An embedded product typically provides coverage developed by an insurer but is distributed through non-insurance channels.
AM Best in a report released last week suggested that embedded insurance is “gradually gaining a foothold” around the world but the role of regulation in protecting policyholders will be critical in encouraging further acceptance of this distribution concept.
The rating agency noted that e-commerce and insurtech have led to specialty insurers that use embedded insurance as their main distribution channel.
AM Best suggested that embedded insurance would fill some protection gaps by “providing secondary coverages and developing an insurance culture among low-income segments of the population”.
“For this to happen, specialized insurers with knowledge of the risk (and the ability to mitigate it) should be willing to provide efficient risk transfer solutions for producers, consumers and retailers,” the report said.
The report provided examples of embedded insurance from seven different countries.
“Only the first chapter of this book”
The mood about embedded insurance at the Insurtech Insights conference in New York at the end of May was decidedly more bullish. Participants stated, however, that this type of product will evolve greatly from here.
For example, Rob Schimek, CEO of insurance exchange Bolttech, suggested that embedded insurance will also evolve to be more about choice, rather than just one option.
“This embedded insurance journey that everyone talks about - and we believe in, by the way - we believe that it is only the first chapter of this book,” Schimek said during a session at the Insurance Insights event.
He continued: “This book has so many more chapters where, instead of being only about providing a single user experience and a single journey with a single product and a single provider, we are providing choice.”
Schimek compared the discussion around embedded insurance as being akin to a children’s soccer match where everyone is following the ball.
“Everybody rushes to this concept of embedded,” he said. “That’s where the ball is today but it’s going somewhere even further than that, and different from that, into the future,” he said.
He said embedded insurance will increasingly be about not just providing a single product but also a service.
“If I’m renting a place and I get locked out, the last thing I really want is a cheque from my insurance company a month later compensating me for the fact that I was locked out of my house and had a miserable vacation,” he said as an example. “What I really want is someone to come open the door and get me the heck into that house.
“So this concept of not just an indemnity, but a service that goes along with it is much more about where the world is going.”
Embedded insurance to reshape industry by 2030
Other industry observers have also commented on the potential of embedded insurance.
“The ascent of embedded insurance and capabilities as a service will reshape the industry by 2030,” Bain & Company said in November in a report on the future of insurance.
Bain stated the embedded concept is a relatively new business model that has become more prominent in certain personal lines to offer insurance at point of sale.
“Chubb, for instance, has partnered with ride-hailing company Grab in Southeast Asia to make accident coverage available for all riders while booking a trip. This will be a double-edged sword as the avenues for selling insurance expand, but the insurer forfeits the customer relationship to the distributor,” Bain said.
The global consultancy noted that a host of insurtech companies have sprung up to provide embedded services and have attracted venture capital investors, including Extend, Element, Qover, Boost, and Wrisk.
Bain added that big technology firms have shown interest in embedded insurance for a longer period. These range from the conventional, such as an AppleCare proposition to provide coverage on its Apple devices, to “emerging flavours” such as Amazon partnering with Next Insurance to offer small business insurance to Amazon Business Prime members, the consultancy said.
Bain noted that some industry analysts estimate that the total size of embedded gross written premium in the property casualty industry will reach $700bn by 2030.
One of these estimates came from business model transformation expert Simon Torrance in 2020.
Torrance at the time commented that embedded insurance does not solve the protection gap, but it does address many of the supply and demand issues and could act as a catalyst for wider industry business model transformation.
He noted that today it is almost exclusively insurtechs, specialist MGAs and agencies that have fully embedded distribution but that any type of company has the potential to do so, including fintechs, primary insurers, reinsurers, developer platforms, and digital brokers, assuming regulatory compliance is in place.
For example, he said that in European markets “fully embedded” channels could climb from less than 2 percent of the market in 2020 to over 24 percent in 2030, or $140bn. He said the US would be a similar story.
Auto, travel and property to have greatest penetration
In its report last November, Bain suggested that embedded insurance penetration will vary significantly by line in the future, with the company believing the greatest penetration will be in auto such as through the car sales process, travel through flight or hotel bookings, and property.
In April, Martin Spit, Americas insurance sector leader for EY’s strategy and transactions, in a report on the consultancy’s website highlighted that many firms are embracing embedded insurance and platform-based business models.
He said that traditional carriers and non-insurers alike are making strategic bets to acquire insurtechs that can help embed revenue-generating insurance products into their ecosystems.
One example of this is Travelers in February this year acquiring the technology of Trōv, which is viewed as one of the earliest insurtechs and which launched an embedded insurance platform to enable companies to distribute insurance products within their existing digital applications.
Spit also highlighted a dealer management system company recently acquiring an insurtech with the capabilities to digitally embed the auto insurance quote-to-bind process within the car-buying experience.
“Using open application programming interfaces (APIs) to seamlessly integrate insurance products and solutions into customers’ digital journeys has become an important avenue of growth,” he wrote.
He added: “For banks, vehicle manufacturers and other partners, adding insurance products to their ecosystems can increase revenue and improve value propositions, resulting in a win-win for insurers and distributors.”
Partnering with legacy players
At the Insurtech Insights conference Bolttech’s Shimek suggested that, rather than competing with legacy players, embedded insurance will expand the market to the benefit of all.
“We think that the future of all of this is to recognize that you can’t be an outsider in this industry when dealing with insurance carriers,” he said. “You have to be viewed as not a competitor with those insurance carriers. We want to enable those carriers to get access to distribution that they wouldn’t otherwise see with their legacy capabilities or with their legacy infrastructure.”
A white paper released in December by IBM with input from Bolttech noted that embedded insurance represents an extra distribution channel that creates net new leads and markets for insurers without cannibalizing current revenue streams.
“Embedded insurance isn’t only about integrating insurance into everyday activities. Just as much, it’s about integrating everyday activities into insurance,” the white paper said. “To achieve this, insurers will need to embrace data and technologies in adjacent sectors.”
During a panel focused on embedded insurance at the Insurtech Insights event, David McFarland, CEO of small business insurtech Coterie, commented that “I think it’s a mistake to try to use embedded insurance to disintermediate.”
“In fact, we always think of ourselves as utilizing data and technology to empower our intermediaries, whether they be agents or brokers, or maybe non traditional types of software players,” he said.
Jeff Merkel, co-founder at life insurance insurtech Ladder, said the product is “breaking beyond the walls of insurance”. He said the discussion is often framed as either being embedded or being through agents, but that the line between the two will blur.
“Increasingly, it’s going to be omnichannel,” Merkel said. “In five years we’ll talk less about digital increasing as a proportion and it’ll be just one user experience.”
Coterie’s McFarland added that embedded insurance will evolve beyond a focus on quoting and buying of the policies, to “understanding exposures through the lifecycle of the insured to where we can proactively sell, proactively underwrite and understand the changes in business”.
In its report last week AM Best concluded that embedded insurance “remains an evolving concept”.
The rating agency added that, for insurers, it should help diversify distribution channels profitably, while helping them develop specialization in standardized insurance products.
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