There is a wave of new startups entering the insurance industry. At times, especially for insurance veterans, it can feel more like an onslaught. A.I.-this, I.O.T.-that and what about blockchain...oh how the “disruptors” are coming, they all say!
For Nick Lamparelli and Jim Rice of reThought Insurance, a new MGA backed by three leaders with years of combined insurance, underwriting and cat-modeling experience, the evolution in technology is real, but the concept of disrupting the insurance industry is a fallacy.
“I can’t think of a worse thing to be in an industry, than a disruptor,” shared Jim. “We don’t want to be disruptive. We don’t want to reinvent the wheel and have people work in a completely different way and upend everything.” Nick couldn’t agree more. “These startups, especially the tech ones, when they come in saying they’re going to disrupt the industry, it’s laughable. It’s impossible to disrupt the industry as it currently exists.”
Instead of trying to “kick in doors” or “break down walls”, the right way to build any new venture in insurance is to work alongside industry leaders and influencers to promote a new level of experience, focus and intelligence that solves existing problems in a unique manner. Nick highlighted, in terms of starting a new MGA, that, “from an underwriting standpoint you have to have some distinct advantage, something special about what you’re bringing to the table that’s totally different. And it’s got to be both profitable and scalable.”
A Recipe for Success
The journey of starting an MGA begins with establishing a unique strategy and a passionate team to see the business through. But the road is rife with twists, turns and pivots that would make any entrepreneur queasy, so it’s vital that new entrants have the funds necessary to survive the inevitable bumps and bruises required to develop a solid foundation.
Jim couldn’t stress enough that “you’ve got to have the right resources.” He continued, “I’m not just talking about people; you’ve got to have sufficient working capital. It’s frightfully obvious, but I just can’t emphasize it enough because without it, you’re nothing, you’re not nimble, and it’s going to be hard to get out of your own way.”
The potential pitfalls of running out of money underscore the need to be prudent in engaging and negotiating your relationships with carriers and reinsurers. First and foremost, it comes down to proving your model works and that you can sell it.
For new MGAs, Nick lays out his advice, point blank: “Tread very lightly when moving into the delegated authority area.”
“I think one of the first things an MGA should be focused on is distribution and sales channels, specifically sourcing business. Get some deals done, versus seeking delegated authority right away because that process is just going to burn capital,” said Nick.
“Tread very lightly when moving into the delegated authority area.”
It’s also a missed opportunity to not establish a sales pipeline before taking a book of business to a reinsurer to get the power of the pen. As Nick identified, “once you have a book, then the delegated authority stuff becomes much easier because, for one thing, you have revenue coming in, so you’re not just burning through cash. Plus, you’re going into the delegated authority negotiation basically saying, ‘here is our average premium size, our average exposure and in this general geography,’ which altogether is going to shave the time it takes by 50 percent or more.”
Jim jumped in, “Now you’re proving to your backers that you can get business. That gives you a massive amount of credibility, by stepping up to the table and saying, ‘we’ve already written these hundred accounts.’”
With the right funding in place, the focus becomes your unique value proposition, and that’s where innovations in both technology and underwriting processes are paramount. In fact, it’s no coincidence that, of the reThought founders, they chose Cory Isaacson, previously CTO of RMS and a founder of multiple software platforms, to take the helm as CEO. Jim shared, “Cory has a grasp of what technology we need to build overall not just for one business, but for growing a lot of businesses. So not only is what we have now unique, but we’re ready to grow the market down the road.”
Reinsurers Are Hungry for Innovation
Although the challenges abound for building a truly novel approach to sourcing and underwriting insurance, the appetite for innovation among the industry’s most powerful reinsurers is explosive. This energy and enthusiasm for smart changes to how MGAs conduct business is an opportunity for savvy program administrators to capitalize on.
“We’re finding more and more that a lot of insurers and reinsurers have armies of people that are devoted to innovation within the industry,” said Jim. “You didn’t find that 5-10 years ago, and it’s a great luxury for us because these people tend to be a lot more receptive and less reliant on legacy thinking. They’re willing to go out on a limb for something they really believe in.”
"Take the five largest reinsurers...They have teams of their own engineers and data scientists, but they're still eager to learn."
It can be daunting, however, to go into a top global reinsurer, who is already investing in innovation and backed by a multi-billion-dollar balance sheet, and tell them something they’re not already aware of or may even be writing the book on. But they’re hungry for knowledge nonetheless.
As Nick laid out, “They want you to bring something new to the table. Take the five largest reinsurers in the world, that probably control 80 percent of all the reinsurance capacity, but what kind of curve ball can you throw that they haven’t seen? They have teams of their own engineers and data scientists, but they’re still eager to learn.”
It’s About Solving Problems
In evaluating complex commercial risks, data and technology are undoubtedly expanding the capabilities of MGAs, but their impact still depends entirely on the intuition and creativity of the underwriters using these tools.
For Nick, it’s all about being inquisitive and taking a moment to investigate the opportunity properly. “We’re happy to swim and marinate in data. I love doing that, but sometimes it’s as easy as just looking for a clue,” he says.
Nick expanded on an example that illustrates how reThought is finding creative ways to approach risks that have been improperly underwritten in the past. “We wrote an underground parking garage in a Midwestern city right on a river that was basically turned down by everybody. And it did not take a lot of Google searches to find out that the Army Corp. of Engineers spent around a hundred-million dollars building a flood wall in the city to protect this area. I’m not saying that the previous underwriters were lazy, I’m just saying that you forget that your job is to understand the risks and that’s what we do.”
"Everyone's afraid because everyone's profit-oriented."
Although profitability is an unquestionable necessity for MGA success, when underwriting is overly focused on making safe decisions based on money, it’s the insured that pays the price in higher premium or inadequate coverage. For new MGAs entering the market, bringing a problem-solving mentality where the quality of coverage is as, if not more, important than the price, can be a game-changer.
“I like to ask questions like ‘What about content protection? What about loss-of-use? What about landscaping?’ Like ‘What else can we cover or what can I plug into this as bells and whistles,’” shared Nick. He continued, “Everyone’s afraid because everyone’s profit-oriented. A lot of underwriters build this wall around our underwriting guidelines so that none of us get fired, instead of saying ‘let’s solve this problem.’ I think the more we’re just detectives looking for clues, looking for a chance to write the business, the better.”
Earning the Market's Trust
By looking at risks differently, and using both technology and data to scale, new MGAs like reThought are on the right path to building a specialty and setting themselves apart from the more commoditized markets. But getting the business off the ground demands broker buy-in, and earning their trust depends on how far you’ll go to help them deliver for their clients.
As Jim stressed, “I think it all gets back to the value of what we can offer and finding ways to make it easier for the broker to sell the products. And that means developing relationships so they know what our products and services are all about.”
"I feel like it's my job to dig a little bit deeper and figure out how we service the customer better..."
It’s also about seeing opportunities to educate brokers on how to define what’s an appropriate level of coverage and making sure that, at the end of the day, the insured is properly protected.
Nick exclaimed, “when brokers approach us concerned about the price, it’s par for the course in our industry. So to me, I feel like it’s my job to dig a little bit deeper and figure out how we service the customer better by creating a better product. You’re not always going to win on price, but if we offer something unique, we can deliver a better level of coverage and value for the insured.”
The right mentality for new entrants into the insurance industry, whether you’re a startup MGA or an insurtech, is to be a facilitator, not a disruptor. The industry itself is evolving, and it’s on each individual, regardless of your role in insurance, to dig deeper and be smarter. Do the research, study harder and invest in technology to simplify and speed up collaboration.
These are the steps required to compete and win in this modern age of insurance.
Written by Michael Fiedel, partner and VP of Business Development, PolicyFly.