--:-- Ryan Hanley: In a crude laboratory in the basement of his home... Hello everyone, and welcome back to the show. Today we have a tremendous episode for you, a conversation with David Gritz, the co-founder and managing director of InsurTech New York.
--:-- Ryan Hanley: David and I have connected over the last few months just chatting about all things InsurTech. I really enjoy his perspective. He has worked in the equity space in the past, done a bunch of different things as a partner in different development firms, and ultimately settled here in the InsurTech space. He has a unique perspective, specifically with expertise in the MGA and MGU space.
--:-- Ryan Hanley: These types of products—managing general agency products—have been listed as one of the future trends in our industry. These specific companies focus on very niche opportunities and very niche risks, and they provide what I believe are independent agents with a very important set of tools in their tool belt. Maybe not a tool they use every day, but something they can have when they need it, or when they run into a great opportunity they can grow, or if it's something they want to focus on.
--:-- Ryan Hanley: MGAs and MGUs are filling the gaps where many traditional carriers just aren't interested in working in a particular space or don't have the capacity to be as micro-focused as they need to be. I agree with David. What I wanted to know was: where do these companies come from? How are they created? What do we need to know as independent agents about MGAs and MGUs?
--:-- Ryan Hanley: InsurTech New York has their MGA Lab. David talks a lot about that—a place to cultivate, incubate, and nurture MGAs and MGUs as they're released into our space. This is a tremendous conversation. If you are interested, particularly in the commercial space, I think MGAs and MGUs are going to play a huge role. But this also goes into personal lines—property accounts, investment property accounts, et cetera. There are a lot of MGAs focused on that. David gives a lot of great examples. I couldn't be happier to have him on the show and to get to know David and learn more about his expertise.
--:-- Ryan Hanley: Before we go, I want to give a quick shout out to the new program I have going—a free course on how to build a foundation around your YouTube channel. The first 10 videos, absolutely free. The first 10 videos you need to create to grow your YouTube channel. I don't care if you're an InsurTech, a carrier, or an agency. These are the 10 videos you need to create to build that foundation to start generating inbound traffic. If inbound traffic isn't your goal, just brand awareness—when someone Googles you, what are they finding? Having these 10 videos as the foundation of your YouTube channel will make it so that when someone Googles you and sees your channel, they find a clear, accurate, and valuable representation of you and your brand.
--:-- Ryan Hanley: Go to ryanhanley.com. Right on top, you'll see a YouTube course. Click that, enter your name and email, and you'll get the course for free. It's 12 videos breaking down these first 10 videos you need to have. That's a little meta—I created a 12-video course that breaks down the first 10 videos you need on YouTube. Go to ryanhanley.com, find the link at the top, click it, enter your name and email, and you'll get that information for free.
--:-- Ryan Hanley: Otherwise, I love you for listening to this show. Let's get on to David Gritz. What's going on, man?
--:-- David Gritz: Hey, Ryan. You have a pretty nice setup there with the background and everything.
--:-- Ryan Hanley: Oh, thanks. Yeah, I can't help myself. If you were to look at the framing of the shot, right here it just looks like a regular office. The only weird part is I have sound dampening blankets that hang from all the walls to keep the sound from echoing in the space.
--:-- David Gritz: Nice. That works well for you?
--:-- Ryan Hanley: Yeah, yeah. They're pretty cool. Actually, they're moving blankets. I say they're sound dampening blankets. If you go to Amazon and type in sound dampening blankets, they'll send you the same exact blankets as if you type in moving blankets. They're the same thing. They're maybe $50 for five or six of them, and they're kind of heavy. I just drape them from the walls, and it makes it so you don't get that echoey sound.
--:-- David Gritz: That's great. I think I do need to upgrade my equipment at some level. When we started doing Amplified, I got this mic and I use the headphones to prevent some of the reverberation, but I think there's definitely a lot more I can do to up my game.
--:-- Ryan Hanley: I have one of those. This also has an XLR jack, so I can go out and I have—I forget what it's called—but it's basically a mixing box for one to two mics. I could probably clean up the audio a little bit from that too.
--:-- David Gritz: When I grow up, I would love to be... Do you know Chris Williamson? Have you heard of his podcast?
--:-- Ryan Hanley: I've heard of him, but I haven't listened to his podcast.
--:-- David Gritz: Not that he listens to the Finding Peak podcast, but if he did, I would want him to take this as a compliment. To me, he's like a younger Joe Rogan—20 years younger. The way he approaches it is much more calculated. He spends a lot of time thinking about the presentation, the questioning. Rogan is just a curious individual who hits and goes. Chris is thoughtful. He has notes. He has a laptop with notes and questions and different things he wants to talk about. But the visual and audio presentation he puts out is so good. He's gotten to the point where he has a couple people that help him on every show. They're usually in a fairly large room with a smaller table, so it has this very intimate but open feel. The audio is deep, rich, and crisp. Sometimes I watch the YouTube version of the podcast just because it's so good—like watching an interview on what used to be the major broadcast channels. That's aspirational. It would be pretty cool to have a team and a setup and a cool place where people come in and do it live with you.
--:-- Ryan Hanley: Yeah, I follow a bunch of YouTubers with pretty good quality. Do you ever follow Andre Jikh? He's one of the Millennial Money people. He does magic tricks in the middle of some of his videos. Most of them are one person—he doesn't really do interviews—but it's interesting how he flips between different formats and views. He has a dark style view and a light style view. He must put a lot of energy into post-production.
--:-- David Gritz: I was listening to someone the other day, a thought leader on one of these channels. There are two schools of thought on this, and I think it goes for everything when it comes to branding and marketing. You and I have been having some conversations about different stuff lately that have been really interesting, and I want to get into that a little bit in our space and the industry. But there are two schools of thought. There is the raw—I'll do air quotes for those watching on YouTube—"authentic" version, where you just get it out and get the message out. If the message is good, people will come and listen. I think there are merits to that. The other side is like this Chris Williamson guy, where part of his presentation is how much thought, effort, and time he's put into the sculpting. I go back and forth. I vacillate between the two because I think both can be right. What we don't do is spend enough time figuring out which one is right. Is our brand raw, uncut, fast, and furious? Or is it more methodical, more planned, with higher quality post-production? We just pick one and go with it, and I don't know that we always properly align that with where we want to be.
--:-- Ryan Hanley: I think there's even some nuance there. There's a lot of delineation between the person and the brand behind them, and I don't think people take advantage of that separation. To use my two examples, the raw guy I follow is James Altucher. He's famous for being a digital nomad, even to the point where his kids were embarrassed to be around him. On the other side, I listen to professionally done podcasts on NPR, like Radiolab, which even has a full-time sound design person. If you think about your brand or business, we want InsurTech New York to be the polished brand—the experience people get when they come to our events or participate in formal programs. But me personally, going out on other panels or meeting people in person, I prefer to be genuine, not reserved, and not methodical about everything. Obviously thoughtful, but everything doesn't have to be planned out in appearances. People are interested in who you are. Having the opportunity to go skiing with me at InsurTech Slopes is very different from people who hide behind executive assistants to get access to a simple conversation.
--:-- Ryan Hanley: I don't know that I have a solid personal philosophy on this yet. It's one area of my life where it tends to depend on what day of the week it is, what season, or which way the wind is blowing. Part of me loves the Cody Sanchez approach—be easy to find and hard to get a hold of. I think there's a lot of merit to that, especially when you're heads down building. I was reminded of this because now that I'm in this consulting and advising role, I want people to have more access to me. I want to make myself both easy to find and easy to get a hold of, because part of what I want to do today is have tons of conversations, figure out what companies I can help, what companies I want to invest in, and what companies I can connect with other individuals. That's the value I'm bringing today. During my Rogue Risk days, when I was heads down on a startup agency pulling out of COVID, if you weren't contacting me to buy insurance, I did not want to speak to you. I think a part of it is what season you're in. If you're in build mode, being difficult to get a hold of is good. But there are other seasons in our career or lives when that doesn't help. If I'm trying to get a hold of you to do business or make a connection—like, "Hey dude, I have this great person I'd love to connect you with who can help your business"—and you're really hard to get a hold of, I'm just going to say, "Whatever, I'm not going to bother," because now it's work.
--:-- David Gritz: The funny thing about that, Ryan, is you can pull up almost any InsurTech website. I'd say 70% of them don't have a phone number. They're paying a lot of money on Google ads and going to conferences. People might meet them but forget their email, and now they're stuck. There could be an easier channel to get a hold of them. It's not that hard to set up Grasshopper.
--:-- Ryan Hanley: This is a rabbit hole I'm happy to go down. I find that so many InsurTech founders are incredible product designers and awesome nerds, but they're just so bad at distribution of their product—horribly, comically bad. You just said basic stuff: if you want people to buy from you, having a way to call you is probably a good idea. Even if it's your cell phone in the early days, just have a phone number. Maybe say, "The best we can do today is text me," but some way to get a hold of you. I remember at Rogue, we were trying to purchase a tool one time. I won't say the name because I can't remember it. We were trying to purchase it, and for some reason the credit card thing wasn't working—Stripe wasn't connected properly or whatever. I still wanted the thing, so I told my operations person, "Just give them a buzz." She said, "There's no number." I said, "Okay, we'll email them." She said, "I can't. The contact form isn't working." We were literally having a chuckle on a Google Meet about how we wanted to give this company money, and there was no way to do it. Eventually we got a hold of them and it ended up being fine, but I mentioned to the founder, "Dude, if I didn't really want to use your tool, I would have just gone somewhere else." He had no idea. He was so heads down on product design that the marketing and sales portion had been left aside.
--:-- David Gritz: It's refreshing when you see someone aware of it. A lot of these InsurTechs are direct-to-consumer. We have one portfolio company called Chase that is a marketplace for extended warranty for your car. By random happenstance, I was in the market for it. It was on a weekend when I had time to think about protecting my car. I texted one of the founders, we jumped on a call, we figured it out, and over the weekend I was able to not just get a quote but actually get a bound policy. That's an example of what can actually work. Who knows, maybe one of your investors will become one of your customers if you make it easy to buy from them.
--:-- Ryan Hanley: That's a great point. I've always said you could have an agency that was only open on the weekends and market it as such and probably do really well, because no one else is open on the weekends. I don't want to thrash InsurTechs too much. Having just gone through my own entrepreneurial journey with Rogue Risk—growing it, selling it, all the things I went through—I understand how many different directions you're pulled in. Sometimes you set something up, it's working today, you say, "Okay, that's fixed, let's move on to other checklist items." It breaks and you don't even know. These are hard things to stay on top of.
--:-- Ryan Hanley: I want to talk about a whole bunch of stuff. I'm so glad to have you on the show. We've recently gotten to know each other a little better, and I'm enjoying that. I'll be speaking in the fall at your event, and I'll be at the AI one coming up in March, which is going to be awesome. This episode will probably come out just before then, maybe the week before. If you're listening and you're in the New York area or want to travel, it's an incredible event on AI and other things. I'll be there. A bunch of friends are coming. I'm really looking forward to it.
--:-- Ryan Hanley: The first question I wanted to get into, because you're so in this world—a lot of the people who listen to this show tend to be on the independent agency side. That's the vast majority of the audience, focused on the retail agency side. We do have wholesalers, MGAs, carriers—I have some carrier execs listening—and I love all those people. But the largest demographic would be agency owners and producers. In that space, because of the nature of their work, they often feel like they catch trends late. They catch things coming down the pipe—technological innovations, conversations happening in your world that are on point and relevant right now. You're seeing down the future. For them, they're a few years behind, not because they're incapable, but because it's not the nature of their work.
--:-- Ryan Hanley: I'd love to start our conversation with this: when you look at the companies you interact with, the founders, the conversations you're having, what excites you the most? What one concept, technology, or thought process, when you hear somebody talk about it, makes you veer toward that conversation?
--:-- David Gritz: I have a small preference and an unfair bias in that my functional skill is product management and product development. The area that excites me the most is MGAs, specifically MGAs that are making products available to markets that don't really have good solutions. I'll give you a handful of examples, and we can follow that rabbit hole as deep as you want.
--:-- David Gritz: One big pain for independent agents: in the last six to 12 months, you've probably had a carrier decide to drop one of your customers. Most likely it's because of inflation, social inflation, or natural disaster risk. It's probably a home or auto thing, especially if you have business in Florida, Washington State, California, or Colorado. A number of InsurTechs have come on the scene and said, "We're not deathly afraid of doing business in Florida or writing homes with wildfire risk. We believe we can have a proprietary process to write the best homes and reward homeowners who focus on making their homes defensible against these natural disasters." That's something immediately available to independent agents. You have to find them and be admitted to sell their policies, but it's something you can act on today.
--:-- David Gritz: Beyond that, there are a lot of really cool products we get to see. That's one of the reasons we built the MGA Lab. We felt there was a gap between, "Hey, I'm really good at this type of business—maybe I write a lot of churches or industrial warehouses—and there's a need out there, but I don't know how to build a product from start to end with the carriers and launch it." The MGA Lab was our opportunity to help with that.
--:-- David Gritz: Just to give a random sampling of some cool concepts we've had in the lab: one is called Five by Five. For individuals who are pilots and want to fly their own plane without hiring a pilot, it's often much more expensive to purchase insurance because it's not their full-time job. Five by Five is a telematics-based solution to help pilots get the right coverage for their hobbies. On the flip side, on the life and health side, we had a company called Flora based in Canada. They're trying to solve the fertility benefits problem. A lot of women decide to focus on career first and family second, which can be expensive down the road if you need treatments or medical support to have children. Instead of investing a ton of money today to freeze your eggs, you can buy an insurance policy. If you need any treatments, it's covered, and you pay the appropriate cost for your age. These are just a few examples. We've also had companies in the crypto space to protect NFTs, a company that does battery warranty, and one that covers the financial risk of the buyer for an acquisition—I know you went through an acquisition of your company. There's so much possible opportunity out there. For me, the entrepreneurs trying to build products that find a niche, help someone with a coverage area that isn't available enough or doesn't even exist—that's what excites me the most.
--:-- Ryan Hanley: I love that. I want to take this back a couple steps and talk more granularly about InsurTech MGA specifically for the listeners. I think we hear this term. One thing I know for sure, especially in the independent space—and this is changing rapidly, which makes me very happy—is that I'm excited to become involved in your events. I'll go to ITC this year and maybe InsurTech Hartford. I'm really excited about this next season of my career, getting involved in some technology companies. I was very much their opponent in 2015 and 2016. I was one of the most outspoken opponents to the InsurTech revolution when all these—we'll call them "coastal dicks" who had done regression analysis in their MBA classes—came in and started telling insurance agents they were dopes and didn't know what they were doing. I thought, "Technologically you might be right, but you have no idea how the psychology of insurance is purchased." Many of that wave of InsurTechs crashed up against the rocks and either evolved or fell apart. But this next wave is so exciting because it feels—there are obviously some DTC plays, and that's great—but so many more of them have built an entire section to work with agents, or they're fully broker-enabled and broker-partner. They're not trying to tell everybody why we've done everything wrong for 442 years, even though we've consistently made profit through that entire time, have more people employed, and have one of the best employment retention ratios of any industry in the world.
--:-- Ryan Hanley: That was a big diatribe because that's the show and I have no other way to ask questions other than long-winded. Coming all the way back: at a very base level for the listeners, is there a difference between an InsurTech MGA and a traditional MGA that some of these guys have used for 20 years? And if so, what are some of the intrinsic qualities?
--:-- David Gritz: Sure. I'll take one of these property examples. In the property space, there are a lot of traditional MGAs that have found a very tight niche—like churches, or commercial real estate segments like industrial properties or vacant buildings. Many of them are great, friendly to work with, and good supporters. The main difference between an InsurTech MGA and a traditional MGA is really just the perspective they look at the world from. An InsurTech MGA looks at the world from a very digital and granular perspective. They want the highest amount of understanding of the risk, because most of their understanding comes from data, not experience.
--:-- David Gritz: Traditional MGAs, many started in the 80s, 90s, or early 2000s, were created because a broker got really good at a business—better than the underwriters of the carrier. So they told the carrier, "Let's do the underwriting for you." InsurTechs don't have 10, 20, or 30 years of legacy. The only way they can be as good or better underwriters than the carriers is by either selecting a niche of business no one else focuses on—like pilots who want to fly their own planes—or by having some type of data advantage. In the example of Batterize, the battery warranty company in our MGA lab, the founder is a battery scientist. Their team is based in Oakland, California, where a lot of green technology is being created. They know better than anyone else what's going to cause a battery to fail or live longer than expected. That data advantage of having 30 years of selling insurance to companies that make batteries is not as much of an advantage as the InsurTech that understands battery chemistry, knows how to collect data, and can digitize that data for better underwriting. Both are good to work with generally speaking, but you're trading in either data and digital underwriting experience or just pure raw expertise.
--:-- Ryan Hanley: I love that. That's a wonderful way to separate it because you explained perfectly how a lot of traditional MGAs evolve—they're just retail brokers who, like you said, get good at something almost better than the underwriting team, get the pen, and evolve from there. Let me frame some of these thoughts in my head. Let's say I have a great idea for a potential MGA and a market I want to go after, a problem I think I can solve from both a marketing perspective and a transfer of risk perspective that will yield profitable results. Maybe I have some history in that industry or have worked with them. If I'm going to base my underwriting and product on data, am I essentially doing what mutual fund or hedge fund managers do—taking a data set and running an algorithm over the last 10 years to see if it would have produced profitable results if we had underwritten it that way? Is that how they approach it? How do they figure out if you don't know what's going to happen in the future? Probabilistically you can come close, but how do you get that data and understand that if you approach this warranty business in a certain way, price it a certain manner, and go after a certain segment, you can actually have success?
--:-- David Gritz: At a high level, I'll give you an example. One of our portfolio companies is called Sirtis. They focus on multifamily properties that are managed professionally—think a 50-unit garden style apartment in any smaller metro area, or a six-floor high rise with 100 units.
--:-- [Discussion continues...]
--:-- Ryan Hanley: Sorry to take you away from the episode, but as you know, we do not run ads on this show. In exchange for that, I need your help. If you're loving this episode, if you enjoy this podcast, whether you're watching on YouTube or listening on your favorite podcast platform, I would love for you to subscribe, share, comment if you're on YouTube, or leave a rating review if you're on Spotify or Apple iTunes.
--:-- This helps the show grow. It helps me bring more guests in. We have a tremendous lineup of people coming in—men and women who've done incredible things, sharing their stories around peak performance, leadership, growth, sales—the things that are going to help you grow as a person and grow your business. But they all check out comments, ratings, and reviews. They check out all this information before they come on. So as I reach out to more and more people and want to bring them in and share their stories with you, I need your help. Share the show, subscribe if you're not subscribed, and I'd love for you to leave a comment about the show because I read all the comments. Or if you're on Apple or Spotify, leave a rating review of this show. I love you for listening to this show and I hope you enjoy listening as much as I do creating the show for you. All right, I'm out of here. Peace. Let's get back to the episode.
--:-- David Gritz: So essentially, that data exists for traditional business. That data exists based off of claims history for a lot of the larger carriers. But the difference is with Sirtis—they're saying all of our operators need to use our software called Leonardo. Leonardo is the checklist for the property manager. They make sure the pools are properly maintained, the roof gets inspected at regular intervals, people are able to report information about the property so it gets fixed. Ultimately, you can cut some of the potential liability out of the equation.
--:-- In that case, you don't necessarily know the impact of Leonardo. For them, it's a little bit unfair—Leonardo has been out there for 10 years, so they could look at properties that have used Leonardo just as the software and see the performance. I think what you can do is say, what's the normal loss ratio for traditional multifamily property? Let's call it 50 to 500 units. What does the top decile look like? What does the top quartile look like? Then you can say, what are some of the characteristics of the top decile and the top quartile of loss performance for these building owners or property managers? What are those characteristics that determine that?
--:-- Obviously, there are normal underwriting factors—age of the building, crime rate of the area, impact of natural disasters like convective storms. But then there are these softer issues. Do the property managers actually follow the checklist? How often are the sidewalks inspected for major problems or divots? How happy are the individuals renting from this specific building? For that softer part, there isn't a magic formula where you can go back and look at Munich Re's loss runs across all of their customers for those things. You basically have to take a leap of faith and say, we know what the pricing needs to be to be competitive today. If we're able to perform in the top median or the top decile, then we will make money for our carrier or reinsurer.
--:-- That's what most of the MGAs have to do. They have to find industry data to get the reinsurers excited, or maybe match up with what the reinsurers already have. Then they say, we are going to beat that industry data because we have these three other data points that we can control for or manage against that we think will give us an advantage. Sometimes they're right, and sometimes they're wrong. If they're wrong, it could mean they go out of business, but it could also just mean next year they figure out better data points to use.
--:-- Ryan Hanley: So if they're looking at essentially the same data—or you'd have to assume a lot of these companies have access to similar data sets, or the traditional carriers could get access to these data sets if they wanted them—why do you think that more traditional or legacy carriers allow these MGAs to exist? Why not just create these products themselves and box them out of the market? Why even open the door for these types of companies?
--:-- It does very much feel like we're heading towards what could be a golden age for MGAs. There are so many popping up, addressing very unique needs. It feels like there are tons of new MGAs popping up all the time, finding different little niches to address and provide value. So why do you think the traditional carriers allow these entities to take space?
--:-- David Gritz: I'll give you two reasons, and I'll give an example for one of them. The first reason is really just a scale problem. If you're Chubb, Travelers, Nationwide, or even Arch, you want your internal teams focusing on how they can take their books of business from $150 million to $200 million, or $450 million to $600 million. Because if they only have a limited number of really strong leaders and effective producers or underwriters, they have to push on the scales where incremental makes a big impact. But going from zero to $150 million is very difficult. Most of the time, the underwriters sitting in the chairs are operators who have not done that or don't know what to do.
--:-- So if an MGA comes to them and says, "I can bring you a book of business. Year one, it might be $10 million. Year two, maybe $30 million. Year 10, it might be $150 million to match one of your other lines of business. Would you be interested?" A lot of the time the answer is maybe, or the answer is yes, because ultimately they don't have enough internal talent to incubate and produce all of theirs. There are some carriers that actually have a strategy—Everspan is one of them—where they acquire and build teams to be able to do this. More power to them. But most carriers do not have that ability.
--:-- It's much easier to say, "We're going to take a risk on a new emerging team. If we take a risk on 10 of them, three or four pan out, and it will pay for the couple that we wasted a little bit of startup capital on, because now we have a great book of business we're writing." So that's one reason: scale.
--:-- The other point may challenge your assumption. Your original assumption was that the carriers have all the data and can use it all. My belief is that the carriers do have all the data, but it may or may not be accessible. Oftentimes it might be locked up in some core system that is not easy to access or run queries on. Or they just might not have enough data scientists or IT people to manipulate the data in a way that is useful or effective. Because of that access problem, it's much easier for a startup with no legacy to just go ahead and create the data, make it accessible in the easiest way, and they're off to the races.
--:-- For a carrier looking at that, even allowing the startup to access some of their own claims data is probably worthwhile because they don't need to pay for the costs. Startups are scrappy. Oftentimes they can do the same thing with one-tenth the cost, whether it's data science or IT resources. Both of those things make a tremendous amount of sense to me.
--:-- Ryan Hanley: I really like this idea. I had never framed this in my head this way. Essentially, what carriers are doing with MGAs is outsourcing scale for themselves. It's almost like a VC placing bets. They might like the AI space, but they have no idea who's going to be the winner. So they take 10 bets and say, "We're going to help you support these programs and hope one or two of them hit, and that makes up for the rest." That's essentially what you described. Maybe not exactly that calculated, but it allows them to push into new markets or get insights into things they don't see without having to spin up teams or build expertise. That's what I hear you saying.
--:-- David Gritz: Definitely. But the other thing is, to have one program manager that can manage five programs. After 10 years, some of the programs might only get to $10 or $20 million in premium. You still only have one person managing five of them, versus if you had to hire five underwriters. So you're actually better off financially to do that as well, even if you don't have one that hits. It's the efficiency of managing programs versus running programs.
--:-- Ryan Hanley: Why do you think it is that a lot of these insurtech MGAs are not deathly afraid of risks like Florida property, California, or insert whatever other traditionally high-exposure risk? What gives them that confidence? Is it just the nature of an entrepreneur trying to attack a problem? Is it that with accessible information and a better understanding of data science, they can actually see things or see around corners that we haven't in the past? What is it about these organizations or the types of individuals that makes them not deathly afraid of, say, Florida property?
--:-- David Gritz: I'll give you the optimistic view and the pessimistic view.
--:-- Ryan Hanley: I love that.
--:-- David Gritz: The optimistic view is that the entrepreneurs can take advantage of hyper-targeting. Take Kettle, Green Shield Risk, or Delos—all doing wildfire in California. They are not State Farm, where they need to be available everywhere in the state. They can say, "Of the thousand submissions, we're okay with taking 25 or 50 a month because we're only interested in this area of Sonoma County. Or we only want to write on one side of the 101 because we feel the coastal side is better than the inland side." When you're able to be that granular, if you're new, you're not necessarily going to upset all the independent agents because they can understand you're just really picky. Or you tell them, "We're only looking for homes that have no grass or shrubs that will actually burn." They can look at their customers and say, "This is the rule. If you want to get the coverage and don't want to be in the state fund, you just have to follow these rules."
--:-- If I was State Farm and said everyone has to remove their shrubs, it's going to make the media. Because these MGAs can do hyper-targeting, they can be more effective in their risk selection. Delos in their first year of writing had zero claims, and they're writing in wildfire-exposed areas. There were fires that year. Kevin did a really great job of targeting, but he also didn't have to own everywhere in the whole state. So that's the optimistic view: they can be more selective and picky.
--:-- The pessimistic view is that it's not their balance sheet. If you're a founder of an MGA, typically the stack looks like a fronting carrier taking maybe 5 to 25% of the risk, and then you're reinsuring for all the rest. You're getting your MGA commission. When you don't have as much skin in the game—they usually have sliding scale profit share, so they are getting upside from the underwriting profit, but they're not getting downside. The carriers are usually going to say MGA commissions are 25%, but they're not going to say you had a 110% loss ratio and we're going to take money back from you. Sometimes the founders just found a loophole in the system where they're ultimately getting access to somebody else's balance sheet. Ultimately they are taking risk in the sense that if it doesn't work out, they could lose their reinsurance and they're done. But how many years did Lemonade lose reinsurers a lot of money, and they're still alive today? Some founders just look at this and maybe they're not Daniel or Shai, but they do have some of that West Coast or East Coast arrogance.
--:-- Ryan Hanley: Well, if you look at Lemonade's stock price, you're not sure they're still alive, but I guess they are. The website still loads. I still have not recovered from the shots they took at the independent agency space when they took them. There's just a small amount of bitterness I retained from 2016 for that.
--:-- So I think it's incredibly interesting. How high is the barrier to spin up an MGA? I talk to some people—I have friends all over the space that play in different regions. Some of them say, "Oh, you just go get some reinsurance paper, talk to these guys, they have a whole shelf of fronting stuff that you just pluck off, put it together, put a brand on it, and off you go." I understand you're being very cavalier with your words, but it can't be that easy. When you describe the relationship, obviously you have to have the relationships, you have to have a business plan. They're not just going to throw reinsurance over the top of something for no reason. But what really is the barrier?
--:-- Say someone is listening and they dominate farms that have large pig populations. They figured out something that gives them an advantage in farm insurance, and they want to go find a reinsurer and some fronting paper to put together a program that will allow them to write pig farm insurance. I'm just making that up. What is the problem? Obviously there are 10 million steps, but at a high level, is it as simple as having the contacts and a good risk? Or is it much more in depth? Do you really have to be part of this world? Like being in the VC/PE world—you're either in that world or you're not. There are not a lot of people that just jump in at any given time. How do you get in there? How do you make these contacts? Do you have to fly all the way to Lloyd's? Where do these things evolve from?
--:-- David Gritz: I'll answer both parts of that in order. First, is it hard? I don't want to shatter people's dreams, but it's extremely difficult. If anyone says starting an MGA is hard, just tell them, "Why don't you go do it first and come back to me?" There are a lot of founders we've seen spend two to three years and either not make it or just barely get over the edge, hanging on the cliff and figuring it out.
--:-- One of the reasons it's hard is because, just like you said, you have to be in the world and in the network. I'll give you an unfair example. I'm not going to name the company specifically, but there was a company that pitched to our fund. They're based in the UK. They focused on helping people solve the sandwich in the middle caregiving gap—taking care of your kids and your parents at the same time—offering solutions as an employee benefit. This is a new line of business in the UK. There are a couple startups doing something similar in the US. It's arguably nice to have, not need to have. If you're a benefits broker selling to mid to large size companies, they're not saying, "I'm really worried about my employees having to take care of their parents. That's causing so much absenteeism. This is my number one priority above having a slightly better dental plan." It's just not true.
--:-- This founder pitched to us and said he got capacity from a very good carrier based in New York. We've talked to that carrier and asked them to participate in the MGA lab, and they were always super reticent about doing anything with startups. Also, the founder was in his younger 20s and had never started an MGA before. After the first call, I kept racking my brain: how did this happen? Is this guy magic?
--:-- Second call, we get on for a diligence call. He also brings his dad on the call, who happens to be the chairman of the UK division of that same carrier in New York. It all clicked for me. If you have that connection, of course you can get the board to approve it. In this case, dad has a lot of skin in the game. If he's betting on his son, it's going to pretty much wreck his career if it doesn't turn out well. Having a good connection on the inside makes a big difference in the viability of pulling this off.
--:-- The other thing—and I would say this is the number one success factor that all the independent agents have an advantage over the founders—is if you have a book of business in the space. If you have $5 or $10 million in premium in the space, the carriers will instantly give you credibility because they know you can get that book over to the program, versus a startup that's completely starting from zero. I wouldn't get discouraged if you're an independent agent. Grow your book in the way that you know how, and then start the process. You don't have to start from zero like every startup. You should leverage those connections. If you know a really great underwriter at Nationwide, it's going to be much easier to get to the programs person than to cold call them.
--:-- That's the hard piece. That's one of the reasons we created the MGA lab. We know how hard it is. We saw how much founders struggled. We wanted to try and create all the ingredients and be the ones that could be your inside reference to get you over that hump.
--:-- The second component is the major steps. There are three primary steps. The first step is the financial model. There are two components to this. One is how to get to scale, and the other is profitable underwriting. For getting to scale, very few carriers are going to care unless you can prove within two to three years you can get to $10 million in premium. If you're starting at one or two, it can be really hard. But if it's a good enough idea and a good enough product, a lot of people are going to want it, and it won't be as difficult as you think because you're not going to be the only one selling it.
--:-- The underwriting side can be broken into three major components. First is the actuarial model, aka the pricing. How can you price it in a way that is interesting enough that people will buy it and you'll still make money? Second is the underwriting guidelines. What's in the box? What's out of the box? What will you make special exceptions for? How do you make sure your underwriter follows those rules? If you can't write it down in an extremely explicit way and hopefully find a similar filing, the carrier or reinsurer is going to look at you and say, "Come back to me when you've figured out what you're going to accept and not accept." Because that's how you protect their balance sheet. If you don't have strong underwriting, they will lose money, and they're going to assume that from the gate.
--:-- The third component is figuring out your regulatory strategy. Is it an admitted product? Is it an E&S product? Are you starting in one state and expanding? Do you quickly want to do a 50-state strategy? Is it going to be offered in an affinity way, or directly through the traditional agent channel? You have to figure all those things out theoretically and then start to execute on them, which could be expensive from the legal perspective. You have to be efficient at that. We've seen 10 to 20 times order of magnitude difference in how much it costs startups to get licensed to sell their product in a state, and it all comes down to how well they thought about it ahead of time.
--:-- So that's the first step: the financial model. The second step is building your risk stack. For admitted and some E&S products, you're going to need to find a front-end carrier or hybrid carrier willing to let you use their paper and licenses. You're not trying to start and become a carrier because you need so much capital. You're going to find someone that wants to put their name on the front of the policy. The second component of that stack is the reinsurance component. The most common for MGAs is to set up some type of quota share. You want to find equal or unequal reinsurance partners that are going to take anywhere from 10 to 90% of the risk. Maybe you want to have some skin in the game by setting up a captive or an offshore reinsurer that allows you to participate. It makes it more interesting to the reinsurers if you have money to lose, but that's not necessary. It's more of a nice to have.
--:-- The last part is probably the part you might be the best at: how you're going to distribute it, what process, and what timeline.
--:-- Ryan Hanley: Geographically speaking, when you're talking to—and I know every project is different with nuances—but as a rule of thumb, do you see it better to start regionally and expand? I had Steve from Branch Insurance on the show. Great guy. They were talking about their expansion strategy about a year and a half ago. They were in like six states, and if you looked at a map, it would look very frenetic. It was all over the place. But obviously he had done his research and had a very detailed plan for how they were expanding.
--:-- To a neophyte, you might say, "We'll start in Pennsylvania, then add these five, and we'll just grow and grow." But I haven't seen that. It seems like everyone kind of jumps around. Maybe that's because the regulatory environments are easier to deal with or less expensive. How do they think about geographical expansion? I know that can be frustrating for agencies sometimes where they see a great product they love to write, but it's not in their state yet, or it's only in one of the states they write in and not the others. That becomes hard to manage. What is the general philosophy behind geographical expansion for MGAs?
--:-- David Gritz: There are three layers to it. First is market, second is regulatory, and third is network.
--:-- First is market. Where are your customers? Let's say you come up with an oil and gas product. You definitely want to be in Texas, Louisiana, probably Pennsylvania and North Dakota if it's fracking related—the places where your customers are. Does it make sense to be in Vermont where they won't even let pipelines go through their state? Probably not. From a market perspective, you might be able to eliminate a bunch of states because they're too small. If it's personal lines, there might not be enough humans in that state. If it's a certain type of risk that doesn't exist in certain states, you don't have to write it. You might want to figure out your top three areas geographically and focus there first.
--:-- Second is regulatory strategy. If it's excess and surplus lines, it's a lot easier to get set up in those states because you don't have to file. It might be much faster to expand everywhere. If it's admitted, you want to think about the cost to go to the states you ideally want to go to. New York and California are usually very difficult states—more expensive, more time consuming. Maybe you want to prioritize doing those first because you have to go through it, or maybe you want to do them last because they're such a pain. Also think about what type of state they are. Are they a file and use state? A use and file state? Or traditional file and approved? That might change your sequence because you know you can get approved a lot faster in Arizona versus California. Even though California might be a bigger market, you might want to start selling right away, so you start in Arizona.
--:-- The third factor is important but not as significant: where is your network? Where do you know distributors? You might think ideally one way, but let me give you an example. There's a startup that was one of the finalists in our competition called Sego. They sell auto insurance primarily to Spanish-speaking audiences. Naturally, certain states are going to be great: Texas, Florida, Illinois, New York, New Jersey. One of the challenges they had regulatorily was that some states did not actually allow policies to be in Spanish. They had to be in English. If they have to do some lobbying to change the laws, they should probably start in the states where it's legal to sell Spanish language policies, then do their lobbying and bring on the other states.
--:-- Ryan Hanley: It's really interesting. I think this segment of our industry plays such a crucial role in how we operate—program business, captive business, MGAs—these niche-focused products, people trying to attack risk from different angles. While I do give legacy carriers a hard time because it's fun, obviously they're tremendously important. They are the suppliers of all suppliers. However, there are so many instances like you mentioned around Florida property and California wildfires. I have a buddy that runs a program focused on flood insurance, particularly in California, because of the odd and unique nature of flood insurance in California versus what I would have to deal with here in New York. It's so different. It's so important that these organizations exist.
--:-- This is one of the reasons I stuck with this topic through our entire conversation. I know we could have gone so many different directions, and it gives me a reason to have you back on. I feel like this segment of our market is often overlooked and often undervalued. We see an MGA and we go, "Ah, I can't put any contingency income on it. It's all fronted or reinsured paper. So how good is it?" There are all these dismissive things thrown at these types of organizations. That has not been my experience. There are always going to be bad apples and people that make bad decisions and come and go. But it does not seem to me like our industry is going to—right now it feels like we're in a contraction phase from our large legacy carriers. That's obviously been the case, but it feels like this is going to last a little longer. The Fed just came out and said they may actually increase interest rates instead of dropping them in 2024, at least in their first meeting. If that happens, being able to place risks with these types of MGAs is going to be more and more necessary to properly serving your customers.
--:-- I'm glad we got to spend so much time on it. I know there are a million topics we could have gone down, and I'm sure maybe you would have. It'll give me a reason to have you back on. I really wanted to press this button because I do think it's important. If people want to learn more about you, about what's going on in InsurTech New York, about the lab, about some of the companies in your portfolio, where do they go? Where should people who are listening that are intrigued go? How do they get on your email list?
--:-- David Gritz: [Begins to respond as the transcript continues into the next part.]
--:-- Ryan Hanley: Give them the pitch for how to get deeper into your world.
--:-- David Gritz: Yeah, so the best place to go is insuretechny.com, and you can find more about the MGA Lab, our spring conference coming up, and all of our events throughout the year. And if you're listening and are curious about this MGA topic, feel free to reach out and connect with me on LinkedIn. As Ryan puts out, I do definitely want to talk to more aspiring MGA founders and I'm happy to see if there's a way that we can help you, whether it's advice or formally through the program.
--:-- Ryan Hanley: Yeah, I love it, dude. So glad we've been connecting here and I look forward to that continuing. Glad we had a chance to have you on the show. Thanks, David.
--:-- David Gritz: Thanks, Ryan.
--:-- [Closing music begins.]
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--:-- Ryan Hanley: Thank you.
