Welcome back to your weekly dose of InsurTech insight. Hopefully in time you’ll come to think of us as a kind of General Assembly for InsurTechs, but instead of learning technological skills, you’ll learn practical information regarding not only regulatory and transactional insurance matters applicable to the InsurTech space, but also issues related to being an entrepreneur (which we will begin to focus on in the second month of this blog). As promised, this week we will take a quick look at determining where your innovation fits within the insurance industry’s ecosystem and the key regulatory issues you will need to navigate.
As a refresher from last week’s post, remember that every insurance company in the industry (regardless of the type of insurance sold) relies on four key areas for its success: distribution, claims, underwriting, and finance. In each of these four areas, there are at least two levels of regulation: licensure requirements and restrictions on your actions. While it may seem at the beginning that obtaining and maintaining licenses is the largest hurdle to clear, it is often the underlying regulatory regimes that are the more arduous because the business of insurance is regulated on the state-level, requiring nuanced attention to the differences and trends under each state’s laws. This week we focus on Distribution and Claims portion of the industry and next week we’ll focus on Underwriting and Finance/ Reinsurance.
The main goal of Distribution in the insurance industry is the acquisition and retention of customers. Because insurance is a business reliant on the “Law of Large Numbers,” the more data points customers an insurance company has, the more likely that reality will conform to its underwriting models and there will be a larger and more diverse risk pool to absorb losses. As such, without Distribution the industry turns into one large thought exercise (RIP Schrödinger’s cat). Distribution-focused InsurTechs come in many forms. There are those that sell policies for multiple insurance companies (acting as a type of KAYAK for insurance coverages), those that develop killer API, those that develop more pinpoint lead generation, and those that simply focus on working with insurance companies to develop better UI and mobile platforms – because everyone now wants to do things with a click of a button. Unfortunately, our predecessors didn’t have modern technology in mind 50+ years ago when a number of the nation’s insurance laws and regulations were written.
A. Distribution Related Insurance Licensure
Whether you will need a license in the Distribution space really comes down to two key issues: (1) are you “selling, soliciting or negotiating” insurance coverage and (2) do you want to be paid based on a percentage of the successful sales? If the answer to both of those questions is no, you likely will not need an insurance-related license for your Distribution focused activities.
However, if the answer is yes to either of those questions, then you will probably need to be licensed as an insurance agency. Moreover, because insurance is regulated on a 50 state basis (the gift that keeps on giving to us insurance regulatory lawyers), not only will you need a license in your primary place of business, but you will also likely need one in every other state (assuming you want to sell to people and companies from sea to shining sea). But the good news is that within the realm of insurance regulation, insurance agency licensure is relatively straightforward.
In short, licensure as an insurance agency requires that at least one officer or director also be individually licensed, which requires that person submitting an application and passing an exam in the person’s resident state. Once licensed in a resident state, the National Insurance Producer Registry (NIPR) provides for an efficient process to get licensed as “non-resident” producer in all 50 states (and, for the most part, will not require duplicate testing in non-resident states).
It is important to remember that separate insurance licenses are required to sell P&C, A&H and Life. And, if you pride yourself on adventurous and non-standard insurance coverage, you may also need to consider a surplus lines broker license as well, which allows you to sell coverage that standard licensed insurers won’t cover – a topic we will be covering in greater depth in future articles. Finally, if you plan on doing both sales and underwriting (and anticipate providing a significant amount of particular insurance company’s business), you will likely need to comply with managing general agency requirements as well, again something we’ll cover more in the coming weeks.
B. Five Key Regulatory Regimes to Know for Distribution-Focused InsurTechs
The area of Claims is where the rubber really hits the road for the industry. The last thing a customer wants is a long drawn out “battle” with their insurance company to get paid after they just suffered a loss (be it an auto accident, unexpected medical bills, or a death in the family). But a quick, efficient, and seamless claims process is also the best way for carriers to engender customer loyalty. The goal for insurance companies and InsurTechs in this space is the balancing of speedy payments and preventing overpayments (both through human error and insurance fraud).
Claims represent a high-potential opportunity for insurers to increase their operational efficiency. Innovative tools such as telematics, the internet of things and drones, allow insurers and claims adjusters access to more data and information in real time, which speeds up the whole claims process from prevention (everything from telemedicene preventing ER visits to automated messages from water boilers when they need repairs before a catastrophic failure), to loss notification (smart phones have made a once tedious process incredibly efficent), to assessment (it’s much easier and safer for drones to see roof damage from a hurricane than having a person climb a rickety 20-foot ladder), to adjustment and payment (using AI to detect insurance fraud in big data).
A. Claims-Related Insurance Licensure
For the most part, the insurance regulators primarily are focused on the assessment, adjustment and payment portions of the Claims process from a licensing standpoint. As such, if you move past developing the technology and licensing it out to insurers to use directly (think SaaS) and actually engage in the process of claims adjusting, you will need to be licensed under the laws of the state you are working in.
Unlike insurance agency licensure, which is relatively the same across the various lines of business, claims adjusting is bifurcated between the P&C side (claims adjuster licenses) and the A&H / Life side (third party administrator and utilization review organizations). On the P&C side, claims adjusting licenses are further broken down between public adjusters (those that represent policyholders) and traditional claims adjusters (who represent the insurance companies). As with insurance agent licenses, there are both individual and corporate licenses that need to be obtained and licensure is required in both resident and non-resident states. Thankfully, NIPR exists for claims adjuster licensing as well, so once you get your resident state license expanding into other states is relatively painless (from a licensure standpoint!). Also, some states will allow for exemptions from various adjuster or third party administrator licenses when agency or other various licenses are held.
On the health side, it’s a whole ’nother ball game. Because claims handling is one of the core components of the definition a “third party administrator,” InsurTechs who are actually adjusting claims in the A&H / Life space likely will need to go through the relatively time-consuming process of obtaining a TPA license in most states. Unfortunately, because TPA licensure also grants underwriting authority, the TPA licensure process is much more involved than a P&C adjuster license. In addition, if you are on the health side of things and addressing the medical necessity, appropriateness, and efficiency of health care services, your start up will also need to be licensed as a utilization review organization in more than a handful of states. As with TPA licensure, obtaining URO licenses is not as “easy” as simply taking an exam and filling out an application. Because of the relatively heavier lift on the licensure side of things, we see more InsurTechs focused on providing the techinical infastructure to insurance carriers and established TPAs and UROs through SaaS and similar arrangments.
B. Five Key Regulatory Regimes to Know for Claims-Focused InsurTechs
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