Some startups in the insurance space are taking the next step to directly compete with incumbents by obtaining insurance licenses.
In the first half of this year, 3 insurtech startups have made major moves towards becoming licensed, full-stack insurers:
- Bestow, a Texas-based life insurance startup, raised a $50M Series B in April and announced it had obtained an insurance carrier license, with aims to launch its own product later this year.
- California-based home insurance company Hippo acquired Spinnaker Insurance Company, a licensed insurer in all 50 states, for an undisclosed fee in June. Hippo also raised a $150M Series E in July, with the CEO saying the company would be ready to IPO in 2021.
- Pie Insurance, a workers’ compensation startup based in Washington DC, raised a $127M Series B in May, with $100M set aside to “build or buy” a licensed insurance carrier.
Currently, these companies act as managing general agents (MGAs), which acquire customers and underwrite policies on behalf of a licensed insurer for a fixed commission. They often have some profit-sharing agreements as well, but the majority of underwriting profits remain with the licensed insurer or are passed on to reinsurers.
But with these recent moves, Bestow, Hippo, and Pie Insurance are planning to join a small cohort of licensed startup insurers — including Lemonade, Metromile, and Root — in the US. Next Insurance, Kin, and Clearcover have also made the transition recently. If this trend persists, other highly funded MGA startups like Ladder, Ethos, and Vouch Insurance could follow a similar path to becoming licensed insurers in the near future.
Moving up the insurance value chain is the natural next step for MGA startups. It gives them more control over their products and core operations, as well as greater exposure to underwriting profits. However, because insurance is a highly regulated and capital-intensive industry, becoming a licensed insurer will force startups to reallocate resources and capital away from growth initiatives.
Below, we take a look at the challenges MGA startups face, why it matters to the industry as a whole, and how incumbents and startups in the space are responding.