Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Investments in insurtech startups have exploded in recent years with over $2 billion invested in 2017 alone. These startups employ cutting-edge technology in an attempt to disrupt and enhance the current insurance process and market. One current trend-with the potential to drive further substantial market growth is the injection of high powered insurtech efficiencies into the program business market, either through partnerships with existing managing general agents (MGAs) or new MGAs developed by insurtech startups themselves. Over the past several years, program business developed by MGAs-specialized insurance programs targeted to a niche market has been a rare success story in the soft property and casualty insurance market. According to a 2017 study by investment management firm Conning & Co., growth in MGAs and the niche insurance programs they serve exceeded the standard property and casualty market by 32%. While the use of insurtech processes improves the chances of success for new MGAs, it does not guarantee it. There are many lessons to be learned from the startups of now established successful MGAs.
MGAs (or alternatively program administrators) typically develop insurance programs tailored to specific business types or coverages. By focusing on a niche business type, MGAs can develop deep expertise on the risks faced by these entities and how to best address their needs. Examples of MGA business include insurance programs that serve varied risks such as arborists, personal trainers, and ski instructors, and coverages such as specialized general liability and catastrophe insurance (earthquake, flood, wildfire, etc.). MGAs are not insurance companies in that they don’t assume insurance risk (the responsibility of paying a claim if an insured event occurs). They do, however, provide underwriting and other critical services such as marketing, binding, and policy issuance. MGAs typically partner with insurers that provide their balance sheet to support the insurance risk. In various alternative configurations, fronting insurers can provide the initial insurance policy (for a fee) and then cede the business to a reinsurer which can in turn keep the risk or cede some to a captive controlled by the MGA.
Program business benefits policyholders because they receive insurance coverage specific to their needs in regards to policy coverage, terms, conditions, limits, and costs. Policyholders are buying from experts who know and understand their business. Insurance carriers benefit from program business because they gain access to large blocks of well underwritten niche business that come with low cost and barriers to entrance and exit. The MGA format is appealing to insurtech startups because it allows these startups to test the value of their competitive advantage, prove the concept works, and control their vision without the large amount of capital required to form an insurance company. They can also benefit from profit sharing agreements typically in place with MGAs or through assuming risk through a captive as discussed above.
Insurtech entities typically develop a competitive advantage or “secret sauce” related to the use of cheaper/faster/smarter technology, a culture of innovation, and a focus on improving the customer experience.
Advanced technology can be used to improve the efficiency or transparency of existing parts of the insurance value chain either by lowering front-end costs related to acquisition of risks or back-end costs related to claims management. Examples of improvements on the front end include streamlining the acquisition process by using chatbots to answer questions and third-party data sources to complete underwriting and rating forms. On the back end, examples include the use of artificial intelligence-based claimbots and digital photos to speed the claims resolution process. Underwriting expenses (representing nearly 30% of property and casualty insurance premiums including commissions) and loss adjustment expenses (representing approximately 10% of premiums) are prime targets for improvement in today’s soft market.
An innovative culture allows insurtech startups to bring a fresh perspective to the insurance process, resulting in new product offerings such as episodic or transactional insurance, pay-as-you-go insurance, and peer-to-peer offerings. These offerings may appeal to those with exposure to loss who are not in the current insurance market, adding to market growth. Insurtech startups are not afraid to push the boundaries of current insurance product offerings and fail fast in their efforts so that they can then move to the next iteration.
To improve the customer experience, some insurtech startups seek to make insurance easy to find, easy to understand, and easy to pay for. This is accomplished through the use of apps, simplified policy language, and connections to digital payment providers resulting in “low touch” underwriting and low hassle to the policyholder. Their focus is to compete through service and ease of transaction rather than on price.
Despite the obvious appeal of creating a program or becoming an MGA for insurtech startups, there are some challenges to success. One of the primary challenges lies in convincing established insurers or reinsurers to back the program and assume the insurance risk. This is particularly challenging for a new program with no historical data and no proof of concept to rely on.
Also, many insurers maintain minimum premium targets for their programs (typically $5 to 10 million) in order to make the expense of monitoring the program worthwhile. They might be skeptical of the quality of the portfolio if aggressive business plans assume a massive scale-up of business to achieve premium targets. Alternatively, insurtech startup MGAs may be frustrated at the slow pace of a more measured scale-up. Often, there needs to be a realistic compromise.
Another challenge to creating a successful new MGA is the current soft market environment for most segments of the property and casualty insurance market. Due to the overabundance of capital and resulting competition, rates have stayed flat or declined in recent years for many lines of business, possibly to the point that current rates are below an adequate level needed to fund losses and expenses. As a result, any advantage from lower rates that startup insurtech MGAs have because of their lower underwriting or loss adjustment expenses would be diminished, making it more difficult for MGAs to charge rates that are both competitive and profitable.
A final challenge for many new MGAs is the sometimes surprising amount of administrative, compliance, and regulatory work that is necessary to operate the business successfully. If the program is intended to operate in the admitted insurance market, there are rate filings to be made, underwriting guidelines to develop, and policy forms to be created and filed–all which need to adhere to existing variations in state regulations. A lesser but still significant amount of work needs to be done even in the non-admitted market, which does not require formal state filings. New MGAs may also need to be involved with data capture for compliance exercises and potential future analytics. Typically, given the recent development of their data systems and technological expertise, the capture and maintenance of data is not a material issue for most insurtech entities.
For insurtech startups looking to become MGAs, there are a number of ways to improve a company’s chance for success. Recommendations, based on past MGA successes, include the following:
There are several entities seeking to respond to the growth in insurtech MGAs by helping to facilitate and streamline the process to get started. These firms include Boost Insurance and incubator firms such as Vibe MGA Management (Vibe MM).
With investment in insurtech startups exploding and substantial room for growth in the MGA market, the time is right for companies to think about how to best take advantage of this emerging trend. The morphing of insurtech startups into MGAs can be successful if done properly. While challenges exist, the recommendations outlined above provide key considerations for businesses looking to develop program business through an MGA. In this way, insurtech startups can enjoy the benefits of the success of their vision without compromise or the burden of a large commitment of capital.