When InsurTech entrepreneurs like Assaf Wand, Max Simkoff and Dan Preston set out on the path of bringing groundbreaking ideas to life in the insurance industry, they heard a lot of negative talk about hurdles they couldn’t climb.

But equipped with “positive naivety” in the words of Simkoff, and the help of a few people willing to take bets on them and their ideas, the founders of InsurTech startups said they also turn to each other to figure out the answers together.

During a recent InsurTech NY webinar titled “How to Become an InsurTech Unicorn,” these three chief executive officers of companies that have almost achieved the milestone $1 billion valuation status talked about how they got to where they are and the ways they have bonded to leap over obstacles that include regulation and reinsurance—and initially, just to combat any seeds of self-doubt that early naysayers tried to plant in their minds. (Editor’s Note: Wand’s Hippo has achieved a $1 billion valuation; Simkoff’s States Title and Preston’s Metromile have not yet.)

“You can go and talk to a bunch of insurance people, and they’re going to tell you all the things that can’t be done,” said Simkoff, CEO of States Title, an InsurTech that uses an algorithmic approach to instantly underwrite title insurance. He heard, “There’s no way you will ever launch an insurance carrier. You have no insurance expertise. You’ll never get approved by the Department of Insurance. They’re going to run these biographical affidavits. You need surplus capital on your balance sheet. Blah, blah, blah, blah, blah, blah, blah…”

“Then I talked to people like Assaf, and he said, ‘Absolutely, you can do it. Here’s how we did it. Here are the mistakes we made. Here’s how you could do it faster,'” Simkoff said, referring to advice from Hippo Insurance CEO Wand. “I think that’s an important thing for people in the founder community to realize: that a lot of times the most valuable connections you’re going to make, who will help you build your business in the industries you’re building it in, are other people who are building their businesses, who by the way are just as clueless as you are—in a good way—about how to figure things out.”

“People tell you it can’t be done…Those are all the people that don’t build transformational businesses.”

Max Simkoff, States Title

Simkoff, Wand and Preston, CEO of Metromile, described other aspects of their journeys in answer to questions posed by EY Partner Rich Brelsford.

Early Days: Funding and Hiring

“Insurance is not a VC-able business. You know it’s highly regulatory. It takes forever to file. People won’t want to buy…All of the current competitors have bazillions of dollars.” Those are the refrains that Hippo’s Wand heard when he was starting up an InsurTech that automated the process of buying homeowners insurance and modernized the coverage, he told Brelsford, who asked how Wand approached the tasks of building out his initial team and raising funds.

The process is gradual, Wand said, explaining that after being fortunate enough to team up with early investor Adam Boyden, who “got it”—the “it” being what Hippo was trying to do—more investors followed after Hippo got licensed. Boyden was one of the founders and the COO of SoFi, Wand reported, noting that Hippo was aiming to do in homeowners insurance what SoFi did for student lending.

When Hippo announced Series A funding from Boyden’s RPM Ventures and others in December 2016, Hippo had already gotten regulatory approval in California and was gearing up for an official launch in 2017. “When it flipped and we actually came to market, and this whole wave of InsurTechs came,” the items that once held the startup back were working in Hippo’s favor. “All of these became really, really awesome,” said Wand. “When we pitched, [we heard], ‘That’s awesome. It’s highly regulatory and you already passed that…You filed and it’s already approved. Every component that was a negative became a positive.'”

“The hard thing was to find the initial investors,” he said. “The initial investors are the ones that are doing you a favor,” he said. And the same is true of early hires. “People are betting on you rather than you betting on them,” he said. “The only currency you have is actually title” at the beginning. “So, you’re giving people that probably should have been an engineering manager” a C-suite title. “They’re the CTO of the company. And it’s fine. That’s just how it goes. That’s the only currency that you actually have.”

For Wand, a key early hire was a VP of product. “It might sound trivial, but in most cases at technology [companies], basically the business partner is the one who is doing the product and the business development, and the other technical founder is doing the technology side. In our case, because we didn’t understand enough about insurance, I had to actually build the insurance product, which means finding the reinsurance, setting up the MGA and all of that. I needed someone to actually look at the consumer-facing product. So, we hired a VP of product, who is still our chief product officer right now.”

Confronting the Regulation Hurdle

Preston, who actually started his career at Metromile as CTO, provided detail on dealing with regulatory hurdles, agreeing with Simkoff and Wand that startup entrepreneurs need to tune out the doubters. For the pay-per-mile auto insurer, that meant “not necessarily taking the advice at face value but just looking at [the problem] from more of a first-principles approach and asking the question, ‘What is it that we’re trying to offer? What is insurance supposed to do? And what are the regulators trying to protect against?'”

“They play a really important role in ensuring that carriers have liquidity, that their customers are treated fairly, that pricing models are structured in a way that isn’t creating disparate impact,” Preston said. Understanding that, the approach to regulators “was pretty straightforward. We simply went in and talked about the insurance product as what it should be. It’s based on what the expected losses are, based on true miles driven,” he said, noting that miles driven (reported by customers) long has been used in auto insurance products and is actually one of the top three variables considered to be fair in the state of California.

“Looking at this as a more fair insurance product from Day 1, you speak to the core of what they’re looking for in the first place,” he said, noting that Metromile was able to get product approvals “in pretty short order.”

Critical Acquisitions

As for the problem of acquiring state licenses, Metromile bought a shell company, Mosaic Insurance, from AXA in September 2016 for $22 million. States Title made a bigger deal in late 2018, acquiring North American Title, a wholly owned subsidiary of homebuilder Lennar. Simkoff outlined the enormity of the transaction during the webinar.

“In most cases, it doesn’t make sense to ultimately become the full-stack carrier. It’s actually better to rely on great partners, great reinsurers, fronting carriers, even primary carriers that can give you the infrastructure and support you need.”

Dan Preston, Metromile

“We were just really driven and pretty naïve,” he said, responding to a question from Brelsford about how his firm went about it. “If we talked to people at the time—experts, investment bankers, people in the insurance space—and we would have asked them, ‘Hey, we’re a 25-person tech startup with less than $300,000 revenue trying to [acquire] a publicly traded company that will in and of itself have close to $200 million in revenue, including a 40-state, fully capitalized, fully licensed insurance carrier,’ they would have said, ‘There’s just no way.'”

“I just keep coming back to this theme of positive naivety. People tell you it can’t be done.” Ignore them. “Those are all the people that don’t build transformational businesses,” he said. “We found a willing partner with Lennar. They were willing to get very creative because this was a part of their business that they realized they could unlock value in by having it combined with a more entrepreneurial management team,” he said, also suggesting that a creative financing structure was part of the recipe.

Full Stack or MGA?

Preston said that Metromile’s acquisition—transforming the company from a digital MGA to become a full-stack carrier—was actually motivated by the desire to control customer experience, adding that given the work involved, this route doesn’t make sense for most InsurTechs.

“Just like our pricing model was built from the ground up with sensor data as the core mechanism to deliver it, we wanted to do the whole customer experience in the same way,” he said. “We wanted your claims experience to be largely instantaneous…We didn’t want you to have to explain everything that happened at the accident scene. We wanted to be able to reconstruct the accident from your sensor data…”

“In order to make that happen, we had to become the full-stack carrier, because asking another large insurance company or TPA or whoever to manage the claims process in the way that you want to is a larger endeavor.”

“For us, it was a really important part of how we saw the future value of the company…But it comes with a very high cost. I actually think, in most cases, it doesn’t make sense to ultimately become the full-stack carrier. It’s actually better to rely on great partners, great reinsurers, fronting carriers, even primary carriers that can give you the infrastructure and support you need,” he said. “That [is] often the best answer because what you bring to bear in the market as your unique way of looking at insurance may not have to do with all of the back-end stuff that happens in the insurance company.”

Wand also stressed the need to bring claims in-house. “The entire essence of an insurance company is taking care of people when [stuff] happens. That’s the entire product, basically. If you wave that side just to a third party, which has its own incentives of locking the transaction as fast as possible, minutes on call, and things like that as opposed to having the right customer experience and touchpoint, then it’s a problem.”

“Everybody who has been an entrepreneur knows that it’s never going up and to the right.”

Assaf Wand, Hippo

He also spoke about Hippo’s recent acquisition of a carrier, Spinnaker Insurance Company, suggesting that it grew out of one of several backup plans he put in place over the years to deal with all the uncertainties that confront a young startup. “Everybody who has been an entrepreneur knows that it’s never going up and to the right,” he said.

“I always build a resiliency. So, I have several reinsurance treaties. I’m using several carriers. Right now we actually bought a carrier,” he said, referring to the late-August deal closing. “You need to build contingencies because you can’t be dependent on one point of failure. You need to have several options. (Editor’s Note: In late September, Hippo ended a three-year partnership with Topa Insurance. Spinnaker will now take over Hippo’s Topa book.)

“I never take one reinsurer, because we had a couple of cases where the reinsurer said, ‘Listen, we just decided not to keep reinsuring you guys,'” Wand said. “The last thing you want to do is sue someone,” he added, reporting there were reinsurers that told Wand that a lawsuit was his only option to try to enforce multiyear reinsurance deals they decided to end. “You have to figure something out,” he said, sharing his backup solution with the webinar audience.

“Every hit that you get is almost completely existential, and you need to bring all kinds of contingencies,” he said.

Further explaining why Hippo decided to buy a carrier, Wand said, “We had another middle man to help in the negotiations with the reinsurer, who has his own opinions.” A second reason relates to growth, he said. Usually, in business, when you get bigger, you get better terms from business partners, he said. “If a standard fronting fee is, let’s say it’s 5 percent, I expected that when I’m passing a certain hundreds of millions of dollars in premiums, I’m going to probably pay 4 percent or 3 percent. What happened is the complete opposite. I started to need to pay 6 and 7 percent, and to buy more reinsurance, which didn’t make any sense. So, it forced us to take charge of our future and to buy more of the stack.”

On the general topic of buying reinsurance, Wand advised, “You don’t just choose the reinsurer, you choose the specific person,” stressing the need for a relationship with a person who takes the time to understand the InsurTechs.

Simkoff told a story about establishing a relationship with a representative of one reinsurer, introduced to him by Wand, supporting the same point. He needed to buy reinsurance for States Title, he said, even though title insurance is usually a product that has almost no loss ratio. “It’s been a business of risk avoidance. It’s focused on manual, backward-looking research at the point of underwriting to make sure that no claims will arise later.” At States Title, however, a machine intelligence-driven approach used to instantly underwrite the insurance and remove friction, frustration and cost for the customer, means the company is essentially creating new risk that isn’t usually there—a characteristic that one particular reinsurance representative at SCOR took the time to understand.