Why Is Insurance Brokerage Hard for Startups?

Michael Lee says insurance brokerage is a very difficult industry for startups to get into. The customer does not pay the broker. The carrier does. Gross retention rates are 90%. The business is relationship-centric, and a broker does not really compete on price.

Sequence has spent time in brokerage since the founding because the market fits what the firm looks for. The work at Sequence does not scale, so each investment has to count, and the aim is companies that can be built into $100 billion plus businesses rather than a pattern repeated 10 times a year. Brokers sit on $2 trillion plus of premiums a year going to carriers and take a vig on that flow. The industry has minted dozens of large companies. Carriers make money by underwriting, pricing risk and hoping to pay out less in claims than they receive, and by investing. The insurance industry has almost made no money underwriting since the beginning of time and has made the principal amount of its money through investing, which pushes carriers to gather high quality premium. Brokerage is powerful because it controls access to that premium.

The same traits make the incumbent hard to unseat. Startups face a huge, relationship-heavy market where the broker is not competing on price and the carrier, not the customer, pays.