Our good friend Charley Ma wrote an excellent short post about the importance of insurtech infrastructure, and the critical lessons learned from first wave insurtech companies that have underperformed in public markets.

To summarize, Charley highlights two common mistakes made by insurtechs:

• Undervaluing the entrenched brokerage relationship, and the challenges of disintermediating the agent via a direct to consumer model.

• Underestimating the complexity of standing up an insurtech, there are many jobs to be done and the infrastructure alone can overwhelm a startup roadmap.

As an insurtech startup in 2022, the learnings from these mistakes have undoubtedly shaped a lot of how we approach Shepherd. With that said, I would add one more item to this list:

• Overemphasis on growth innovation and not enough focus on underwriting innovation.

Second wave opportunites in insurtech

Let’s take a step back. In many ways, Shepherd doesn’t even exist without the first wave of insurtech innovators. The idea that any startup technology company could participate in a capital intensive and highly regulated industry like insurance is a huge accomplishment in itself. We’re indebted to the many trailblazers that came before us in this regard: Lemonade, Hippo, Metromile, Root, and more.

Today’s insurance landscape finds tech impacting almost every industry vertical across both consumer and business. The maturity of the startup MGA / MGU model which allows startups to “rent” existing carrier licenses (and in some cases pricing models) has unlocked faster go-to-market for startups. There are more fronting carriers structured specifically to support MGA business than ever before.

But what we’ve learned from Insurtech 1.0, however, is that innovation alone and successful underwriting businesses are two very different things. A majority of early entrants to the insurtech market focused on new ways to distribute and capture market share, while the actual risk selection of these programs has produced poor loss results. What has worked so well for Silicon Valley in the past – growth first, focus on unit economics, then profitability last, is generally a poor strategy for running an insurance carrier or MGA. You may not hold risk as a startup, but at the end of the day someone is left holding the bag and eventually the bill comes due.

Credit: Hudson Structured Capital Management’s insurtech index originally announced in this post.

Changes in market conditions

As a startup, the trickle down impacts of poor performing late-stage insurtechs are already being felt in several ways:

• Reinsurance markets want to spend 95% of their diligence on the underwriting model. Distribution advantage is a nice narrative, but it’s secondary to underwriting profitability and program sustainability.

• Fully fronted programs (where the carrier providing the ‘paper’ is simply a pass through) are highly unappealing in commercial B2B spaces, especially when the MGA/MGU isn’t taking much risk themselves. Reinsurers want certainty that the paper being leveraged will have some oversight and expertise to offer, rather than just a pass through entity.

• Venture capital is aware of poorly performing public insurtechs, and this will create questions during fundraising. But in our opinion this isn’t impacting early stage financing appetite quite yet. The next wave of insurtech companies to go public (many of which do focus on underwriting advantage) should have a significant impact on this conversation.

Building Shepherd in today’s insurtech environment

• Today, we are an underwriting company first and a tech company second. Starting with the talent we bring in on the insurance side, we’re focused on creating long-term data advantages within our pricing model. Part of that approach is by partnering with exceptional companies like Procore or Autodesk to help them leverage the power of their data in order to reward customers who are making investments in these tools.

• We’re building our own systems and tools from the ground up, but leveraging insurtech infrastructure whenever possible. As Charley mentions in his article, we’re definitely in the early innings of insurtech infrastructure. The new insurtech tools such as Ascend, Agent Sync, and others provide an opportunity to avoid reinventing the wheel for things like payments or licensing.

• Drink your own champagne: participating in your own risk sends a signal that you’re in this for the long haul. Shepherd is not a traditional MGU model in the sense that we are very much an active participant in the risk of our own program. We are staking our own reputation as underwriters and standing side by side with our carrier and reinsurance partners.

• Having a compelling “why-now” moment creates momentum to bring a program to life. In the case of Shepherd, we are launching at the intersection both insurtech 2.0 as well as construction-tech 2.0. The reason to build a new type of insurance carrier for the construction industry is precisely because of all the changes the industry has seen in the last 5 to 10 years.