One of the most crucial components of an insurance program is its capacity. What coverages a program can offer, how quickly it can grow - and whether it can get to market at all - are all determined by insurance capacity.
Insurance Capacity Defined
An insurance program’s capacity is the maximum amount of value that it can insure, which is typically associated with a total premium. This is determined by the amount of capital available to cover its losses.
For context, let’s quickly recap how insurance finances work:
The insurance company sells a policy that promises to reimburse the customer for money (or other damages) the customer loses in certain situations. For example, a pet insurance policy might reimburse money spent on emergency care for a pet that gets injured.
The customer then pays a regular premium to the insurance company in order to keep the policy active.
If all goes well, the customer never needs to use their policy (insured or not, after all, nobody wants their pet to be hurt). If something does happen, however, the customer can file a claim for the money they’re entitled to based on their policy, and the insurance company will pay them. This payment is then a loss for the insurance company.
To ensure that the company stays solvent, it can’t sell policies that could potentially result in more losses than the company can absorb. This creates a limit on the amount that an insurance company can cover in its total policies - i.e., the insurance capacity.
It’s important to note that when it comes to capacity for insurance programs, it’s not enough to just have money sitting in a bank account. By law, insurance products must be backed by a licensed insurance carrier.
Why is Insurance Capacity Important?
Insurance capacity is vital for any insurance program. If you don’t have the capital to pay out policyholder claims, then you don’t have an insurance program.
The availability of insurance capacity is not just a concern for launching a new program, however. Once an insurance program is live, its ability to grow will be directly impacted by the amount of capacity it has available.
With each new policy written, the amount of value the program is insuring will increase - which directly decreases its available insurance capacity. For insurtechs, this means that scaling their business will require continually adding more capacity to their insurance programs. Otherwise, the insurtech will hit the limits of what their insurance capacity can support, and won’t be able to sell any more policies until that capacity increases.
How Do Insurtechs Get Insurance Capacity?
As we discussed earlier, insurance capacity requires more than just funding: the provider must also be a licensed insurance or reinsurance carrier. An insurtech looking to launch a new insurance program would need to either become a licensed carrier with sufficient capital itself, or work with another company that already meets those requirements.
The first “option” isn’t really an option at all - insurance capacity providers require a vast amount of capital to operate, with millions or billions of dollars on their balance sheets. For most businesses, this will be impossible to raise themselves as a startup or even growth stage company. The more realistic path is to secure a partner who can provide them with the insurance capacity they need.
How to Find an Insurance Capacity Partner
There are two ways for an insurtech to go about finding a capacity partner:
1. Go directly to a carrier.
The first is to go directly to a carrier, and try to convince them to provide backing. For insurtechs without connections to industry incumbents, it can be a difficult route to capacity. Insurtechs will first identify and gain access to the right decision makers at the carriers, then convince them to commit the carrier’s financial resources to backing a new entrant’s product. For startup insurtech companies, this can easily become a years-long process.
2. Work with an insurance-as-a-service provider.
The second option is to work with an insurance infrastructure-as-a-service provider (like Boost) who has already gone through the process of acquiring insurance capacity from carriers, and can then extend it to partners. Insurtechs that go this route can white-label an insurance product developed by the infrastructure-as-a-service partner, which are already backed by licensed carrier entities. This is almost always a faster path to market than going directly to the carriers themselves, providing insurtechs with the ability to launch with the capacity they need in weeks rather than years.
As we’ve discussed, however, insurance capacity is an issue for more than just launch. As an insurtech’s business scales, the capacity that their partner provides will need to scale as well. When choosing an insurance as a service provider, it’s a good idea to ask questions about how much capacity they can provide, and how many carriers/reinsurers they work with. If the provider only has one or two capacity partners, that’s a red flag that they might not be able to keep up with the needs of a fast-growing insurtech. If the provider works with a network of carriers or reinsurers, it’s a good indicator that they will not only have sufficient capacity today but also have the relationships in place to be able to continually secure more as their insurtech partner's scale.
Insurance capacity is a critical part of any insurance program. Any insurtech hoping to launch or expand an insurance offering will need to first determine how they’ll secure the capacity they need. Working with an insurance infrastructure-as-a-service provider can be a faster, smoother path to market than trying to work with a carrier directly.
Learn more about how Boost’s insurance infrastructure as a service works, or contact our team to discuss how working with Boost can get your business the insurance capacity you need to launch or expand your insurance program.
