incidental Channels

In the latter of the two customer states, we believe “incidental channels” will increasingly serve opportunity-driven customers. In this approach, the customer acquisition engine (often a brokerage or agency) creates a product or service that delivers value independently of insurance/risk management but that uses the resulting relationship with the customer and data about the customer’s needs to make a timely and relevant offer of insurance.

We spend quite a bit of our time thinking about incidental sales channels and find three things about them particularly interesting:

  1. Reduced transactional friction—In many cases, customers using these third-party products/services are providing (or granting API access to) much of the information required to digitally quote or bind insurance. Even if these services were to monetize via lead generation referral fees rather than directly brokering policies, they could still remove purchase friction by plugging directly into other aggregators or online agencies.
  2. Dramatically lower customer acquisition costs—Insurance customers are expensive to acquire. Average per-customer acquisition costs for the industry are estimated to be between $500 and $800, and insurance keywords are among the top keywords by paid search ad spend, often priced between $30 and $50 per click. Customer acquisition costs for carriers or brokers using an incidental model can be much lower, given naturally lower costs to acquire a customer with free/low cost SaaS and consumer apps. Network effects and virality, both difficult to create in the direct insurance business but often present in “consumerized” apps, enhance this delta in acquisition costs. Moreover, a commercial SaaS-focused incidental channel can acquire many insurance customers through one sale to an organization.
  3. Improved customer engagement—Insurance can be a low-touch and poorly rated business. However, because most customers choose to use third-party products and services of their own volition (given the independent value they provide), incidental channels create opportunities to support risk management without making the customer actively think about insurance—for example, an eye care checkup that happens while shopping for a new pair of glasses. In addition, the use of third-party apps creates more frequent opportunities to engage with customers, which improves customer retention.

Additional Considerations and Questions

The digital-customer-acquisition diagram below shows how customers move through intent-driven and opportunity-driven states. Notice that the boundary between customer states is permeable. Opportunity-driven customers often turn into intent-driven customers once they are exposed to an offer to purchase. However, as these channels continue developing, strategists must recognize where the customer begins the purchase process—with intent or opportunistically. Recognizing this starting point creates clarity around the whole product and for the user experience required for success on each path.


Despite our confidence in the growth of mobile-first and incidental strategies, we are curious to see how numerous uncertainties around these approaches evolve. For example, how does a mobile-first brokerage create defensibility? How will carriers and their systems/APIs need to grow to work with mobile-first customers? With regard to incidental channels, which factors most influence success—the frequency of user engagement with the third-party app, the ability of data collected through the service to influence pricing, the extensibility of the incidental platform/service to multiple insurance products, some combination of these or something else entirely?

Innovation in how insurance is distributed is an area of significant opportunity. We’re optimistic that both insurers and start-ups will employ the strategies above with great success and will also find other, equally interesting, approaches to deliver insurance products to customers.