Building an insurance program in-house from scratch is a long, expensive process that can take several years to complete. In this blog, we’ll walk you step-by-step through the entire journey from licensing to launch.
Step 1: Get Licensed As An Insurance Agency
Before you can take any action toward creating a new insurance program, you need to ensure you have all the necessary licenses. There are two kinds of insurance licenses that you’ll need to acquire as a preparatory step: an individual license, and an entity license.
Why It’s Important
Each state requires a separate license to sell, solicit, or negotiate insurance within that specific state. If you or your company attempted to sell or market insurance in a state for which you didn’t have the right licenses, that state would consider you to be illegally selling insurance. This could lead to significant fines and other legal consequences from the state’s insurance regulatory agency.
What You Need to Do
If your business currently sells insurance, you likely already have this step covered. If insurance is a new vertical for your company, however, then you’ll need to go through this process.
First, someone within your company must obtain an individual insurance license. Exact requirements vary by state, but this person will likely need to complete a pre-licensing education course and a specific amount of study time, then pass the state’s licensing exam.
Once they have their individual license, they can take on the role of Designated Responsible Licensed Producer (DRLP) within your company (this role is sometimes also called “principal agent”). Your DRLP can then sponsor your company to obtain an entity license.
2. Become a Managing General Agency (MGA)
The next step is to become a Managing General Agency (MGA). An MGA is a specialized type of insurance broker/agent that has been given authority by an insurance carrier to carry out tasks that would otherwise only be done by the carrier itself. This includes things like making underwriting decisions and issuing policies.
Why it’s Important
While a general insurance license permits you to sell incumbents’ insurance products, an MGA license is a prerequisite to legally developing products yourself. This extra license grants the authority to create and sell insurance products from scratch.
What You Need to Do
The requirements for becoming an MGA vary by state, so it will be important for you to do your research on the individual requirements of the state(s) where you want to do business. In some states, it may be as simple as filling out extra paperwork, while others may require other factors like an additional exam.
Once you have all the licensing you need, you’ll have to start the actual work of building a team of industry experts, creating an insurance product, and developing the technology you’ll need to sell it.
3. Create Your Forms, Rates, and Underwriting Guidelines
Now that you’re legally permitted to create new insurance products, it’s time to get to work.
Why it’s Important
This is where you create the actual product you intend to sell. Needless to say, getting this part right is critical for your program’s success.
What You Need to Do
Building an insurance product starts with creating forms that detail the product, its coverages, your rates, explanations for your prices, and underwriting guidelines that spell out which risks you are (and aren’t) willing to take on. That means that you will also have to determine the risk factors for your product, decide what data is necessary to make informed risk assessments and underwriting decisions, and then craft your applications to capture all the required details.
To do this, you’ll need expert actuaries, underwriters, insurance regulatory attorneys, and more–which means you’ll need to either hire a team in-house or partner with a specialized law firm, or other external expert.
Your product will also need to be submitted to state regulators in each state where you want to sell it. Remember that all of your product documentation will be subject to the approval of state regulators, so it’s worth investing time and money on this step.
4. Get Carrier Buy-In and Capacity
Now your product is built, but in order to get to market you will need capacity.
Why it’s Important
An insurance program’s capacity is the maximum amount of value that it can insure, which is typically associated with a total premium. This is determined by the amount of capital available to cover its losses. And not just any capital - by law, insurance products must be backed by a licensed carrier.
Without capacity and carrier buy-in, you won’t be able to get your product off the ground because there won’t be any funding to cover your customers' expenses when they make claims against their policies.
What You Need to Do
You’ll need to find an established, licensed insurance carrier to back your product, preferably one with an A-rating and excellent financial strength. The stronger and more reputable your carrier, the more trustworthy and reliable your product will be in the market.
Once you’ve found a carrier, you’ll need to convince them that your product is solid, and won’t expose them to undue risk. Since it’s ultimately their money on the line, the carrier won’t want to back a product if they aren’t comfortable with the risks it’s taking, or if they don’t think the insurance can be offered profitably.
This step can be very difficult, especially for new entrants who don’t already have connections to the insurance world. It can easily take years to connect with the right people at the right carrier and convince them to back your product with their reinsurance capacity. Adding to your overall timeline, securing a carrier’s backing for the product is only half the battle. Before you can actually sell it, there’s another step.
5. Be Appointed As A Producer By An Insurance Carrier
Why it’s Important
At this stage your product is ready to sell. However, since the product is being sold on the carrier’s paper, it’s now technically their product. Without their permission, you can’t sell it - or handle any other parts of the transaction.
Permission to sell is just that - selling. Without further permissions from the carrier, you would have to go through them for each stage of the transaction. This means that for each policy you write, you would have to take your customer’s request, contact the carrier, wait for the carrier to approve (or not), and then see that your customer gets their updated documents–a process that could take days or weeks.
What You Need to Do
First, your company needs to be appointed as a producer by the carrier that’s backing the product, which will allow you to sell the product on their behalf.
As we saw, however, being a producer is not enough to manage the full transaction. To be able to deliver a seamless experience to your customers, you’ll need the carrier to delegate you the authority to rate, quote, bind, underwrite, and issue policies on their behalf. This will allow you to offer a modern, all-digital experience rather than needing to go back to the carrier each time you need to complete a policy transaction.
6. Build Distribution Technology
Once your product is ready and you’ve cleared all of the compliance and capacity hurdles, you will need a policy administration system (PAS) that will let you actually offer, issue, modify, renew, and/or cancel policies through your website.
Why it’s Important
The PAS is the technical underpinning for all-online insurance transactions. Not all PAS have the same capabilities, and delivering an all-online insurance experience is only possible if your PAS is capable of supporting the functions you need.
What You Need to Do
To acquire a PAS that can support your transaction workflows, you’ll need to either buy one off the shelf and customize it, partner with a company that already has what you need, or build a proprietary PAS in-house.
This is another one of those “involved, technically complex, and potentially expensive” steps in this process. Whether you decide to build your PAS in-house or partner with another company, both choices have cost and time associated with them. If you decide to build in-house, we recommend budgeting roughly a year for development and testing, and several million dollars for development costs. Another option is to partner with a SaaS company that offers off-the-shelf administration software. This is expensive - enterprise SaaS fees can easily run upwards of $200k annually, for each product you offer online.
Additionally, because state insurance regulations are always subject to change, your PAS will need to be frequently updated to stay up-to-date on compliance. If you build a proprietary PAS in-house, this will require hiring and retaining experienced engineers, product managers, and designers, along with insurance experts who can provide input on what changes to make and how.
7. Create Claims Administration Ability
You’ve arrived at the final step. Before you get to market, you’ll need a way to actually process and pay out your customers’ claims.
Why it’s Important
In the eyes of your customers, claims administration is the essence of your business and the key value proposition for your product. Filing a claim is one of the only times your customer will interact with your brand post-sale, and the experience they have can influence whether they stay a customer.
What You Need to Do
Providing a good customer claims experience requires people and systems in place that can accurately and quickly process customer claims against their policies and pay them what they are due.
You’ll need to either hire licensed professionals (also called claims adjusters) in-house, or partner with an appropriately licensed third-party agency (TPA) and outsource the claims process to them.
Both options have their pros and cons. On one hand, the in-house option gives you more control over your customer experience, but it will cost you the salaries, training, compliance, and claim program maintenance responsibilities associated with it. On the other hand, partnering with a TPA is easier to manage and potentially less expensive, but you lose control over your customer experience.
Is there an alternative?
In short, the process of building an insurance program is not short. In fact, building from scratch in-house will take you a minimum of three years. And that’s the best-case scenario with everything going to plan and never hitting a bump in the road.
If you are interested in building a custom insurance product but want to skip some or most of this hassle, you might consider partnering with an insurance infrastructure-as-a-service (IIAAS) company. IIAAS provides everything you need to get you from the drawing board to selling on the insurance market.
To learn more about building a custom insurance product with Boost, contact us to get started today.
