Manufacturing Fundamental Change in Insurance
I had the honor of interviewing David McFarland in the Planck booth at ITC 2022 in Las Vegas — together with Elad Tsur and Leandro DalleMule.
David is a real Renaissance man: His in-depth understanding of mathematics, physics, actuarial science, history, and culture, combined with his insurance background, make his founding of Coterie Insurance a natural outcome.
Coterie addresses the insurance needs of small businesses — a massive market with high expense ratios and a low insured population. Seeing that insurance distributors did not have a way to efficiently service these millions of small businesses, Coterie was founded to enable insurance distributors to address this huge market efficiently and profitably. Coterie has accomplished this by building its insurance products in the background, from the ground up.
The points David discusses in this interview are as inspiring as they are simple. I trust you will enjoy reading this interview as much as I enjoyed my conversation with David.
A Quote from David McFarland
“I use the phrases “insurance manufacturer” or “manufacturing insurance” because I want to look at the value chain from the perspective of manufacturing and distribution. And when I say insurance manufacturing, I mean everything about the insurance product — from soup to nuts. From the pricing, from the data that underlies it, to how we’re pulling in individual parts, like the AI services that Planck offers.”
David Schapiro (DS): Could you please tell us about yourself and how you found your way into insurance and founding an insurance company?
David McFarland (DM): My background is heavy in the insurance space, but I actually got into actuarial science by accident. I was a history major before I switched to mathematics in my junior year. Until that time I had avoided math, but I found a class and discovered that I just love problem solving.
I went from school to the NCCI (National Council on Compensation Insurance). It was there that I recognized the powerful things that could be done if you could classify and understand exposures in the correct way. You could leverage data to create an extreme competitive advantage, and use that to impact loss and expense ratios. We can reduce losses and expenses and really create something special for the end user. With this in mind, I went into actuarial consulting and worked with various insurance companies to try and implement these ideas.
The most significant hurdle I experienced working with legacy carriers was the limitations of their existing technology. It was very difficult to get to the point where you could use the data effectively and establish a data structure for a significant impact. I began to realize that the only way to do this was to start a new company.
It’s interesting that your company is called Planck, because I tend to think of things in terms of the Planck width. I approach a problem by breaking it down to its most fundamental displacement unit and say, “Okay, how can we take that and build from there?” And that’s what we did at Coterie — but we built it backwards, starting with the benefit to the end user.
Take workers’ comp for example. Historically, an agent and a broker would be responsible for determining the function of each employee. To accomplish this efficiently, they would estimate based on the number of employees and the total amount of the payroll. And that was the easiest way to classify. But now we have systems where we know every employee’s identifying information, what their start date is, and what their salary is. And we can say — with a high level of confidence — what this individual person does and how much they’re getting paid to do it.
So, why aren’t we using those pieces of information? Why aren’t we using the streams of revenue information that we have? We have so much data… why aren’t we using it at a Planck-level to build on these things and price from micro to macro? If we do that, we fundamentally change how we view insurance. That’s a major step in the right direction, but I think there’s even more to do from there.
DS: Where do you see the greatest innovations happening in insurance?
DM: Incumbents have a major hurdle in overcoming the limitations of their current systems, but there’s also the opportunity cost. It doesn’t make sense for them to invest in rebuilding their systems, as they can yield a much higher and quicker return by investing in other areas, because of their scale. This is the classic innovator’s dilemma.
So where is the innovation going to come from? I think the big problem that we’re trying to solve is changing how insurance is bought and sold, and proliferating the supporting data. To do that well, you need to do the insurance manufacturing well. Building insurance in the background, from the ground up.
And it really helps to be from insurance because the regulatory landscape is difficult. You can’t just go in assuming you’re going to enact a sea change within the industry, because you’re not. It makes much more sense to pick certain lines to change. Like commercial, which is what we’re in now. You want to pick lines where the sophistication of the buyer is high. Because regulatory scrutiny is inversely proportional to the sophistication of the buyer.
DS: What do you mean by manufacturing the insurance product?
DM: I use the phrases “insurance manufacturer” or “manufacturing insurance” because I want to look at the value chain from the perspective of manufacturing and distribution. And when I say insurance manufacturing, I mean everything about the insurance product — from soup to nuts. From the pricing, from the data that underlies it, to how we’re pulling in individual parts, like the AI services that Planck offers.
It’s similar to the automotive industry: There are auto manufacturers and auto distributors. The insurance distributors are our agents and brokers, as well as other nontraditional insurance distributors. And there has been a lot of innovation dedicated to making insurance distribution better by creating different types of insurance distributors.
I think this approach is helpful, but I don’t think it’s the answer. That’s why we created Coterie to be an insurance manufacturer — to make it easier for insurance distributors to do their jobs.
Now, our insurance distributors can access millions of small businesses that they couldn’t touch before because they were losing money. Because with just a name and business address, they can bind a policy. Coterie is able to provide that access because of good parts suppliers — like Planck, efficiently pulling in underwriting data and risk insights — and because we create it and manufacture the insurance product.
DS: Can you elaborate on your distribution model? Is it digital, direct… or a combination of the two?
DM: We don’t do any direct-to-consumer (D2C). We don’t spend any money on D2C. Everything we do is through partnerships — both traditional and non-traditional. Traditional being where insurance is the primary thing being sold, non-traditional is where it’s not the primary thing being sold.
We’ve built out micro services and APIs so the insurance distributor can select which parts they want to distribute. How much of this do they want embedded into the system? Do they want to run an insurance company via API? And that’s the goal for Coterie: Enable distribution to essentially tap into an API-run insurance company. It helps their servicing incumbents, and it helps us as well. It’s just much more efficient.
Some of our partners are lower tech brick-and-mortar agents, using traditional dashboards and accounts. Some are digitally inclined. They can literally buy policies with us with nothing because they’ve sent us everything via the API. Customers can literally click a button and they’ve got a policy. They are passing us all the information we need. So, we see ourselves as the insurance manufacturer that empowers how every distribution is going to be done, ensuring it’s to the benefit of the end policyholder and the insurance distributor.
DS: So you see your approach as actually enabling existing distribution?
DM: It’s like Archimedean principle: If you give me a lever big enough, I can move the world. And that’s what we’re looking at. We look at the small business insurance space — a space that has a massive total addressable market (TAM), high expense ratios, and a low insured population — and we look for the big lever. Where can we make the biggest impact?
And we saw that the insurance distributors did not have a way to efficiently service these millions of small businesses. And there’s even more opportunity in the commercial space — this is just the beginning. So, let’s focus on these partners — traditional and non-traditional — and insert ourselves to create something in such a way that the insurance distributors can efficiently and profitably address this TAM. It’s changing the way that they’re doing business, which is pretty cool.
DS: How does insurance industry regulation factor into the innovation equation?
DM: Regulators should not be the enemy. Too often, people who are immature in the insurance space look at regulatory agencies and commissioners as “the people we’ve got to get around.”
In my experience, regulatory agencies want to help. They protect from insolvency and protect the consumer. But they have laws, and they must work within them. And we’ve found that if you simply reach out — and sometimes they’ll do you the favor of contacting you, depending on your submission — they’ll help you realize what it is you’re trying to accomplish and show you how to make it work within regulatory guidelines.
Regulators are especially helpful if you approach the issue kindly, with the goal of benefiting the end consumer. More successful insurance companies and successful insurtechs will start focusing on the end consumer. Creating more value for those consumers will lead them to become more valuable companies. Plus, they will be very well positioned to work with the regulatory agencies and build the products that create that value.
DS: Are there any final thoughts you would like to share?
DM: I’m a big believer in first order negative, second order positive. If you do the hard things first, you’re going to benefit in the long-term. If you start with the easy things, you’re going to suffer in the long-term. This is pretty basic stuff, but it can require discipline. Like saving for retirement — I’ve got to give up some money now so I don’t have to eat cat food when I’m 80 years old.
And it’s true in so many things. If you take the shortcut and decide not to increase rates, instead opting to go in at a low rate, that’s positive in the short term. You’re going to see that climbing new business, and then you’re going to see that climbing new business penalty that comes with it. Do the hard things first and you will get the benefits later on.
David McFarland – Bio
Co-founder and CEO of Coterie Insurance, David McFarland is making risk transfer more efficient for the small commercial P&C insurance space. Founded in 2018, Coterie simplifies commercial insurance for agents, partners, and small businesses through data, technology and insurance expertise and by incorporating speed, simplicity and service into the commercial insurance experience. Prior to Coterie, David served as Chief Actuary and Head of Insurance Product & Pricing at Clearcover, a personal auto insurtech in Chicago.