CEO of INZMO, a Berlin-based insurtech for the rental sector & a top 10 European insurtech driving change in digital insurance in 2023.
Not so long ago, it looked as if there would be a new wave of insurance providers emerging from the ranks of newly funded insurtechs. But that picture is less certain today.
Forrester Research predicts that more than a quarter of insurtechs will leave the insurance marketplace in 2023. I see other insurtechs, however, doubling down on their positions as managing general agents (MGAs) rather than pursuing fully-fledged insurance licenses.
What’s going on? Why are MGAs digging in rather than taking on the big beasts of the industry?
The MGA Future
Indeed, there is a lot of interest in MGAs right now. For those not as familiar, MGAs are specialized insurance agents or brokers that have been granted underwriting authority by an insurer. As well as offering coverage and underwriting, they can handle and settle claims and appoint their own retail agents. In other words, they already occupy a privileged position in the insurance ecosystem.
According to McKinsey & Company, “Private-equity investment in MGAs has accelerated in the past two years, increasing the competitiveness of each deal and pushing valuations higher.” They describe how MGAs occupy a sweet spot in the insurance value chain, with investors attracted to their high margins, low capital requirements, high free cash flow and relatively high recurring revenue.
While that all sounds great for MGAs, the report also points out that their future outlook depends on their ability to stay relevant. MGAs need to find ways to innovate to create quicker, more convenient ways of interacting with brokers and customers. That could involve finding and fixing the issues currently causing the most friction and applying technology to improve the experience.
MGAs Need To Get Closer To The Data
As the leader of an MGA, I believe that the industry can prepare for the future by leveraging data to help improve underwriting, risk management and the broker/customer experience. I find this an incredibly achievable goal since MGAs tend to have access to the data needed for these types of customer insights.
Within the insurance value chain, those in the industry tend to set themselves apart in a few ways.
• By specializing in specialized insurance lines such as cyber risk or short-term property-related insurance.
• Through privileged access to specific customer segments.
• By focusing on less complex, often small- and mid-size enterprises, providing capacity as an additional channel to expand distribution.
No matter the route, I believe that data-driven insights can help improve offerings by leveraging both in-house data (such as risk and claims) as well as various external data.
Alternative Sources Of Data
But even if conventional data is not in plentiful supply at your enterprise, there is also the emerging science of behavioral analytics, which is making enormous strides in consumer lending right now. Acknowledging that traditional forms of data (from credit bureaus, for example) can be pretty thin—especially with younger customers, the subprime market and in less economically developed markets—lenders are derisking business by looking at alternative data sources.
These include metadata collected during onboarding or any other interaction with a client. Analyzing a user’s device fingerprint, app installation patterns, IP address, mouse movements, typing patterns, session analysis and other behaviors such as Twitter usage has been shown possible to reduce bad debts.
The benefits of this approach cross over into insurance, too, where complex underwriting can be time-consuming and costly and impact the customer experience. Alternative data can provide a new way of approaching underwriting risk and loss prevention with the ability to review each application individually while minimizing costs and delays and improving the accuracy of the quote.
By industrializing the generation of data-driven insights, I believe that MGAs can accurately assess the marginal impact of new quotes on their portfolio to make the best underwriting decisions.
It’s All About Partnerships
However, there are some challenges. Specifically, according to Deloitte, there are four competencies to keep in mind as we move ahead: strategy and governance, data and analytics, culture and talent and technology. This is a tough ask.
I believe that MGAs can use data analytics to improve their business outcomes across these competencies by better understanding their customers, creating new offerings, enhancing their service quality and pricing their risks accurately. However, building your own data analytics platform may be beyond your capabilities or budget, which is why I recommend relying on the assistance of carriers who can offer a data analytics platform that integrates and organizes data from various sources and formats.
All of these needs put the spotlight firmly on your partnerships with insurers. Insurers and MGAs have a complex relationship that can involve both benefits and challenges. On one hand, insurers can benefit from MGAs’ expertise, underwriting authority, market access and operational efficiency. MGAs can help insurers enter new markets, offer specialized products and reduce costs.
On the other hand, insurers need to oversee MGAs effectively to ensure that they comply with regulations, manage risks and sell products that meet customers’ needs. Insurers also need to ensure that MGAs do not compete with their own distribution channels or erode their margins.
As a final analysis, I believe MGAs look set for growth provided they are fully aligned with their partners and have clear and transparent agreements, aligned incentives and mutual trust.
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