Regulatory Approval for Insurance Startups

Property & Casualty (P&C) insurance startups must enter a regulatory maze to reach the company’s launch.
Obtaining regulatory approval is one of the most critical and tedious steps to ensure your business is legally authorized to operate.

While each state contains specific regulations, the process behind regulatory approval often follows a standardized framework shaped by the NAIC (National Association of Insurance Commissioners) or UCAA (Uniform Certificate of Authority Application).

In this series, we outline each step of the process behind launching a P&C insurance start up:

1. The Application Process and Fees

The regulatory journey begins with submitting an application to the state insurance department where the company intends to operate. Most states require startups to submit applications via the UCAA, which helps standardize the process across jurisdictions. Some states enforce additional statutes or requirements.

The application includes detailed information about the startup’s business model, financial structure, and governance framework.

A key part of this application is the submission of an application fee, which varies by state. Startups should ensure that their application is complete and accurate to avoid delays in the approval process.

2. UCAA Pro Forma Statements

One critical component of the application is the inclusion of UCAA Pro Forma Statements. These financial projections include detailed estimates of the startup’s Risk-Based Capital (RBC).

Startup Checklist for insurance. | WaterStreet Company

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What is RBC?

RBC is a regulatory requirement that measures the minimum capital necessary to support the business’s risk profile. These projections demonstrate to state regulators that the company has adequate capital to cover potential liabilities and solvency risks.

Accurate and conservative financial modeling is crucial here, as it can affect the startup’s approval timeline. The pro forma statements should provide:

A clear understanding of premium growth expectations.
Loss ratios.
Capacity to absorb potential financial shocks.

3. Plan of Operation and Statutory Requirements

The next step to regulatory approval is the submission of a comprehensive Plan of Operation. This document outlines the startup’s business plan, product offerings, and market strategy. It should detail the company’s goals and how it intends to achieve them while remaining compliant with industry regulations.

Every state also requires adherence to a specific set of statutes that cover various operational and governance aspects. These statutes typically follow NAIC/UCAA formats but may vary slightly across states. Essential components include:

Products to be Sold: Clearly define the insurance products your company plans to offer, including coverage limits and target markets.
Management Discussion and Analysis: An overview of the management team’s strategy, risks, and financial outlook.
Biographical Affidavits and Background Checks: Every Board of Directors member and key executive must undergo rigorous background checks, including fingerprinting. These Biographical Affidavits serve to ensure that those in charge of the startup meet ethical and professional standards.
Corporate Governance Documents: These include the Articles of Incorporation, By-laws, and policies governing conflicts of interest, non-compete agreements, expense management, and internal controls. The startup must also provide a Certificate of Status from the Department of State, confirming its legal standing.
Books and Records Location: Defining the location where the company’s books and records will be stored is necessary to ensure proper regulatory oversight.

By ensuring these documents are meticulously prepared, startups can demonstrate their commitment to transparency and sound corporate governance.

4. Governance Structures and Committees

Corporate governance plays a pivotal role in gaining regulatory approval. The company must define its Board of Directors’ composition, including the responsibilities of key committees like audit, compensation, and investment committees. Startups may also consider forming a risk committee, especially if there is a focus on environmental, social, and governance (ESG) issues.

A well-established governance structure demonstrates to regulators that the startup has the necessary oversight mechanisms to manage risks effectively and maintain operational integrity.

5. Operational and Compliance Plans

Regulatory bodies also require an in-depth view of the startup’s operational plans, especially regarding staffing, claims handling, and disaster recovery. Key areas include:

Staffing Plans: A detailed outline of the company’s staffing strategy, which should align with the operational needs and financial projections.
Claims Governance: Insurance startups must present a clear framework for handling claims, including the establishment of a Special Investigative Unit (SIU) to manage fraud risks.
Disaster Recovery Plan: Contingency planning is essential to ensure business continuity in case of a disaster. Regulators expect companies to have a robust recovery strategy, including plans for data protection and operational recovery.

The startup must then provide copies of vendor agreements with key partners and outline any affiliations with other insurance companies. These documents help regulators assess the operational stability of the startup and ensure compliance with vendor management regulations.

6. Deposits and a Fidelity Bond

Most states require startups to make a State Deposit in a trust as a safeguard against insolvency. This deposit serves as a reserve, protecting policyholders in the event of financial distress. The amount of the deposit varies by state and depends on the nature of the startup’s insurance products and risk exposure.

Startups are also required to obtain a Fidelity Bond, which protects the company against fraudulent acts committed by its employees. This bond is an essential component of financial protection and adds an additional layer of security to the company’s operations.

7. Select Professional Advisors

The regulatory process also mandates that insurance startups select key professional advisors to help manage their operations and compliance. These include:

Audit Firm: An independent audit firm is necessary to provide STAT (statutory accounting principles) and GAAP (generally accepted accounting principles) audits, ensuring transparency and regulatory compliance.
Actuarial Firm: Actuaries will certify the startup’s loss reserves and pricing models to demonstrate the soundness of the company’s risk management practices.
Investment Advisory Firm and Custodian: The startup must select a firm to manage its investment portfolio. The company’s Investment Committee should work with the advisor to create an investment policy that balances growth with regulatory constraints.

8. Finalize Regulatory Approvals

The final step is to negotiate and finalize the startup’s regulatory approvals. This includes:

Consent Orders, which outline the terms of regulatory oversight.
Certificate of Authority, which grants the startup legal permission to operate.
Rate and Form Filing approvals, which ensures that product pricing and policies meet state insurance department standards.

This step finalizes the regulatory approval process and allows the startup to begin selling insurance products.

WaterStreet Company & Insurance Startups

Here at WaterStreet Company, we support P&C insurance startups with next-generation, cloud-based insurance software. From Policy Administration and Underwriting to Claims and Accounting, we provide all elements of technology for your company to thrive.

Experience firsthand how WaterStreet’s cloud-based solutions can revolutionize your P&C insurance operations. Contact us today to request a consultation and demo.

Authored by Kelly King, CFO of WaterStreet Company