Greg Hoffnagle is Partner at Goodwin Law, a global law firm serving the innovators and the investors in a rapidly changing, technology-driven economy. Greg was interviewed by Michael Fiedel, a Managing Director at InsurTech Ohio and Co-Founder at PolicyFly, Inc.
Greg, what are some of the pressure points that force early insurtech to pivot?
“Over the last couple years of working with insurtechs, I could pinpoint a handful of reasons why they pivot. Depending on what your product is or what issue you're trying to solve in the insurance space, quality, customer acquisition is very difficult, so I've seen insurtech pivot from being a tech-driven MGA to “just” a SaaS provider for this reason.
Another point that often forces some of my insurtech clients to pivot is investors, and that's twofold. First, the investors are intrigued or bullish on an aspect of what they're doing, but not everything (e.g., they like the tech stack but not the insurance product). Investors will let them know where the value lies and what is truly scalable. Sometimes it's just that knowledge a sophisticated investor brings.
The last pressure point that forces insurtechs to pivot is competition. Three young and smart entrepreneurs think they have a clever idea, but then realize that there are others selling those products or doing very similar innovating in the space. Take embedded insurance, for example. There are probably 15 insurtechs right now that have the same general thesis: enabling non-insurance companies to offer insurance products as an add-on, generally as part of the digital sale. They're all focused on the same thing, and it's the cream that rises to the top. Competition's one that often leads a company to realize, ‘You know what, we don't do this great,’ or ‘there are people that seemingly already have a stronger foothold in this market, and we need to try to find a different angle in the space.’”
Why does this lead some insurtechs to be more mindful of focusing on a partnership-driven strategy?
“It's something that I try to instill into all of my clients when they come to me as an advisor. What I've seen is an evolution as to the way of thinking in insurtech. While its core is disrupting and innovating, it's generally not a ‘do it alone’ space. The insurance industry in the US is too large, too entrenched and too complicated. To try to go out there and say, ‘We're not going to work with anybody; we are going to do it alone’ has been a recipe for failure or at the very least stagnated growth significantly. The entire industry, whether it’s a traditional carrier, brokerage, third-party vendor or SaaS provider, has recognized that it’s best to stick to doing what you do great and then partner with other companies that do the other parts equally great as well.
I have noticed more and more that collaboration allows clients to scale faster. There are several unicorns out there that have been able to thread the needle on their own, but, generally speaking, this is a partnership-driven space. That's why you need to be focused on this from the beginning and willing to work with other people that do things better than you. Then you, ultimately, bring a product or service to your customers that's excellent all around."
What ideas or companies are in the best position to impact the evolution of the insurance industry?
“Companies that have superior tech are very well placed. That's where the insurance industry has been less than great. Carriers used to create their own technology or try to implement tech throughout the space but failed in the execution.
The other component is you need to know the insurance business. Great tech is only going to get you halfway there. The companies that are willing to embrace the traditional insurance pipeline and incorporate it with their tech are the ones that are best to succeed in this space. The mindset of ‘we don't really care how the insurance space ‘traditionally’ works, we're here to completely revolutionize it’ does not work. You have to be sharp on both sides of the coin.”
How can the formation of an MGA play a key role in allowing organizations that are new or have never been in the insurance industry to effectively enter and operate?
“An MGA allows scalability. You have the ability either through your technology or marketing to sell the product and then offload basically everything else initially to carrier partners or third-party vendors. What it also allows you to do is, as you learn the business, capture more of the user experience, data, underwriting and claim handling. Overall, it allows you to grow your business when you're ready to grow it and capture more of the revenue as you do.
The other part of it is carrier capacity providers are constantly looking for specialists in certain industries, markets and types of customers. You can focus on an area that’s attractive to carriers, but it allows you to have a natural scaling process where you do very little in the beginning but sell policies. As you get more comfortable, trust is built, and you can serve as the underwriting and claims handler for large carriers for particular lines of business. Your tools or processes have proven that you are best in identifying ‘better’ risks and helping them become customers of large carriers.”
What do those that want to form an MGA need to be mindful of in terms of getting the process started?
“I often advise my clients to have an insurance industry advisor and a vendor to help with licensing. People also need to understand they need carrier partners. Carrier partners don't really have an interest in working with you until you have a license, plan and clientele that you're going to offer products to.
It really is in the planning and being very deliberate in your thought process. Sometimes it's researching and sometimes it's trial and error. Try to build some of that market data that will get carriers interested. Most carriers don't want to put the time investment in a company that isn’t ready to go live soon. You need to be confident and sure that you can demonstrate to carrier partners that you have the ability to sell their products or a new product and have them want to back it.
Again, while the insurance industry is big, you don't want to get turned down by four or five large carriers because they didn't think you were ready. Then it's harder to find capacity going forward. It's just being smart and having demonstrable evidence of why your product or your idea will work. Nobody can actually prove a concept until you test it. But, it's doing that market research and making sure that you have a story that carriers can and want to understand because as much as you want to revolutionize the insurance market, one of the prerequisites for being an MGA is having carrier partners.”