How to start a health insurance company

Health insurance is designed to help individuals and families offset the high cost of medical treatment. Without coverage, patients would be left to pay for the full cost of healthcare and hospital expenses on their own. This makes health insurance plans among the industry’s most in-demand products.

For aspiring entrepreneurs, this presents a good opportunity to venture into the insurance business. Starting your own health insurance company, however, requires careful planning and preparation.

To help you in your journey, Insurance Business gives you a step-by-step guide on how to start a health insurance company. Whether you’re an industry first-timer testing the market or an insurance veteran wanting to take charge of your own business, this article can help. Find out what it takes to build a successful health insurance company in this guide.

A health insurance company specializes in providing clients with a range of health plans to cover a part or the full cost of medical and hospital care. The main goal is to help patients get coverage to help them offset the steep healthcare and treatment expenses in the country.

Many health insurance companies operate as small businesses assisting clients in accessing affordable coverage through the health insurance marketplace.

If you’re new to the industry, the health insurance marketplace is where many low-income Americans search for affordable healthcare coverage. It is also called the health insurance exchange or simply the marketplace.

In most states, the marketplace is administered by the federal government through Healthcare.gov. Some states also operate their own exchanges. People can access these websites to shop around and enroll in a health plan that fits their needs and budget. Clients can also find suitable coverage through call centers and in-person services.

There are also private health insurers, some of which are well-known global brands. These health insurance giants boast a network of hundreds of thousands, if not millions, of healthcare specialists, and serve tens of millions of clients. Based on the latest data, the 10 largest health insurance companies in the US control almost 60% of the market.

Just like other insurance businesses, what makes starting a health insurance company an attractive venture is the strong growth potential that comes with it. Launching your own insurance firm requires a lot of planning, hard work, and dedication. This step-by-step guide on starting your own health insurance company can help steer you in the right direction.

Step 1: Prepare a solid business plan.

A sound business plan is the foundation of your health insurance company. This will serve as your guide as you lead your health insurance business towards profitability. Having a solid business plan can help you identify key markets. It also reveals a strong understanding of how businesses operate, allowing you to secure funding for your company. 

A comprehensive business plan consists of several elements. This Insurance Business checklist shows what you need to include in your business plan. You can download this file and save it for easy reference.

Step 2: Decide on what health insurance plans to offer.

In 2010, the US enacted the Affordable Care Act (ACA). Also known as Obamacare, the ACA is a comprehensive reform law designed to reduce healthcare costs for families and ensure that more Americans can access health insurance. The ACA lets citizens who may be uninsured because of limited finances or pre-existing conditions to get affordable coverage through the health insurance marketplace.

Through these exchanges, patients can pick a health plan that matches their unique needs and situation. These include:

Health Maintenance Organization (HMO)

In this type of plan, coverage is limited to care from doctors who work for or are contracted with the HMO. This rule applies except in emergency situations. Some health plans may require a policyholder to live or work in their service area to qualify for coverage.

Exclusive Provider Organization (EPO)

This is a managed care plan that covers services only if the doctors, specialists, or hospitals are in the plan’s network. Just like HMO plans, these restrictions don’t apply in cases of emergency.

Point of Service (POS)

This is where policyholders pay less if they choose doctors, hospitals, and other healthcare providers in the plan’s network. POS plans also require policyholders to get a referral from their primary care doctor when seeing a specialist.

Preferred Provider Organization (PPO)

In a PPO plan, policyholders pay less if they access treatment from healthcare providers in the plan’s network. They can also see doctors, hospitals, and providers outside of the network without a referral for an additional cost.

Step 3: Raise the necessary funding.

Starting your own health insurance company is an expensive project. Industry experts estimate a startup capital of between $50,000 and $500,000, possibly even more. The amount depends on the size and structure of your business. The funds you raise will cover:

• licensing requirements
• business registration and permits
• operational expenses, including office space, equipment, staffing, and compensation
• marketing and advertising costs
• insurance coverage

Check out the how much it costs to start an insurance company in this guide.

You can use your personal funds to cover the cost of starting a health insurance company. These may include your personal savings. You can also raise money by selling property or other assets.

If your personal funds still aren’t sufficient, there are other ways for you to secure financing. These include:

• business loan: the most common way of raising capital for a startup business, you can apply for a business loan through banks and other lenders; you will need a solid business plan and a good credit history to get approval
• SBA-guaranteed loan: the Small Business Administration acts as a guarantor to help you secure bank approval through an SBA-guaranteed loan
• government-sponsored grants: the federal government provides financial assistance to new businesses through grants.gov
• crowdfunding websites: these offer a low-risk option if you’re looking for donors to fund your health insurance company

Step 4: Meet licensing and other business requirements.

Almost all businesses and professionals operating in the insurance sector need to get a license to legally provide a product or service. The licensing requirements vary depending on where you plan to start a health insurance company.

If you intend to open an insurance agency, you may need to assign a “designated responsible licensed producer” or DRLP. A DRLP is a licensed insurance professional in charge of ensuring that your insurance agency is compliant with the laws and rules of your state.

Besides insurance licenses, you may need to comply with other business requirements before launching your health insurance company, including:

General business license

You may need to secure a general business license to legally operate within the jurisdiction, depending on state laws.

State registration

All insurance businesses need to register as a “resident business entity” through their state insurance commissioner’s office.

Tax identification number

If your health insurance company will operate as a partnership or corporation, the IRS requires you to use your federal employer identification number (FEIN) when filing taxes. If your business is structured as a sole proprietorship or single-member LLC, you may use your Social Security number.

Sign permit

If you intend to put up signs to advertise your insurance business, some jurisdictions will require you to secure the necessary permits.

Step 5: Protect your company with the right business insurance.

One of the biggest benefits of taking out business insurance is the financial protection it provides when unexpected losses occur. As your business carves out the path to success, you may face situations that can impact its profitability.

Mistakes can lead to costly lawsuits. Accidents and calamities can take a huge chunk out of your revenue. Getting the right business insurance policies plays an important role in helping your health insurance company recover faster.

Taking out business insurance coverage also boosts your firm’s credibility as stakeholders and clients prefer working with businesses that they know are financially protected.

Having business insurance, however, is just one way of minimizing your business’ losses. Pairing insurance coverage with sound risk management practices is often the best way you can protect your business’ assets and finances.

Here’s a summary of the steps you need to take to start a health insurance company.

There are several ways health insurance companies make money, including:

1. Underwriting profit

Underwriting profit is calculated as the total premiums your company has generated in the financial year, minus the amount that you’ve paid out in claims.

For example, if your health insurance company has written $5 million in premiums for the year but paid out only $2.5 million in claims, the remaining $2.5 million is considered your underwriting revenue.

2. Investments

Health insurance companies, especially the large industry players, invest a huge chunk of the premiums they collect in different assets to boost their earnings.

3. Commissions

If you plan on starting a health insurance agency, you can get commissions for every policy you close. The commission rates vary depending on the health insurance provider you’re working with. The general range is between 2.5% and 5% of a policy’s premiums for the first year. The rates typically go down once a plan has been renewed.

If you’re specializing in group policies, you earn slightly lower commissions ranging from 1.5% to 3% of the total premiums. Since group plans are often purchased by businesses for their employees, you can make up to four- or even five-figure earnings per company, depending on the number of employees.

4. Profit sharing

Many insurance carriers implement profit-sharing programs for their partner agencies. Once these insurance agencies reach certain revenue targets, insurance companies reward them with a portion of either written or earned premiums as a bonus.

Accident and health insurance companies across the country have written a combined $1.44 trillion worth of premiums. This is according to the latest market share report from the National Association of Insurance Commissioners (NAIC). The figure represents a 7% increase from $1.37 trillion from the previous year and almost double that of $745 billion 10 years ago.

These numbers show a market heading on an upward trajectory. This, in turn, presents a good opportunity for those seeking to venture into the health insurance business.

Of the total underwritten premiums in NAIC’s report, almost two-thirds are from the country’s top 25 health insurance companies. This also shows that a health insurance business, if managed well, can be profitable.

Another way of making sure that your health insurance company stays profitable is to keep abreast of the latest industry trends. You can do so by visiting our Life & Health News section regularly. Be sure to bookmark this page for quick access to breaking news and the latest industry developments.

Do you want to start a health insurance company? Did this guide help you? Let us know in the comments.