The Manufacturer of Small Commercial Insurance

David McFarland introduced himself as a recovering actuary, which is a tough background when launching to independent agents and brokers. In the agent’s mind, the underwriter says the actuary raised the rates, so the actuary is the person glued to a calculator in the back room who is to blame. David’s conversations with agents often begin with an apology.

About David McFarland

David McFarland is CEO and founder of Coterie, a small-commercial P&C insurer that operates as an MGA/MGU with a digital binding authority and an API-first product. Before founding Coterie, he was an actuary at the National Council on Compensation Insurance, worked in actuarial consulting, built analytics at Jewelers Mutual in Wisconsin, and was at Clearcover.

What Coterie Does

Coterie specializes in small-commercial property and casualty: business owner’s policies, general liability and professional liability for small businesses. Policies are typically between about $750 and $5,000, a segment David says has been neglected because big carriers copied the middle-market process and have little incentive to invest in a small part of their business. An agent therefore goes through the same back-and-forth with underwriting for a $5,000 policy as for a $50,000 one.

David describes Coterie as the manufacturer of insurance, in contrast to digital agencies such as Brisa, Layr and Milo. Coterie sets rates, binds, issues policies and handles claims (a third-party administrator administers them within Coterie), with reinsurers and carriers on the back end taking the risk and granting authority to file and code products. To the states, it acts like a carrier. It builds its products in-house so that digital agencies, traditional agencies and other partners can focus on small commercial risks, and its API documentation is designed to make integration easy.

A Product for Independent Agents

Coterie had just launched a dashboard for independent agents and brokers, and was working on agency management system integrations. It retrieves the data needed to classify a risk correctly and check things such as sprinklers, distance from a hydrant and coastal exposure, so the agent can focus on relationships and coverage recommendations rather than data entry. Feedback from the first agents was strong.

Working With Other Startups

Gilad asked about the partnership with Ben Monroe of Brisa, who was an earlier guest. David said Ben had wondered whether Coterie was a competitor, but they realized Coterie could help: Brisa hooks up to manufacturers’ APIs, so it integrated with Coterie and offers the Coterie product, with the two teams working together. A similar launch was made with Tarmika.

How does working with startups differ from working with established carriers? Established players hand over off-the-shelf API docs. Coterie works with partners differently, setting up Slack channels and helping with integration testing, since it is a partnership-focused company, whether the partner is an independent agent, a digital agency or a QuickBooks or Intuit. Startups are motivated to get things done quickly. The challenge is when insurance is a secondary or tertiary priority for the partner: startups can focus on only one thing at a time, and insurance never rises to the top, which Coterie struggled with early on. Insurtechs focused on insurance get to the primary slot far more easily.

What’s Next for Small Commercial

David noted that reinsurers are particularly interested in small commercial, because they have little access to it: big legacy carriers such as Hartford, Travelers, Liberty and Chubb keep all of that risk, and small commercial runs good loss ratios, around 40 percent in his example, so reinsurers want a way in without the administrative hassle.

Why Leave Clearcover to Start a Company

David said that every job he has moved to has paid less than the one before, to his wife’s chagrin. He seeks challenge and discomfort. He started at NCCI, moved into actuarial consulting, where he was thrown into the deep end, built things at Jewelers Mutual, and then helped start Clearcover with Kyle, which became a rocket ship. When he started Coterie, several people asked whether he was sure. He emphasized that he left none of those companies out of dislike and still keeps in touch with the Clearcover team.

What he loves is how fast a startup changes. There is the pivot to product-market fit, then building systems and mechanisms to scale, and the scaling phase has its own inflection points, with the challenge of reducing entropy as you grow. Coterie, in the stage after its Series A and a follow-on round, is focused less on product-market fit, with the top of the funnel healthy, and more on creating processes that turn raw material into revenue.

Hiring: The Presence of Strength

Coterie competes with carriers and startups for talent. It hires on five things. First, there is a need, and the candidate must have a superpower that meets it: they hire on the presence of strength, not the absence of weakness. If someone is amazing at one thing but weaker at another, that’s fine. The other four are core values: integrity, intelligence, humility and passion, or in one sentence, smart, energetic people who do the right thing and don’t brag about it.

David described intelligence as the ability to hold two conflicting ideas at once, and cited a colleague who will throw out an idea and then explain in the same sentence why it is bad. He added that many people in insurance are hungry to do something meaningful but find it hard to move into innovation inside legacy carriers, and a startup is a good remedy.

Advice: Read

His life hack is reading, because it compounds like interest. He wishes he had started earlier and would swap many of the hours he spent on actuarial exams for reading. His book recommendations: Principles by Ray Dalio, Poor Charlie’s Almanack (Charlie Munger’s folksy wisdom, hard to find), Shane Parrish’s work on mental models, and Influence by Robert Cialdini, which he said takes the veil off the techniques marketers use.

Key Takeaways

• Coterie is the manufacturer: it sets rates, binds, issues policies and handles claims for small-commercial risks, while reinsurers and carriers back it.
• Policies of $750 to $5,000 have been neglected because incumbents copied the middle-market process; Coterie’s dashboard and API cut data entry for agents.
• Partnerships work with startups when insurance is the partner’s focus; if insurance is secondary, it never rises to the top.
• Reinsurers are drawn to small commercial because they rarely get access to it.
• David hires for the presence of strength, plus integrity, intelligence, humility and passion.
• At the post-Series A stage, the focus is turning proven product-market fit into scalable processes.