Insurance is quite possibly the best example of a “grudge purchase” – nobody wants it, but everyone needs it. It’s what everyone thought accounted for the negligible profit or even losses of 80 percent of insurers leading up to 2020. But now, a new trend in fintech, embedded insurance, is suggesting that consumers do indeed want insurance and are willing to pay for it. It may just need to be presented to them differently.
The market for embedded insurance has been predicted to reach $3 trillion by 2023, and it’s hoped that it will reduce the global protection gap that the Swiss Re Institute says has doubled since 2000. This gap was highlighted during the COVID-19 pandemic because it means, among other things, that the majority of families in the world can’t maintain their standard of living if their breadwinner dies.
So, what is embedded insurance, and what does it offer parties that traditional insurance models don’t?
What Is Embedded Insurance and How Does It Work?
The basic concept underlying embedded insurance is nothing new. It’s effectively point-of-sale insurance, much like what car rental companies offer when we rent a car, for example. Auto dealers, banks, and travel companies are among those industries that have been onselling insurance for decades.
But now, information technology makes it easy for any vendor to integrate insurance into its customers’ digital journey. Vendors’ developers can code around APIs (application programming interfaces) that connect end-users seamlessly to the backend systems of insurance companies without any change in their interface – all of which means that insurance tailored specifically to the product or service being sold can be purchased with the click of a button.
What Does Embedded Insurance Offer Consumers?
For consumers, purchasing insurance is often associated with complicated forms and inflexible products. The benefits aren’t always clear, and even expensive coverage can prove to be deficient when claims are filed. On the other hand, embedded insurance is cheaper, more accessible, and more relevant.
It’s also more personalized, especially when the vendor system’s data can be used to establish the needs and criteria for building bespoke insurance products. Take Uber, for example, which has 3 million drivers operating globally under localized regulations. These gig economy workers need insurance for their vehicles, personal injury coverage, and protection against loss of income, among other things. But traditional insurers weren’t structured to deal with a “taxi” company that neither owns its vehicles nor employs its drivers.
To meet the needs of its drivers, Uber works with specialized digital insurance agents and brokers called managing general agents (MGAs). Through robotic process automation (RPA), small MGAs can nimbly perform many mundane, time-consuming tasks ordinarily handled by hundreds of employees in large insurance companies. It leaves them free to concentrate on value-added product innovation such as coverage that’s only active when a driver is “in service.” And with such a large base, Uber can offer other products like life coverage or medical insurance in the future. In the same way, it is already offering its drivers embedded finance options like loans and bank accounts.
What Does Embedded Insurance Offer Insurers?
Distribution costs for insurers have historically been among the highest of any industry at about 50 percent of total costs. Selling products to customers that don’t want or understand them is expensive work. And onerous laws and regulations make it more so. On the other hand, digital organizations like Uber provide significant new markets at minimal distribution costs.
Insurers know the math to manage risk when presented with it, but their systems don’t have the data to match supply with demand. To date, it’s been the most significant thing holding the industry back. But now, assuming their interests align, vendors and insurers can share information – and everyone wins.
What Does Embedded Insurance Offer Platform Vendors?
For vendors, embedded insurance can be a way to enhance their value proposition and attract customers by differentiating them from competitors. Ongoing insurance can also be a way to maintain customer relationships and retain those who might otherwise disengage.
For some, it has become a lucrative new revenue stream. QuickBooks, the online accounting platform, for example, recently launched QuickBooks Insurance. The service provides business insurance to small and medium-sized businesses – QuickBooks’ client base, in other words. So QuickBooks is not only already “plugged in” to its distribution channel, but it also manages the financial data to provide bespoke solutions to its clients.
All QuickBooks had to do was add the APIs provided by its chosen insurers, AP Intego, Coterie, Cover Genius, and Next Insurance. Its users could then view and make changes to their insurance policies via a tab within their accounting and payroll software.
With $3 trillion up for the taking, insurers, investors, fintechs, and digital vendors should all look at embedded insurance.