Embedded Insurance: the future of insurance distribution

The pandemic-fuelled shift to online purchasing and increased demand for digital gave new impetus to embedded insurance products. This trend is presenting insurers with an invaluable opportunity to scale and improve their distribution.

Embedded insurance offerings have taken off as of late, with insurers, InsurTechs and venture capital firms viewing the trend as a significant driver of growth in the industry. According to a report by InsTech London, the embedded insurance market is forecast to grow to $722bn in gross written premiums (GWP) by 2030, more than six times its current size.

Embedded insurance provides coverage alongside a product or service the user has purchased; the protection is sold as native. It could help to address the so-called protection gap, the gap between the amount of insurance that is economically and socially beneficial for individuals and businesses, and the amount actually bought. According to the Swiss Re Institute, this gap doubled between 2000 and 2020.

According to Ruth Fisk, vice president of insurance marketing at Smart Communications, a provider of a cloud-based customer conversations management platform, embedded insurance can be seen as the future of insurance distribution. Although it is not a new phenomenon, it is becoming more integral to improving customer experiences.

“Even though embedded insurance products have been around for years – most often seen as “just in time” coverage such as “hole-in-one” coverage when you purchase your tee time fees at the golf course, travel insurance when you purchase your airline ticket or extended warranty coverage when you buy that new appliance, these products have exploded as consumers buying habits shifted to online and the use of embedded insurance products became an integrated component of a digital purchase,” she said.

Meeting customers where they are

The consensus in the industry is that this type of offering is good news for customers. Insurance is often considered an inconvenient purchase, with associated unappealing hassle, particularly if a claim must be made.

Research brought to the market by Duck Creek Technologies has highlighted that consumers are demanding more from the insurance buying process. In a survey of 2,000 consumers communications gaps were highlighted, as was a stronger interest in engaging in digital channels and online services.

Smart Communications’ Fisk said that with the pandemic forcing many people to rely solely on digital services to meet even basic needs, customers have higher expectations than ever. Embedded insurance meets customers where they are, in the channels they prefer, at the right moment, “so customers can gain instantaneous access to the insurance products and services they need.”

Alex Astengo, head of sales UK at Cloud Insurance agrees. “Insurance is being pushed to purchase at point of need, and embedded insurance makes this possible by minimising friction in the purchase and enrolment.”

Devin Chawda, co-founder and CEO of the InsurTech for tradespeople ARMD, said that embedded insurance has the potential to make insurance more accessible, especially to those that would not typically buy it. “Bringing the buying of a product and protection together seamlessly at checkout should mean better coverage and protection overall – as long as it’s really easy and affordable,” he said.

According to Chawda, embedded protection makes it easier for consumers to buy insurance, and therefore customers are better protected. For example, 54% of tradespeople do not have tool insurance, and “this is a problem that needs addressing in a new way as the existing approach isn’t working,” he said. Not only is the customer likely to be better covered given the ease of purchase, he continued, but the offering is also backed by an insurer and is less likely to be contested as there is proof of purchase, recorded at the same time as the policy inception.

Supporting the demand

As companies evolve and increase the adoption of embedded insurance as an additional revenue stream, insurers will need to continue to evolve in new insurance models to support the demand, Smart Communications’ Fisk said.

“Many up-and-coming InsurTechs are moving to newer service models that provide coverage on a need-only basis – think a “pay as you go” model,” Fisk said. She pointed to InsurTech Trov, which offers digital, in-app embedded insurance products, and Slice which provides usage-based insurance products.  Adopting new coverage models, such as those offered as in-app experiences, will be key for companies to meet customers’ higher expectations.

Fisk stressed the importance of the correct technology and infrastructure being in place. A modern communications platform, for example, can easily be integrated with a company’s technology ecosystem to capture a customer’s application details through an intelligent adaptive interview and pass that data onto the managing general agent (MGA), agent or carrier, to have real time approvals.

Non-insurance companies attempting to create and embed protection products may not have the experience that traditional insurers do. However, Cloud Insurance’s Astengo, said that they may actually be at an advantage. “Traditional insurer technology is a problem in itself, generally non-insurers are able to take advantage of newer technologies which allow for customer-driven engagement,” he said.

The key, Astengo added, may be in partnering with providers who understand the insurance model and can help non-insurers develop platforms that are compliant and able to provide underwriting data for a profitable business.

Greater competition or collaboration?

Non-insurers embedding insurance products into their services could threaten incumbent insurers’ position in the market. Yet, according to ARMD’s Chawda, insurers will remain relevant “as long as they are providing capacity.” However, this may change if more new entrants choose to go the ‘full stack’ route, but he notes this requires a lot of capital and few InsurTechs have achieved this.

We may be more likely to see a slew of successful partnerships. Chawda said, “Increasingly, insurers are looking for partners to exploit new technology opportunities, especially those that require a nimble technology approach like embedded offerings combined with IoT security, so this is an area where insurers and non-insurance companies can successfully partner.”

For example, Airbnb is building an embedded travel insurance offering with a “reputable insurance carrier”, Ryder and REIND partnered to launch embedded insurance for used truck customers at the point of purchase, Roamly and Wheelbase are to provide RV insurance for consumer who book rentals or vacations, and Ryanair brought digital insurer Cover Genius on board to integrate travel insurance into its booking experience.

According to Cloud Insurance’s Mariia Shvets, head of marketing, such partnerships can expand insurers and InsurTechs customer base and distribution. “More and more insurers are teaming up with P2P platforms to provide cover for assets or services,” she said. “Through such partnerships, insurance providers gain access to new target groups and business lines as digital platforms are well positioned to connect insurers with customers. This is enabling insurers to distribute their products through marketplace platforms, reassuring sharers that the policies they take out are relevant to the cover they need.”

In addition, Cloud Insurance’s Astengo said that in most embedded offerings, the non-insurers will not want to take on regulatory and compliance requirements of insurers, so partnerships could benefit them in this way also. “Collaboration is typical in insurance and embedded offerings have been provided before, what’s different now is the ability of the partners to use data to offer more personalised and appropriate options to customers.”

The road ahead

Indeed, ARMD’s Chawda said that the challenges non-insurance companies may face are likely to be surrounding compliance and regulation. The attraction of embedded offerings to customers is largely around convenience and speed, yet there is a balance to be struck between providing a seamless purchasing experience and ensuring sufficient checks such as KYC are in place, in addition to fair pricing and the provision of policy documents.

Cloud Insurance’s Astengo stressed the need for transparency and for the consumer to understand the product they are purchasing. He said the main issues he foresees is the reputation risk to the consumer brand if claims are not handled in an appropriate manner. “This may be linked to the level of coverage perceived by clients not being the reality, so messaging needs to be very clear.”

Looking ahead, Smart Communications’ Fisk said the success of non-insurers building protection products will be dependent on the longevity of digital companies as a distributor of embedded insurance products. “As markets mature – this may provide a monopolistic holding on some type of insurance products – such as pet insurance distributed by pet retail giant Petco,” she said.

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