Technology-driven insurance startups, or insurtechs, will source much of their underwriting capacity directly from reinsurance companies unless traditional primary insurers become more accommodating, an insurtech CEO has said.

Many insurtechs start out life as underwriting agencies or brokers and so are dependent on the traditional market for underwriting capacity.

Sten Saar, co-founder and CEO of commercial motor insurtech Zego, told the Insurance 3.0 insurtech conference Oct. 8 that traditional insurers are typically the bridge between insurtechs and reinsurers. Often, though, neither insurtech nor insurer is happy with that arrangement, so insurtechs are increasingly seeking direct contact with reinsurers.

"I think the capacity will predominantly come through reinsurers, unless the insurers really can structure themselves so they are more flexible and adaptable," he said. Saar added that "the biggest thing that has been killing every startup ... is the inflexibility and the archaic systems" of traditional insurers.

Zego has set up its own risk carrier as well as partnering with traditional insurers, such as RSA Insurance Group PLC, on some of its products. He said those working at incumbent insurers are "very smart and very, very good," but "it is just the infrastructure and the way the company operates is all against them."

Zego started out offering pay-as-you-go insurance for couriers working for takeaway food delivery companies, such as Deliveroo. Saar said the general response to the plan was good, but when the company told insurers, "they said: 'it's a terrible idea'" — although it did eventually find an insurer that thought the idea made sense.

Saar said Zego had set up its own carrier in part because "there is lots of reinsurer interest to work with a company like ourselves who has an advantage in terms of understanding risk." Zego has a quota-share arrangement with Swiss Re AG, and Saar said the reinsurer had been "hugely helpful in sharing data and so forth."

Zego also uses "several novel rating factors" to determine the price charged for cover, Saar said, which might be difficult for traditional insurers to accept.

Underwriting capital requirements have been "the biggest hurdle that has held back a huge disruption" of the traditional insurance industry to date, Saar said. But he added that this was "getting easier day by day" because there is "just so much capital available."

He pointed to Lemonade Inc.'s initial public offering, Root Inc.'s plans to go public and talk that Hippo Enterprises Inc. might follow suit. "There is a big, big wave that's coming and there will be more capital and interest in that regard," he said.