Insurtechs' varied journeys from MGA to full-stack carrier

The insurtech startup wave has brought many new companies attempting to identify new or underserved markets, innovate new insurance products, or rethink consumer experience from the bottom up. These startups present like carriers and talk like carriers, but it’s an incumbent insurer writing the risk in most cases.

This approach is sensible. A small startup with limited funding doesn’t have the reserves to write and bind insurance policies. If a more established insurer underwrites the risk instead, the startup is free to focus on the differentiators (usually a mix of customer experience, product, and market) to prove out a business model. Most insurers recognize that these startups are MGAs despite their public positioning as carriers.

In the past twelve months, the industry has seen many of these “carrier” MGAs taking steps to become actual carriers writing on their own paper. This development may be, in some cases, because these MGAs believe that they will be able to keep customer acquisition costs low with sufficient capital and modern digital capabilities. Others may want to move away from profit sharing with insurer partners or backers, especially in personal lines with thin margins.

And, of course, they all likely believe that this is the most opportune path for growth.

Next Insurance was one of the earliest companies to take part in this phenomenon. It began as a commercial insurance MGA providing niche program business-style coverage for small businesses. The company recently became a licensed small commercial insurer, offering online quote, bind, and certificates of insurance.

Buckle began as a startup MGA providing personal auto insurance and coverage for rideshare drivers. It has since acquired Gateway Insurance (and Gateway’s 47 state insurance licenses), which will allow it to pivot to a full-stack carrier.

Startup Clearcover started as a digital MGA, but with a Series C round of $50M, it is looking to become a full-stack insurer in all 50 states.

It’s not clear to Novarica that becoming a licensed carrier is always the correct choice for an insurtech startup MGA. There are certainly values as the full-stack player, as well as risks. It’s also a very different financial model. An MGA approach allows an organization to focus on technology and the customer, but it may not provide the long-term growth potential that investors want.

Some startup MGAs are looking to pivot away from insurance sales altogether, focusing on licensing the technology they’ve built. A software licensing model is more comfortable for most VCs and PE firms.

A phased approach makes sense for the startup carriers listed above and others who might be on a similar journey from an MGA to a licensed carrier. Start with a focus on non-risk-holding sales to prove the model, grow through a mix of customer acquisition and additional funding, and become a licensed risk holder in measured steps.

Novarica wishes the best of luck to this generation of true new insurance carriers.

This blog entry was reprinted with permission from Novarica.