Join Robert Tomilson and Scott Galla , insurance attorneys with Clark Hill, for a discussion of legal considerations in starting a full stack insurer.
DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.
DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.
Join Robert Tomilson and Scott Galla , insurance attorneys with Clark Hill, for a discussion of legal considerations in starting a full stack insurer.
DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.
DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.
Hello, and welcome to InsureTech briefly, a quick legal review involving innovations in the insurance space. My name is Scott Galla and I'm an attorney at the law firm of Clark Hill. I'm joined today by my colleague Robert Tolson, who's a partner at the firm.
Speaker 2:Hello, Scott. What's our topic today?
Speaker 1:Let's discuss risk participation. It seems that with increasing frequency, producers are coming to us, um, looking for ways to take on, you know, an increased share of the risk or at least of the premium, um, and, and are seeking advice on how best to do that. So I thought it might be helpful to address some of those ways, whether it's, uh, as a newly formed carrier, an acquired shell company, a producer on reinsurance, captive, uh, or by profit participation or some other contingent commission agreement.
Speaker 2:Sure. I think that's a good topic. Um, you know, we've dealt with all of those scenarios, and certainly there's been an uptick in successful MGOs and MGOs, um, seeking a piece of the action, uh, getting a piece of the risk beyond commission dollars. Um, I've seen this a lot recently in cyber, uh, sometimes at the carrier's insistence and sometimes at the MGOs. Um, depending on the path that these companies want to take, um, these arrangements can allow the producer to potentially control the entire value chain from generating leads to issuing its own policy to paying claims on those policies.
Speaker 1:And we'll, we'll go through multiple options for doing this in future episodes, but for today, let's start with what's perhaps the most involved approach, which is forming a new insurance company. Why would a producer want to go through the time and expense of starting a new company? Well,
Speaker 2:Primarily it's, it's to own the customer experience. Um, I can't tell you how many companies have come to me. Um, and the first thing they say is, is we'd like to start an insurance company right from the ground up. Um, and they don't mean being a producer or being an agency or even an underwriter. They mean a full stack insurer from the ground up. Now, I've talked a lot of them out of that, um, you know, talked them out of becoming a, a risk bearer, at least initially. Many of them have gone on to become very successful insurance companies. Um, and the reason is, is they didn't like hearing no from the carriers that they were working with. So they set up their own company and they did it with their own paper.
Speaker 1:So increased profit potential and no longer being subject to, uh, some limitations that may be, may be placed by legacy carriers or great reasons. Of course, for better or for worse, these companies are then, you know, tasked with running their own distribution. They're run underwriting, they're claims, they're finance, financing their reinsurance, so they get to control the whole experience, but they also have all those other obligations. What's the, what's the process like for, you know, starting a carrier from the ground up? From a regulatory perspective?
Speaker 2:Um, it's, it's not a small task. Um, it, it certainly is significant in terms of costs, uh, capital time and human resources. Um, a company that's looking to set up an insurance carrier, and again, just so we got our terms clear, not setting up an agency, not setting up a producer, not, uh, even being an underwriter who's going out and underwriting for somebody else's paper or even white labeling, but rather really going out, starting a company fresh and having all the components of an insurance company. Um, not insignificant in terms of the investment of capital and time, but a company looking to do this, the first thing they're gonna have to do is determine their domicile it's home. And what you'd wanna do is you wanna choose a state that doesn't have owner's requirements in making application or in regulating insurance companies. As a general matter, uh, the licensing process is not as bad as it's sometimes advertised. Um, there are capital and surplus requirements, there's personnel requirements, C F O, and actuary. Uh, most states have minimum in capital, minimum capital and surplus requirements that are under a million dollars, but that's usually just for making application. Uh, you can compare that with the N AIC C'S requirement for an e n s carrier to maintain a$5 million trust at the time of application. Uh, bear in mind that both of those figures, both those that are under a million and then 5 million for the excess and surplus trust, um, those are merely for making the application. So if you're an M G A that's writing, that's say gross written premium of 50 million a year in business, and you expect to write that same amount on your own paper in the first year, you're certainly gonna need more than a million dollars in capital and surplus to start out. Uh, the same is true for newly established d n s carriers. Gross written premium will dictate your reserves, uh, and a successful company will quickly be squiring away millions of dollars in reserves. Now, of course, you can buy reinsurance to offload some of that free up capital so that you can write more, but many, if not most states, they wanna attract new companies, whether they're MGAs or full stack insurance companies. So they'll work with you. So the process, as I say, um, not insignificant, um, but um, it gets done, gets done every day.
Speaker 1:So it sounds like there's a, you know, a significant capital requirement in any state that you're gonna, you know, for a successful venture. But could you speak to the importance of selecting a domicile state for the soon-to-be carrier?
Speaker 2:Sure, yeah. And it is significant. Um, once a company is licensed in its home state, it still has to apply to right in the remaining 49 states. So many states have seasoning requirements. That's the time that a company must be in business prior to writing in that state. So for example, California has a three year seasoning requirement. So if you start your company in New York in 2022, you cannot write business, assuming you don't fit within an exception or otherwise get a dispensation from, from, uh, from the department until 2025. Um, some states have no seasoning requirement, Texas, Georgia, North Carolina, for example, but their retaliatory if your home state imposes a seasoning requirement on their carriers. So if you start an insurance company in North Carolina, for example, you could conceivably start writing business in Texas in the same year. However, if your domestic home is California, you'd not be able to write in Texas for three years. In other words, Texas adopts California seasoning requirements for California companies, and that makes sense. Otherwise, everybody would incorporate in California, which has an incredibly large population, and then just take advantage of all the states without the seasoning requirements.
Speaker 1:Yeah, and of course you'll still need to satisfy the commissioner for each state that you're trying to expand into, uh, that you're fit to right business in that state. Uh, we'll revisit many of the parts of the process you just discussed, such as the uniform certificate of authority application, the seizing requirement, and rating challenges in more detail in future episodes. That will do it for today though. If you think you may benefit from hearing about InsureTech and insurance regulations five minutes at a time, please follow us on Spotify or wherever you get your podcasts.
Speaker 3:This podcast is intended for general education and informational purposes only, and should not be regarded as either legal advice or a legal opinion. You should not act upon or use this publication or any of its contents for any specific situation. Recipients are cautioned to obtain legal advice from their legal counsel with respect to any decision or course of action contemplated in a specific situation. Clark Hill PLC and its attorneys provide legal advice only after establishing an attorney-client relationship through a written attorney-client engagement agreement. This recording does not establish an attorney-client relationship with any recipient.