Insurtech is here to stay. Insurance companies and venture capitalists are pouring money into Insurtech startups at a frantic pace. In 2016 alone, investors put over $1.7 billion into Insurtech ventures.
However, many of the Insurtech startups hype the “disruptive technologies” they bring to the table when negotiating with venture capitalists. The open question for some of these Insurtech technologies is whether the hype will stand up in the face of the conservatism and legislative inertia built into the fifty plus insurance regulatory systems of the United States and its territories.
Adam Hamm, the former insurance commissioner for the state of North Dakota and former president of the National Association of Insurance Commissioners (“NAIC”) in 2014, is quoted as saying Insurtechs are in for a “rude awakening.” This rude awakening follows from these startups not recognizing the different regulatory requirement for each state.
Mr. Hamm now is a managing director of a company that offers services, among other services, to educate Insurtechs on how to adjust their business models to comply with different state regulations.
Ignoring regulatory compliance can be costly to Insurtechs
The poster child for state regulatory compliance issues in the Insurtech space is Zenefits, one of the first would-be disruptors of the insurance industry.
Massachusetts passed the first anti-rebating statute in 1887.
Zenefits was a fifty-state insurance broker providing companies free human resource software to integrate businesses’ existing human resource and payroll systems and simplifying the processes of hiring, signing up for payroll, figuring out taxes and deductions, and enrolling in insurance or benefit plans. Zenefits made its money from placing the benefit plans for users of its free software. Venture capitalists loved the idea and threw in over $585 million.
Zenefits quickly ran into regulatory problems in several states regarding its failure to license some of its insurance producers and its attempt in California to circumvent regulatory test requirements for its California applicants. Because of regulatory compliance problems, the president and founder of Zenefts was forced out and the company lost its luster. See Agency Checklists’ article of September 26, 2017, “Zenefits Raised $583 Million To Disrupt Insurance Industry Now Has Stopped Selling Insurance.”
Some Insurtech models may have statutory rebating problems
One unique attribute of the United States insurance regulatory systems is the existence of anti-rebating statutes. Massachusetts passed the first anti-rebating statute in 1887. Other states quickly followed with their own laws. The Massachusetts statute states, in part:
No company, no officer or agent thereof and no insurance broker shall pay or allow, or offer to pay or allow, in connection with placing or negotiating any policy of insurance…any valuable consideration or inducement not specified in the policy or contract…
One issue that Zenefits had beside licensing compliance was several states ruling that the company’s free software was an illegal rebate. Insurtech’s operating as agents or brokers offering insured’s some side benefit for placing a policy would likely violate this statute.
Peer-to-Peer Insurtech models where insureds group to together over the Internet and pool premiums through a broker offer an example of a model that likely might have problems under, at least, the Massachusetts regulatory rules.
Several peer-to-peer companies have started in Europe. The largest and oldest of these is Friendsurance started in Germany in 2010. Friendsurance uses social media to allow small groups of people, each holding the same type of personal lines policies to pay part of their premiums into a pool and based on the claims, the members get part of their premium back.
Interestingly, though this peer-to-peer concept is touted as a disruptive technology it actually mimics a type of insurance entity around since, at least, the 1880s: The reciprocal insurance exchange. Farmers Insurance, USAA, and Eire Group are three large reciprocal exchanges.
The regulatory difficulty with the Insurtech business models for peer-to-peer premium rebates would be a statute such as in Massachusetts that states:
“No…[insurance] company, officer, agent or broker shall at any time pay or allow, or offer to pay or allow, any rebate of any premium paid or payable on any policy of insurance…”
To comply with this statute, a peer-to-peer would have to form and capitalize a mutual insurer or a reciprocal insurer to allow rebates in the form of dividends to insureds. But, even in that case, anti-discrimination laws relating to dividend payments would severely crimp the perceived benefits of this peer-to-peer insurance concept.
Other models may have problems under different regulations and statutes.
Will state insurance law and regulations adopt to accommodate Insurtech models?
The NAIC has recognized that outmoded regulations tracing their history back to the 19th century when insurance policies were hand-written may unfairly impede the development of innovative and beneficial Insurtech products and services.
In March of 2017 The NAIC charged its “Innovation & Technology Task Force” to provide a forum for regulator education and discussion of innovation and technology in the insurance sector, to monitor technology developments that impact the state insurance regulatory framework, and to develop regulatory guidance, as appropriate.
This task force also is to provide a forum for the discussion of innovation and technology developments in the insurance sector, including…new products, services and distribution platforms—in order to educate state insurance regulators on how these developments impact consumer protection, insurer and producer oversight, marketplace dynamics, and the state-based insurance regulatory framework.
Notwithstanding this recognition by insurance regulators of the shortcomings of the present regulatory environment, regulatory changes in the state insurance markets move at a slow pace when they move at all. At an Insurtech event this year, a venture capitalist who obviously got it, gave the best advice I have heard for Insurtechs to heed: “First, get a good insurance regulatory lawyer.”