What is that Insurtech?
All kinds of "Insurtechs" exist from claims Insurtechs to sales Insurtechs to data consolidation/analytics Insurtechs to certificate issuance Insurtechs to agency/broker Insurtechs to carrier Insurtechs. The problem, and this is a major risk factor not to be taken lightly, is that transparency is severely lacking with many Insurtechs relative to what they really are.
An agency using an Insurtech had better know if the "Insurtech" is a carrier, a broker, a legitimate broker, an agency, or some other kind of pass-through organization. If an agency makes a mistake, their E&O is at risk and don't expect the Insurtech to bail you out.
An example is a new market that is advertising hard to entice agents to sell their niche property form. They are advertising that they are a carrier in the form of, "ABC's new ... form is better and less expensive than any on the market." However, they are the broker. They are not the carrier.
These are single entity brokers in the sense that they sell one carrier's products. These are not the traditional MGA's that sell multi-carrier offerings. I am not sure the people running these single purpose MGA's even understand the critical differences. In this case, the carrier behind the MGA only had $25 million in total surplus and was basically brand new. Does it really make sense to place business with a carrier that only has $25 million in surplus when far larger carriers exist who have better ratings?
I have great regard for A.M. Best's ratings. There is a particular carrier that was rated "A-" by A.M. Best and I am not questioning the rating in any way whatsoever. However, agents would be smart to look at the carrier's surplus in addition to the rating because $25 million in surplus is not much money as far as surplus goes. The average home value is around $500,000 so that is only 50 houses (if Coverages B and C are included, much less additional living expenses, it really is maybe 30 homes).
When a broker is selling a carrier's products, the broker has an obligation to disclose the carrier’s identity from whom they are providing the quote. I do not see that is always happening although it is not necessarily nefarious. I have talked to many Insurtech executives and quite a few do not know the difference between a carrier and a broker.
From an E&O perspective at the most basic level, agents should list the actual carrier on the application. One cannot list a broker as a carrier. In the example above, the broker had four different carriers that were all tiny and their results, i.e., their surplus was not the same. Which of the four carriers is actually writing the policy? The agent must know this, and should disclose it to the insured, before submitting the application.
I see this situation often with various cyber forms. The cyber forms are marketed as "ABC's cyber form". An MGA cannot own a form unless they are also the carrier (within the same entity and not different entities) or they have a specialized program with a market like Lloyds whereby they have a form that Lloyds supports and usually the broker must have the pen. They don't file the forms or provide the surplus specific to the form.
The form is the carrier's form, not the broker's form. For E&O purposes, putting the broker's name on the application as the carrier is problematic because for one, it is a misrepresentation, and for another the entity named is not a rated entity or even a licensed carrier meaning the agency may have no E&O coverage in the event insolvency becomes an issue.
Another example that exhibits the lack of transparency is how some Insurtech carriers do not understand reinsurance (It is actually the brokers who usually don't know the difference between their broker status and a carrier status, but also some carriers do not know this either). One Insurtech recently advertised they were completely reinsured. They were not really reinsured. They had a cut-through agreement. With whom they had made the cut-through agreement was not documented anywhere that I could find it.
First, cut-through agreements are not commodities. These agreements vary materially from one to another. Second, they do not work like reinsurance. Third, cut-through agreements often indicate there are significant financial issues. In the past, cut-through agreements were often the last resort for a company that could not obtain capital or reinsurance in sufficient quantities. Some cut-through agreements provide quite limited coverage.
An agent truly needs to know whether an Insurtech has reinsurance or a cut-through agreement. If it is a cut-through agreement, they MUST know the other carrier and at least have some semblance of knowledge regarding what is covered by the agreement. Otherwise, it is irresponsible to place business with that carrier.
I have seen these Insurtech entities make the opposite mistake too. They thought they had a cut-through agreement when they really had reinsurance.
Another example of the lack of transparency is when an InsurTech is double brokering. They are advertising they have a product, but it is really a carrier's product they are accessing through another broker. As with many examples, the founder of this InsurTech most likely had no idea what they were doing was potentially illegal or in violation of contracts.
Many Insurtech leaders do not understand and have not taken the time or made the effort to understand how insurance distribution and regulation work. I talked to one who thought that if they had a wholesale license, they automatically got a retail license. They were selling insurance on a retail basis without a license. Some are not so innocent. I had one leader advise me that he understood and simply was not going to respect the contracts or regulations because contracts and regulations got in the way of his achieving his goals.
I read an article recently debating whether these new Insurtech carriers needed to be profitable to be valuable. Insurance is not like other industries in the sense that companies do need to be profitable at some level, so they have the money with which to pay claims. Initially, losing money is to be expected but the probability of always losing money and somehow continuing to maintain adequate surplus with which to pay claims is improbable. For a couple of Insurtech entities, my hat is off to them for convincing investors to continue supplying surplus for as long as they have. They should get awards for being the best salespeople on earth, but probably not an award for building a sustainable insurance company. At the end of the day, what matters is whether an insurance company has the money to pay claims for years into the future. If this factor does not exist, the rest does not really matter.
When a market has no idea what they really are, agents should be wary about doing business with them. I see agents, particularly younger agents, attracted to these fresh entities. I can see why too because they do have a fresh approach that is very enticing. Would they have a fresh approach if they were fully transparent? If the agents understood what the market actually was and the risks attendant to using such a market?
In some cases, the situation reminds me of the biblical and old folklore stories in so many cultures of a demon that appears as a beautiful woman. I believe there is another technology now applicable called "catfishing" where software can make people look far better only to create quite a surprise on the first date. It pays to know who you are kissing. Transparency is important. Do not write insurance with a market where you do not know the exact carrier backing the policy. If you think this is too much work, then write with standard carriers who have long histories and high ratings.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.