Looking to Embed Insurance on Your Website? Know These Licensing Rules First
Editor's note: Co-authored by Heidi Lawson, Alexander Traum and Michael Coburn, this article was originally published by Legaltech News.
Across a range of industries, companies are increasingly looking to “embed” insurance into their platforms, providing their consumers tailor-made insurance coverage at the point of sale. Embedded insurance products are often closely integrated with a company’s website to permit its customers to seamlessly purchase insurance online while they are purchasing other goods or services. But companies considering this “embedded insurance” model must confront the complicated, and sometimes confusing, world of the US’s state-based insurance regulatory regime.
As we’ve previously written here, companies seeking to enter into the highly-regulated insurance space should be familiar with certain key regulatory issues. This article provides an overview into the perhaps the most fundamental regulatory issue that is essential to understand before launching an embedded insurance offering: licensing.
Licensed Insurance Producer
In order to sell an embedded insurance product through its website a company may need to be licensed as an insurance producer. Any person or entity selling, soliciting or negotiating insurance must be licensed as an insurance producer (“producer” being a general term for either an agent or broker) or qualify for an exemption from such licensing requirements. A license is required in each state in which the insurance products are offered and for each type (or “line”) of insurance offered. Where activities are transacted online, this typically means that a license is required in all U.S. jurisdictions.
In obtaining an insurance producer license, a company must take into consideration certain state-specific requirements related to corporate structure, name approval, qualification with the secretary of state, address and appointment of certain individuals as officers. Most importantly, even if the licensed entity will be selling the insurance via an online platform without using any individual agents to interact with consumers, such entity will still need to identify at least one natural person, known as the designated responsible licensed producer (the DRLP), to be responsible for the producer’s compliance with all state insurance laws and regulations.
Managing General Agency
Rather than just selling insurance to its customers, an embedded insurance provider may decide to operate as a managing general agency (MGA) in order to have greater control over pricing and designing its embedded insurance products. MGAs are licensed insurance producers who are delegated authority by their carrier partners to underwrite insurance policies and, in certain instances, pay claims. The MGA model may make sense for embedded insurance providers with access to customer data that would allow them to underwrite and price insurance policies more cost effectively and efficiently than the insurance companies with whom they are partnering.
It is important to note here that although MGAs are often referred colloquially in the industry as any insurance producer that also has the authority to underwrite insurance, state insurance laws have specific criteria of what constitutes an MGA and the regulatory obligations that attach when such criteria are met. Therefore, one must analyze whether a “MGA”-type model is indeed a true MGA, as a matter of law, in order to ascertain the regulatory and licensure regime that applies.
Marketing Partnership
Instead of becoming a licensed producer itself, a company looking to embed insurance on its platform may decide to host a third-party licensed producer. Under this scenario, the company would only provide the platform through which the third-party licensed insurance producer could sell its insurance products, similar to a company hosting a banner advertisement on its website.
If a company decides to pursue this route, the company will face legal limits on how it may market the insurance offerings as well as how it may be compensated. Whether or not licensed as an insurance producer itself, a company will still need to partner with an adequately licensed (or “authorized”) insurance carrier to underwrite the policies.
SaaS Partnership
Although a company may be willing to be licensed as an insurance producer to offer the embedded insurance product on its platform, it may still decide to partner with an insurtech to provide the technology necessary to support the embedded insurance product. In such cases the company will partner directly with the insurance carrier to sell insurance on behalf of the carrier as their agent or broker in exchange for a commission but will also partner with an insurance technology provider to develop and maintain the SaaS infrastructure and APIs necessary to operate the offering. This option may make sense if a company is willing to become fully licensed itself but lacks the technological know-how needed to offer a seamless embedded insurance offering on its platform.
Full-Stack Insurance Carrier
While the options discussed above remain the most common in the embedded insurance model, companies may also offer embedded insurance as “full-stack” insurance companies. Like an insurance producer, an insurance carrier must, subject to certain exceptions beyond the scope of this article (e.g., on a surplus lines basis), be licensed, or “authorized”, in each state in which insurance policies are placed.
In order to become authorized as an insurance carrier, a company will need to disclose extensive financial and personal information to its domestic regulator, raise significant amounts of capital and comply with state seasoning requirements which require a non-domiciliary insurance company to operate satisfactorily in another jurisdiction for a minimum period of time before being authorized to transact business in that state. Notwithstanding the significant capital and regulatory hurdles of becoming a “full-stack” insurance company, a company may decide to become licensed as an insurance carrier in order to exercise greater control over its business while capturing more of the value chain.
Other Alternatives
There are other “intermediate” steps that company may consider prior to owning a full-stack insurer. For example, a company may decide to acquire a relatively small percentage of an existing shell insurance company in partnership with other unaffiliated investors. Such investors may at a later time, subject to any applicable regulatory approval requirement, acquire greater ownership of the insurer.
Alternatively, a company may decide to form a “captive insurer”, which has less onerous regulatory requirements than a full-stack carrier but, generally speaking, will still require the use of a third-party authorized “fronting” carrier to provide the direct coverage pursuant to which the captive will then provide reinsurance capacity.
Although companies looking to embed insurance on their platforms must attend to a variety of insurance regulatory issues on an ongoing basis after launching, determining what license(s) to obtain—and what that means in practice—is a necessary first step.
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