Winston Churchill is widely quoted as saying, “We shape our buildings; thereafter, they shape us.” The same is true for companies—and not least insurtechs, whose fast growth and change models can mean foundations are built before the business establishes its final strategy.

If we look back to early-wave insurtechs five or 10 years ago, the norm was for a model of managing general agent (MGA) backed by a reinsurer. However, recent market developments have led newer startups in insurtech 2.0 to embrace a wide variety of different structures and partnership opportunities. These choices of partnership structure are critical, as they can either set a firm up for innovation success—or for failure.

Below, some lessons gleaned from more than 15 years working in insurtech on this fascinating topic, along with observations learned from hundreds of conversations with peers across the industry this year.

New structuring options for insurtechs

A decade ago, the insurtech scene was dominated by innovative startups that offered a new technology and launched their own insurance products by partnering with a carrier. To some extent, this approach continues, but we are increasingly seeing insurtechs today launching and scaling with a different approach. They aren’t an MGA and have no intention of selling complete insurance products. Sometimes they are existing businesses outside the insurance space, with deep industry expertise. What they have to sell is specialist technology and data to supercharge the insurance stack.

Recently, fascinating examples of specialists have been emerging. Consider a few examples demonstrating the breadth of insurtech business models in the current insurtech world:

• Clearspeed has seen fantastic growth success offering counter-fraud solutions to all types of insurance and noninsurance businesses.
• Enviro Trees UK is a company founded by arborists who have leveraged the data they’ve collected on tree health to offer predictive analytics related to building subsidence, a great example of established experts outside insurance leaning in.
• SAMP Technology's engineers have brought extensive power plant risk experience to the energy sector to support product evolution and pricing sophistication and to encourage safe practices.
• Huge success stories Ki and Artificial Labs yield great benefits to the London market world using smart follow and algorithmic underwriting methods.
• Mitigrate’s app scans a property and uses artificial intelligence (AI) to offer suggestions on flood prevention.
• Other insurtechs, like Paperbox and Sprout, have focused on driving down the expense ratio by developing tools that offer superior customer triage or communication, often utilising smart AI technologies.
• Akur8 is an established insurtech leader concentrating on next-generation actuarial software excellence, whiles Genasys is supporting a wide range of insurers to escape their legacy technology—both examples of unlocking greater power within insurance companies

Fifteen years ago, firms like these might have tried to market their own complete insurance products, expanding sideways outside their critical areas of advantage to build departments in compliance, actuarial claims, marketing, etc. But at this point in the innovation cycle, just as many insurtechs are acknowledging they aren’t experts in everything—and their strength comes from outperforming in a specialist area. Why recreate the full insurance value chain, where you must compete against established firms’ economies of scale and breadth of experience, when you can concentrate on excellence in one vertical and grow through partnerships?

However, this means selecting the right partner(s), and the next steps in working together are crucial.

Communication is key to a compatible insurance partner for startups

When choosing an insurance partner, insurtechs should take the same approach they likely take when building internal teams and pick a firm whose strengths match their weaknesses.

Ensuring both firms have compatible cultures also is important, as is finding a match in communication styles. The worlds of insurance and technology famously employ their own jargon, but it’s important to clearly explain germane concepts so all parties understand each other. For example, even the term “product” can imply different things to a tech or insurance native. Speaking a common language—and listening to the other side—is essential to communicating among partners and working in sync.

And communicating among all partners is vital. While having a single point of contact from the startup and the insurer might sound simpler and more efficient, it is risky. That lone person might not have a full understanding of all company operations, and they might miss a meeting or leave the firm altogether, leaving uninformed colleagues to attempt to carry forward. Establishing committees from the insurer and the startup that meet regularly or otherwise share information will help the joint venture proceed more smoothly.

Tech startups and insurers must align interests

To build an enduring partnership, every member must benefit from the arrangement. While “winning” in initial negotiations might strengthen one party’s bottom line in the short term, the “losing” party may eventually find the arrangement unfavourable and seek to modify or even end the relationship. In a sustainable partnership, everyone’s interests must be aligned.

It’s important at the beginning to discuss each party’s goals and measures of success and to agree on aligned objectives. For example, if one party aims to double insurance sales in five years, but the other party has regulatory constraints requiring more capital to take on additional risk so quickly, then they may be working in opposition to each other. Similarly, lopsided stakes in the target expense or loss ratio, or allowing one party’s interests to dominate the other’s, may set the relationship up for ultimate failure. True success for a partnership means that everyone benefits from business gains—and, in the event of challenges, everyone’s interests are aligned to work together towards a resolution.

Unrealistic business expectations and overpromises can likewise cause a partnership to sour. So can situations in which one party dominates the marketing strategy and messages, or when a large, established carrier views the startup as a “little insurtech” and discounts its leaders’ opinions despite being the experts in that area. Equally, the incumbent carrier has depth and breadth of experience to bring to the relationship, and the insurtech should seek to understand how to turn any “no” into a “yes” by understanding the wider context and impact of their ideas.

However, disagreements should not immediately cause a partnership to dissolve. Communication is essential. The arrangement may need to evolve through several iterations to find something that’s mutually beneficial. This could take years, but just because the first approach fails does not mean the partnership should be abandoned altogether.

How insurtechs can vet a potential partner

A third party with a stake in the partnership—the venture capital or private equity investor—can sometimes pose a different dynamic when building insurtech-insurance partnerships. When raising money, emerging startups may be eager to demonstrate they can thrive on their own and reluctant to acknowledge they would be better off with the help of a partner. Plus, no matter how compatible the two firms are, if the partnership fails, then the startup, and the investor, will share in that failure, presenting financial risk to all. A critical reliance on an external partnership creates an existential risk for business, and investors know this.

The best protection against concerns in this area is the same action that will help with all the issues previously discussed: thoroughly vetting prospective partner(s) and the nature of the relationship. It’s essential to understand a firm’s operations, financial health and compatibility before moving forward.

But how can a startup evaluate an organisation that specialises in an area its leaders know nothing about? Again, selecting such a partner who fills in gaps in expertise is a good strategy for a successful union, but startups new to insurance may struggle to determine whether an insurer is any good.

This is the time to get independent advice from an outside expert. A seasoned external advisor will know the market; have experience working with startups, carriers and regulators; and be able to offer guidance—setting insurtechs up for strong partnerships and ultimate growth and success.

In the excitement of building, sometimes it’s easy to be caught in the fast lane, but those who take time to consider different strategic options will avoid the limitations imposed by early decisions and find themselves in a much stronger position in the long run. It is certainly true there are some revolutionary insurtechs who launched with an MGA model, but perhaps the best solution for your insurtech lies down the way of partnership roots and specialist value-add.

Structure your insurtech foundations to grow with your business, and who knows how high it may reach!