This post is part of a series sponsored by AgentSync.
Just a few years ago, Managing General Agencies (MGAs) were an attractive investment option in the insurtech space. But market turmoil and emerging industry challenges are changing the tides. In early 2023, we asked: Is there a limit to MGA growth? As we round out the year, it seems we’re one step closer to an answer.
But first, let’s go back in time to discover what made the MGA business model such an attractive insurtech investment in the first place.
Insurtech funding reaches an all-time high
The year is 2021. Our first female vice president is sworn into office, there’s a massive container ship stuck in the Suez Canal, and, in insurance news: Venture capital funding in the insurtech space is booming.
The COVID-19 pandemic spurred a digital overhaul in the historically low-tech insurance industry, and by 2021 investors were rewarding organizations that used technology to drive fresh approaches to traditional insurance practices. By the end of 2021, total insurtech investments reached $15.8 billion, beating out the amount invested in 2019 and 2020 combined. Large valuations were commonplace, and the industry showed no signs of slowing down.
MGAs benefited from large insurtech valuations
One particular subset of the industry, insurtechs that were also MGAs, were particularly well-poised to reap the benefits of increased investor appetites, due in large part to their unique business models.
Much of the tech adoption hurdle comes from the lift (and upfront cost) of overhauling incumbent legacy systems and replacing them with more modern tech infrastructure. Because MGAs are generally smaller than insurance carriers, they’re able to adapt to changing business landscapes, including digital transformations with more ease. This fact has long cemented MGAs as places of innovation for insurance policies and underwriting, as well as ideal sandboxes for experimenting with digital processes and new technologies.
This, combined with a tighter leadership structure, allows MGAs to adapt and invest quicker than other insurance businesses that have more hoops to jump through before making a purchasing decision.
These conditions made MGAs a popular method of operation for new insurtech startups, as well as an attractive choice for investors who saw a trillion-dollar industry taking unprecedented leaps toward technology-driven practices.
Too much of a good thing
Things were looking up for MGA and insurtech startups looking to leverage technology to drive the insurance industry forward. But, just two years later and we’re already seeing a pretty significant decline in investor appetite at a time some are affectionately referring to as the “Death of Insurtech 1.0”.
In 2023, funding was down by 50% compared to last year and valuations decreased by more than 60%. What happened? The decrease in funding is driven by a combination of factors, most notably the broad market downturn and a failure on the startups to show profitability.
Macroeconomic challenges pile on
These days you can’t talk about the insurance industry without mentioning the challenges it’s currently facing thanks to a slew of macroeconomic factors. Extreme inflation, rising interest rates, and the impact of climate change are compounding losses and threatening the very foundations of Property and Casualty insurance.
MGA startups need to prove they have the capacity to underwrite, which is difficult in the hard market conditions the industry’s currently facing. Overall, the broad market downturn creates a tough environment for even the most established insurance businesses, with big-name carriers pulling out of states they claim are too pricy to underwrite in, so it’s no surprise newcomers who are still trying to prove themselves are feeling the strain.
The tech industry moves fast… insurance not so much
Insurtech startup MGAs exist at the crossroads of two industries that behave in very different ways from one another: technology and insurance. While tech startups are often characterized by rapid, exponential growth, the opposite is true of insurance businesses, which typically take longer to show profitability.
At the height of the 2021 insurtech frenzy, investors were valuing MGAs just as they would any tech startup, without taking into account the insurance side of things. As time went on, investors who were drawn in by the shiny, digital promises of MGAs weren’t seeing returns as quickly as they thought, leaving them cautious to invest further until they see their current bets mature.
In a similar vein, MGA startups that had the technological expertise but lacked the insurance background may have been caught off guard at the severity that recent industry challenges posed to their business model.
It’s a lesson a lot of insurtech investors and founders learned: While a company may have the opportunity to transform the insurance space in a big way, it still has to play by the industry’s rules.
What does the future of MGA funding look like?
Some industry experts say 2024 spells more trouble for insurtechs and MGAs, while others claim they already see the light at the end of the tunnel.
Either way, it seems that while long-term interest remains, MGA startups will stay in survival mode for the time being. Going forward, investors will place higher value on sustainability and durability when deciding who gets funding. Success will come more easily to those who can prove they have both the technological expertise and insurance knowledge to succeed at the crossroads of these two often contrasting industries.
AgentSync, which operates within the insurtech space and supports MGAs (along with carriers and agencies), is no stranger to the fluctuations the market has faced over the last few years, but our mission to deliver modern producer and compliance management solutions to our customers remains unchanged. Check out how our solution helps MGAs like Jetty cut costs, eliminate inefficiencies, and reduce compliance risk through hard markets, thriving economic conditions, and everything in between.
To learn more about how AgentSync can help you create greater efficiencies in your producer licensing and compliance workflows, contact us or request a demo today.
Topics
Mergers & Acquisitions
InsurTech
Tech
Insurance Wholesale
Interested in Insurance Wholesale?
Get automatic alerts for this topic.
