Will Ross, CEO and Co-Founder of Federato and Seth Egliht, Federato’s Chief Revenue Officer recently spoke with Lori Chordas of AM Best TV at the Target Markets Annual Summit in Scottsdale, Arizona. Will and Seth discussed the key trends they are seeing in the Program and MGA space, how the growing use of AI and LLMs are impacting underwriters and insurance operations, and what insurers can expect from their reinsurance partners on 1/1.
Lori: I'm Lori Chordas for AM Best TV. And we're at the Target Markets Annual Summit in Scottsdale, Arizona. Joining us now is Federato co-founder and CEO, Will Ross, and Chief Revenue Officer, Seth Egliht. Welcome.
Seth: Thank you so much.
Lori: Thank you so much for joining us. Seth, congratulations. Your new position as CRO, your second week on the job. Congratulations!
Seth: Thank you so much. I appreciate it. Excited to be here.
Lori: Your background is in bank tech and banking as a service as well as analytics and data. What parallels do you see between banking and insurance when it comes to the business challenges and technology adoption?
Seth: Right. So a tremendous amount of parallels. That was actually a large topic of conversation as it was leading up to me joining Federato. So at a very high level, both verticals, the insurance industry and the banking industry are focused on two things primarily, right? It's risk mitigation and maximizing margins. Uniquely in the insurance industry though, risk is the business. So there's a little bit of a different spin on that.
But fundamentally, in the changing expectations, whether that's of the underwriter or of the consumer, there's a lot of parallels in terms of when and how you adopt that technology. My experience in the banking space was specifically around credit unions, community banks, regional banks: they don't have large IT staff. So in order to adapt and actually move the business forward and move their offerings forward, they do have to rely on great partnerships.
You know, the advent of the iPhone really kind of changed the consumer expectations in the banking space. Right now, mitigating that risk in an increasingly risky environment, whether that's the cyber environment, etc., addressing that risk through the use of technology is right in front of us.
There's a reason we're at Target Markets. We have a thriving carrier business, but I think that the Program segment is both showing a lot of the innovation and is a tremendous hotbed of opportunity for that innovation.
Both of the industries, and I'll leave it at this, are built on disparate legacy systems as the foundation, right? So the data isn't structured the same. You're pulling from a lot of different places. You're having to do a lot of manual analysis. So the ability to standardize that data, that ability to federate that data, as it were, and really bring that to view and bring that to bear for the underwriters, for the carriers, and for the MGAs, I think it's right here in front of us, and I think it's a great time here.
Lori: Will, there's no question that insurance is having its AI moment. Where do you see the most promising use cases for the technology today in underwriting?
Will: Yeah, I mean, it's a good question. I think one thing I always try to say is we're a platform play, right? And so at the end of the day, we expect every customer to kind of go after something slightly different first and continue to build through time.
If I had to nail it down to one key theme that we're seeing in the marketplace, it's that insurers are finally getting beyond this idea of AI as just about scoring a risk. I think what we've observed is this kind of phenomenon of what one of our advisors calls the ‘dumbification’ of underwriting, where AI is being used a lot to automate away or replace processes that underwriters have done.
But if we really believe that underwriters play a role in underwriting and finding those marginal gains of risk, we have to believe in that uniquely human creativity. And so what we have been finding is businesses are really adopting these AI use cases that allow for something that humans have never been able to do before but always would have liked to.
A really great example of this would be in the underwriting guidelines space. No underwriter has the time to go read all 500 pages of guidelines and figure out, ‘What are the right questions to be asking at the right time?’ Well, with some of the cooler technologies that are coming out, what we can now do is go read those guidelines using AI in the context of an account and then generate that just right question for that account that then unlocks that underwriter to go and say, ‘Hey, you know, this is the thing I need to be thinking about.’ And that's a really powerful thing compared to just good risk, bad risk. And I think that gets clients excited.
Lori: Seth, what role do Insurtech providers like Federato play in helping insurers steer the course through the hype and to implement solutions that their users, their partners, and policyholders can embrace and trust?
Seth: Well, Lori, I think you used a key word there, and that's trust. And so the providers have to be able to partner with the carriers, with the MGAs, and they in turn have to be able to trust the providers to deliver the solutions that they're promising, really helping propel their business forward.
“What providers like Federato are bringing to the market is the ability for those businesses to actually trust the data that they have comprehensively, so whether that's writing new business, whether that's renewals, whether that's reinsurance. Taking a look at the portfolio and being able to really, really trust the decisions that your business is making based on things that may not have been contemplated in their totality.”
If you were having to go to each of those different systems, that should provide a great amount of trust that the businesses can then in turn do the best thing for their owners and for their policyholders.
Lori: Will, you and I talked about challenges in the market in terms of capacity challenges, rising reinsurance costs facing Program and MGAs today. Well, 1/1 is coming. What can insurers expect as the hard market continues into 2024? And what should insurers keep in mind when preparing for their next reinsurance negotiation?
Will: Yeah, I mean, Seth said it earlier, we're here for a reason, right? This is Target Markets. What are most of the conversations that are happening here right now? People are trying to secure capacity, people are trying to negotiate their reinsurance treaties for the next year. And just walking down the halls, as I was standing right here yesterday, I heard, "Oh, well, the hard part is the reinsurance bid."
And I read something recently, which is that when reinsurers sneeze, everything else catches a cold, right? And I think that really rings true. This is a very, very difficult environment, right? We're seeing constraints at the top end of capacity that all trickle down through the stack.
What we are observing, though, is there was a really interesting moment I heard about from Seth and the team yesterday where a carrier actually came to us and said, "Oh, Federato, I've seen your product." I said, "I don't know that we've ever interacted with you before." And what we've heard about was that in Programs, some of our customers had actually been showing those carriers our application, demonstrating how our application could help with their portfolio management, etc.
And I think that captures the idea, which is, in a phrase, it's all about show, don't tell, right?
“In the current environment, If you're not showing reinsurers and capacity providers that you're going to do what you say you're going to do, you're going to be at a disadvantage. The days of that fancy PowerPoint presentation with selective information pulling the wool over people's eyes is slowly coming to an end. And I think data and the truth will prevail, and that's a big part of where we have focused our business.”
Lori: Well, Seth, you've had the opportunity to connect with most of Federato's MGA and Program clients. Any real-world use cases that you can share to inspire our audience about what is possible with AI?
Seth: Certainly. So I will just touch on one right there. Great example from a carrier perspective.
“What I'm finding to be common across our clients and prospective clients alike is that, one, it feels really good when they're describing the problems or the challenges that they're facing, and it almost feels like they're telling us about our product itself. So that's a great place to be.”
But I have had the opportunity to really dig in here, as you mentioned, I’m new to the company, but have had a lot of conversations here at Target Markets.
Another one was an MGA that focuses on habitational risk and just the ability to solve for efficiency:
“They're struggling to actually address all of the submissions, actually be able to operate as effectively as they possibly could. Being able to bring all of that into one system was a problem that they're looking to solve. It's one that we're solving for all of our clients, really.”
We were purpose-built for the riskiest and most complex markets, so California wildfires, New York City construction, habitational risk in high-growth markets. It's something that I'm really excited about and feel like there's a tremendous amount of alignment, but that the prospective clients, clients, the MGAs, the carriers are looking to the future and do understand that process improvement, system improvement, access to data. As Will said, that level of visibility is going to drive the business forward. And the first movers and the fast followers are going to reap the rewards of it.
Lori: Absolutely. Well, as you said, looking towards the future. I'm going to ask you both to take out your crystal ball. What do you think the future holds for the Program market and the use of AI going forward?
Will: Yeah, I mean, there’s no doubt in my mind that we're going to keep seeing growth in the Program market. AI is core to the insurance industry. We've been using what we would call generalized linear models to come up with pricing strategies for years and years and years.
“Especially in the Program markets, which not exclusively, but in many cases means Specialty markets as well, there's a real opportunity for algorithmic advancement. We're going to start to see people playing with new techniques, using new sources of data to uncover things that are very unique to them, whether that's a telematics player working in large commercial trucking or a property insurer working with complex CAT models. Those innovations are going to keep happening because of the entrepreneurial nature of the market.”
And I don't think anyone has a perfect crystal ball, but what I do believe is that those people who are pushing the envelope, those people who are innovating, are the ones who are going to triumph in this class of risk. And it's just a really, really good time to be in the Program business. It's tough out there from a capacity perspective right now, for sure, but I think part of the reason it's tough is because there are so many places to choose from. There are so many directions those who do have capacity could go.
Lori: Absolutely. And Seth, any lessons learned from the banking industry that the insurance industry can look at and use in terms of their use of AI and technology?
Seth: Sure. With any adoption of new technology, there is a healthy amount of skepticism at the beginning, and justifiably so. It's viewed as inherently risky. But again, back to the first movers and fast followers, the adoption of technology actually helps reduce your risk rather than increase it by consolidating the view that you have, making sure that no stone is left unturned, that all of the data that you have is usable.
The speed at which innovation begins to occur on top of innovation, it just compounds. So that is definitely something that I saw from, as I mentioned before, the advent of the iPhone changing consumer expectations in that space, all the way through the use of AI and machine learning for intelligent and actionable analytics that get put in front of both consumers and the institution. So I think that we're going to experience something similar here. The increasing rate of adoption is then, again, going to increase the rate of innovation.
Lori: Well, Seth, Will, pleasure to speak with you. Thank you both so much for joining us.
Seth: Thank you.
Lori: For AM Best TV in Scottsdale, Arizona, I'm Lori Chordas.