Technology has changed the world of finance in many ways over the years, and it continues to make our lives easier. One area of finance that doesn’t get as much attention is the insurance industry. As a subcategory of fintech, insurtech focuses on innovations aimed at making the insurance industry more efficient.
As with any other industry that has been transformed by technology, the greater the efficiency, the greater the potential profits from running an insurance agency.
However, many budding entrepreneurs don’t even consider opening their own insurance agency because they don’t know enough about the industry, while others simply can’t get over the barriers to entry (i.e. carrier access, technology and resources required to succeed).
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Grant Barra, SVP of operations at Reliance Global Group (NASDAQ:RELI), said that as more entrepreneurs learn about insurtech solutions, they are flocking to the industry despite a down economy.
“Insurance is a recession-resistant industry because people always need insurance, no matter what the economy looks like and how they are doing financially,” Barra explained. “Insurtech goes even further because it boosts growth even more in an industry that’s already displaying explosive growth.
All that growth and the recession-resistant nature of the insurance industry present the potential for attractive investment opportunities in insurtech stocks.
Here’s How Much Insurance Agencies Make
Of course, one of the first questions entrepreneurs want to know is how much of a profit they can expect to make within the industry. In the world of insurance, there are two routes to opening your own insurance agency.
The first option is to work as what's called a "captive agent," which means you can only sell a single carrier offering. Many old school insurance companies, like State Farm or Allstate, offer programs for people who want to start their own agency and sell their insurance. Typically, captive insurance agents are paid a commission of 5% to 10% of every policy they sell.
The other route to opening an insurance agency is the independent route, which allows agents to access multiple carriers, allowing the agent to provide much more value to the client. Independent agents usually earn a commission of about 10% to 15% of all the policies they sell, so it's clear which path is the most lucrative option.
Here’s How Much It Costs To Start An Insurance Agency
Of course, starting a business always requires some level of financial commitment, and opening your own insurance agency is no different. However, the amount of investment required to get started can vary widely, depending on whether you become a captive agent or an independent agent.
For example, captive agents may need an initial cash investment of at least $100,000 to set up their agency under the company whose insurance they want to sell and pay for all the additional upfront costs, including training, getting your insurance license, and other expenses.
Other upfront costs include staffing, office expenses, furniture, computers, and everything else required to keep an office up and running.
On the other hand, insurtech is making it much cheaper and easier for entrepreneurs to start their own independent insurance agencies. White-label platforms offer low upfront costs to get things going.
Such platforms are considered "white label" because they allow agency owners to operate the business under their own name instead of using the name of the company whose platform they have constructed their agency on.
Some white-label platforms tap the power of insurtech to maximize agency founders' profits and improve the customer experience while making it possible for virtually anyone to open their own insurance agency.
The Earliest Stages Of Insurtech
One of the most important changes to the insurance industry over the last 20 years has been the ability for customers to shop for insurance policies online. After all, a key challenge in the pre-internet days was making multiple phone calls to compare rates from multiple providers.
Unfortunately, it wasn't always clear what each policy covered since buyers were shopping via phone. Sometimes there was a good reason for one company to charge more than another, like a lower deductible, and it had nothing to do with their branding.
The internet transformed the insurance industry by making it easy for customers to compare multiple policies from a variety of companies to ensure they are getting the best rate. However, technology hasn't just transformed the customer experience.
Insurance brokers are benefiting from new innovations as well, often with a disruptive impact.
How Insurance Agents Are Also Benefiting From Insurtech
Insurtech keeps the costs of starting an insurance agency down while providing everything customers have come to expect from an insurance company, including shopping online.
From the insurance agent's perspective, a key benefit of insurtech is that it allows them to start their own agency without the need to pay for office space, furniture and equipment, and workers. Staffing is one of the most expensive costs when starting and running a business, but insurtech provides the backbone of today's most profitable independent insurance agencies.
Insurtech combines artificial intelligence with automation, enabling every new insurance agency to compete with the largest players in the insurance business. Customers can shop and buy insurance policies around the clock with just a few clicks.
Independent agents who tap a white-label insurtech platform operate their businesses under their own agency name.
This enables them to personalize their business because their first clients will often buy policies from them since they personally know and trust them. While many customers will shop for insurance online, the industry is still a relationship business for other customers.
Potential Problems… Solved
Independent insurance brokers have many things to consider, and insurtech has a solution for all those problems. For example, insurance is one of the most regulated industries in the market today, so just staying compliant can be a challenge for independent brokers.
However, insurtech platforms ensure that all these potential issues are covered. It's like having someone watching your back 24/7 without having to pay for a full-time compliance officer.
A related issue is security. If you don't have an office, you don't need to worry about someone physically breaking in and accessing your files, but cybersecurity is still a concern. Insurtech companies provide a complete package to help insurance brokers protect their customers' information.
Investment Opportunities In Insurtech
With all these benefits for customers and insurance brokers alike, it makes sense for investors to look for ways to tap into the shift to insurtech. According to EY, insurtech firms attracted a record $15.4 billion in private capital last year, almost double the 2020 level, on the back of increased volumes in late-stage funding and growing interest from private equity firms.
Firms utilizing artificial intelligence, big data, APIs and digitalization across the value chain appear to be enjoying the strongest growth.
The investment opportunities aren’t just restricted to venture capital and PE. Investors in the public markets can also tap into this growth if they know where to look. For example, publicly traded companies like Hippo (NYSE:HIPO), Lemonade (NYSE:LMND), Root (NASDAQ:ROOT), and Reliance Global Group (NASDAQ:RELI) all offer exposure to the insurtech market.
“The insurtech market has been growing so rapidly because it brings innovation to a critical industry that every consumer needs and that hasn’t seen real, life-changing innovation in decades,” Barra said. “If you think about how fintech has transformed the financial markets, we expect insurtech to do the same thing for the insurance industry.”
One estimate suggests the global insurtech market was worth $3.85 billion in 2021. With an impressive compound annual growth rate of 51.7% estimated from 2022 to 2030, investors could enjoy sizable gains from insurtech stocks such as those listed above.
Insurtech has changed the face of the insurance business forever. The legacy path of becoming a captive insurance agent is so outdated that it may become virtually obsolete in the coming years.
It's clear that the easiest way to make the most money in insurance is to become an independent broker allowed to sell policies from multiple companies.
Within that sphere, insurtech solves all the potential problems that may be caused by striking out on your own as an independent agent. It allows brokers to meet customers right where they are — usually, online — and offer them the best policies for their specific circumstances.
Insurtech also solves all the potential problems an independent broker might have, from high staffing and office expenses to industry compliance. It's clear that investors are watching the economy and looking for new opportunities like insurtech.