New Doors Opening in the Program Market Kevin Mason, Chief Strategy Officer | Nov 19, 2018

Insurance Program Market Opportunities

At Instec, we have witnessed some curious events in 2018. We have seen carriers invest in insuretechs and insuretechs become carriers. We have seen Tier 1 carriers shunning the so-called market leaders as they search for new systems. We have seen carriers striking creative deals with MGAs and retail brokers, and a stampede of MGAs rushing to buy systems. And we have seen retailers and wholesalers moving toward the program administrator model. What is going on here? The truth is, this is “evolution as usual” in the Darwinian Economy.

Described in earlier posts, the Darwinian Economy is the state of affairs that commercial insurance finds itself in today. Vast amounts of money and technology have flattened barriers to entry resulting in a no- holds-barred battle for survival. At the epicenter is the program space, the most profitable niche of commercial insurance industry and, at 10-15% of the market, the fastest growing segment. For every competitor leaving the program market, four rush in. In this Darwinian contest, business and technology strategies are evolving in both surprising and predictable ways.

Business Strategy Evolution

On the business side, Instec has identified at least three trends that reflect the evolution of business strategy:

First, intense focus on the distribution channel is leading to some very interesting changes. MGAs seeking greater control, flexibility, and growth are acquiring fast, reliable, and cost-effective systems, such as Instec's. This leads to some significant advantages. It gives MGAs ownership over their data and independence from the carrier. While carrier paper is still important, as are underwriting guidelines, there are so many competing carriers that most MGAs can find multiple takers for any program.

Carriers are responding by being more creative with MGAs on their commissions (see our third trend below). At the same time, they are bypassing MGAs by selling direct or working with retail brokers who have established agent networks.

The second trend we see is that of new competitors entering the space. Industry veterans are being paid to scout the market for untapped potential programs, while domestic and international carriers (in both commercial and personal lines) have raised programs to a strategic priority. For carriers already in the market, defending their programs and MGA relationships has become paramount.

Lastly, we see players making creative use of money flowing into the market. M&A activity has increased, as established players like Irwin Siegel and brokers like Hays are purchased (by Ryan Specialty Group and Brown & Brown respectively). Money is being applied creatively in other ways, too. With savings from lower reinsurance rates, carriers are offering richer commission structures to their MGAs, either to keep them in the fold or to fund the acquisition of systems. Carriers are also expanding their risk appetites so that MGAs with proven success in a specific niche can pursue new opportunities.

Technology Strategy Evolution

Technology strategy is not standing still either. We are seeing a dramatic shift in buyer preferences and a re-evaluation of technology itself. These changes are manifested in four trends:

First, the value proposition that interests buyers is changing from “one system for everything” to “speed, cost, and reliability”. Buyers are moving away from suites to a best-of-breed approach, with a preference for software-as-a-service (SaaS) delivery and pricing models. Large carriers, in particular, no longer insist their enterprise suite be applied to their program business. Carriers are now selecting the right software for the right job.

The second trend is the shift away from mammoth core system replacements. There are simply too many examples of failed projects at the policy administration level to ignore. Policy systems that performed well on the personal lines side cannot handle the requirements of a complex, 50-state multi-line commercial book, especially admitted business where bureau updates present a constant challenge. After five or more years and millions of dollars spent in futility, carriers are looking for software that can execute when a new opportunity is spotted.

Closely related to the first two, the third trend we see is a shift to a more pragmatic application of technology. Buyers are becoming more cautious about jumping on the latest trends, such as microservices, that promise to be the silver bullet of tomorrow. Our approach at Instec has always been to apply the right architecture to the right problem. We see buyers adopting that same approach in the form of “best-fit” solutions.

Finally, we see data ownership as the rallying cry for MGAs and carriers. Everyone wants the data that feeds powerful analytical models. Carriers and MGAs alike are using the insights from these tools to improve existing programs and uncover opportunities for profitable new ones.

The best way to summarize these changes is that the program market is dynamic and highly competitive and will continue to evolve as competition intensifies. System vendors entering programs simply because it seems hot will have a hard time adjusting their business models to the reality of the market. And what works today may not work tomorrow. At Instec, this is a challenge we relish.

Kevin Mason has worked in many aspects of software development since 1981, including roles as product strategist, software development methodologist, project manager, and technology architect for companies such as Cincinnati Bell Information Systems, SHL Systemhouse (now part of EDS), AGENCY.COM, and GENECA. He joined Instec in 2008 and is responsible for development associated with all products. He holds a BA in Political Science, from the University of Iowa and an AS in Computer Science.