The insurance industry is undergoing substantial innovation, as companies develop new technology to address evolving customer expectations and risks. Insurtechs have impacted nearly every aspect of the industry, from underwriting and claims management to distribution and product development.
With this growth, however, there are many important legal issues to consider when operating in the heavily regulated and ever-changing insurance ecosystem. This includes critical issues such as data use and security, intellectual property rights, compensation and confidentiality. When it comes to contracts, startups and emerging companies in the insurtech space must address these issues but often lack the leverage or resources to negotiate every term. In this series of articles, we highlight some of the key issues to consider when contracting — to demonstrate what is truly important and where insurtechs should focus — whether it concerns program administrator agreements or other types of partnership, master services, or marketing agreements.
1. Data use & security
With the digitalization of insurance, many insurtechs now process and maintain significant amounts of customer data, which can be used to underwrite risks, develop new products and detect fraud. The ownership and access to data, as well as data security, are important matters to address in any contractual negotiation but particularly in an industry where data has now become a highly regulated, valuable commodity.
For example, in a program administrator agreement — which is a common way for Managing General Agents (MGAs), to partner with carriers and have the ability to underwrite, quote, issue, and service policies — it is important to document which party will maintain customer data, any data specifications or requirements, and further representations and warranties regarding data security. From a data security perspective, the more data insurtechs are maintained, the greater the need becomes to focus on these provisions and make sure they are clearly negotiated and protective.
Of course, it always remains necessary to meet the relevant legal requirements governing the use and security of customer data. And with innovation happening across the industry, data security must be considered throughout the whole lifecycle and companies must maintain appropriate safeguards.
2. Exclusivity
When partnering in the insurtech space, exclusivity is a key issue that must be addressed at the outset. To the extent that an exclusive arrangement is possible and/or desired, the parties must consider the scope (including any limitations) and duration of the exclusivity term.
As a practical matter, there are several different ways to approach this issue. For example, if an MGA is looking to partner with a carrier, the parties oftentimes will agree to a mutual exclusivity term which specifies that neither party will produce insurance business that is substantially similar to the relevant subject matter during the exclusivity period. From the carrier’s perspective, this allows it to share in the upside from the relationship and justifies a partnership with niche MGAs. From the MGAs perspective, this ensures that the carrier will not work with a competitor during the relevant period, or at the very least that the MGA has a right of first refusal when it comes to a related product.
As for the length of any exclusivity term, the parties should ensure that the duration is reasonably necessary to protect the interests of the parties and does not unduly restrict either party from future endeavors.
3. Intellectual property
When dealing with new insurance products and services, it is also necessary to address which party maintains ownership of any intellectual property rights that may exist. For example, a simple way to address this is to include a provision that anything developed by one party remains owned by the developing party, whereas anything developed jointly is jointly owned by each party and each party has the right to use it. Of course, this may not apply in all contexts, such as where an insurtech is partnering to develop a new product and wants to maintain ownership rights over any resulting work-product. Often, parties will license the use of their intellectual property to the other during and even after the termination of an agreement.
4. Customer experience
If data is paramount in the insurtech space, customer experience is a close second. With all of the innovation in the industry, it should come as no surprise that there has been an acute focus on improving the customer experience. In fact, when it comes to developing new insurance products and services, customer service is the ‘special sauce’ that differentiates one business from another in a highly competitive space. It is therefore critical to address the customer when contracting in the insurtech space.
This includes a process for addressing customer complaints, ensuring cooperation where needed to ensure a more streamlined and frictionless user experience, and appropriately defining each party’s authority when it comes to interacting with consumers. In most circumstances, carriers may delegate these powers to their partners and administrators, but it is important to be clear at the outset about what is expected from each party and who retains ultimate control over underwriting, claims management, and marketing. Oftentimes, capturing this in agreeable contract language between the parties can be difficult and can even be read as ‘aspirational’ at times, but it is very important to at least try to set down in writing how each partner should help or at least not hinder the customer experience.
When contracting in the insurtech space, it is important to give careful consideration to these issues to avoid unexpected results.
