With the potential to generate trillions of dollars in new market value, embedded insurance is one of the most interesting models ambitious insurers are launching to capitalize on rapidly changing expectations for customer experiences.
By Rory Yates, Head of Strategy, EMEA, and Asia Pac, EIS
Expectations around the customer experience finally have collided with insurers’ ability to deliver. New cloud-native insurance systems are capable of taking in real-time data, analyzing it and acting on it. And it’s about to have a massive – and positive – impact on customers as well as on insurers’ business models, tech stack, and revenues.
The insurance industry is eager for this change and investing heavily, as evidenced by ever increasing insurtech funding – totaling $19.8 billion in 2021 – according to “Insurtech Funding Roundup, Q4 2021,” by Forrester Research.
According to that report, digital insurers attracted 55% of that capital, with life insurers prioritizing the digital experience, and P&C insurers simplifying business processes. All of which means that embedded insurance, which helps accomplish both of those goals, presents opportunities your competitors already are pursuing.
What is Embedded Insurance?
The common example of embedded insurance is a mortgage company that offers an insurance product to protect against the mortgagee’s loss of income, or in case something should happen with a payment. With the mortgagee’s financial information and all data around the home, the lender and its insurance carrier partner are just a few questions away from being able to provide insurance coverage.
While this model can potentially increase revenue and offer greater convenience to customers, it’s not yet offering a fundamentally different customer experience.
A better example of an embedded experience, however, is Revolut, an online banking service that automatically applies a variety of protections to members’ purchases and other financial decisions and transactions and offers customers a near-real-time view of their finances. There’s no physical effort or decision to be made on how each purchase decision is insured. That’s all happening seamlessly, embedded into the customer experience.
By using and expanding their use of real-time data and APIs (application programming interfaces), insurers can fully leverage these game-changing elements to improve the digital experience, simplify business processes, and finally join the “experience economy” with leaders like Amazon and Netflix.
Further, banks and other financial companies are generally speaking further along with embedded finance models, secure-remote and mobile access and the like. Considering that insurers and financial companies both hold a wealth of complementary data, the insights and collaborations could yield extremely beneficial products and experiences for customers.
Why should insurance and finance care about embedded insurance?
The insurance and finance industries have reached an inflection point: our technological capabilities have caught up with our aspirations. Cloud-native API-first insurance platforms can access, analyze, and orchestrate internal and external data using AI and ML, and offer real-time data exchanges that previously took days when done via batch processing or even weeks when done on paper.
How do we know? You can see it happening. Connected cars and IoT devices are mainstream. BMW Connected Drive is already 20 years old. Tesla, and most every other auto manufacturer, is looking to create ecosystems to offer value-added goods and services, which now includes insurance and finance.
Should automakers embed insurance into auto purchases, they will have several advantages over incumbents: direct access to drivers and the connected car data, which allows them to track, understand, and influence drivers’ behaviors, and dashboard-like access to information that helps them drive more safely, more economically, more environmentally friendly, stay on top of vehicle maintenance, and lower their risk.
Until recently, that feedback loop to mitigate risk and communicate with insureds in near real time simply hasn’t existed. That creates a fundamentally different sort of relationship between insurer and insured, and a healthy basis for a continuous relationship.
More quickly than you might expect, insurers, banks, and insurtechs are evolving to this more expansive definition of embedded insurance, which includes more risk mitigation, as well as bundling of products and services, and leverages the massive amount of data available through IoT devices, existing but previously inaccessible customer data, and third-party providers.
Achieving this state, insureds pay appropriately based on their behaviors, usage, and risk. The insurer benefits from lower losses, streamlined claims processes, and perhaps most important: the opportunity to have a positive impact on people’s lives by understanding and engaging more regularly, rewarding behaviors that lower losses, increase revenue, and close the insurance gap.
Those are compelling differentiators. As cheap and readily available IoT devices offer more detailed, timely, relevant data, with a bit of creativity, that model can be tweaked and applied to commercial vehicle and property insurance, as well as life, health, and other segments to price and personalize coverage, communicate with customers, and mitigate risks.
Embedded Insurance and the Data Challenge
As compelling as embedded insurance is, there are hurdles to be cleared. One of the biggest hurdles – customer centricity – will be the hardest for insurers because there are both technological and mindset challenges to overcome.
Even now, the insurance business is still fundamentally built around policies and policy administration. As an insurer, you take information, put it into a rating system, and offer a price for that risk/policy.
Without focusing too much on data structures here, many insurers will need to replace insurance systems that were built around policy records or continue to endure limitations and workarounds, like data lakes, point systems, and non-real-time integrations to customer data.
To fully realize the promise of embedded insurance, insurers will need to put the customer record – not the policy record – at the center of their business systems, vastly increasing their knowledge of the customer and their ability to act on it.
That’s also likely to drive new ways to underwrite risk and drive insurers’ desire to configure and create new products that make a difference in people’s lives, help them make better decisions, and avoid risk.
We can do all of that if we can establish this customer-centric mindset in insurers. Ambitious insurers get this customer-centricity idea and are looking at the best ways to evolve their systems and business models. Whereas legacy insurers are overwhelmed, look at it and think: too hard, too risky, too expensive, not going anywhere near it.
What’s Next for Embedded Insurance
While technology is an obviously important driver of the changes everyone would like to see in the insurance industry, perhaps the most important result will be a deeper kind of human insight.
With embedded insurance – and the data and openness it’s built upon – insurers can improve underwriting, claims, distribution, and sales and marketing processes. But the real opportunity is for insurers to take that insight and act more like modular producers.
The challenge of course is to do all this in a regulated environment, ensuring fairness to the customer and full auditability / accountability throughout.
The future belongs to insurers that can “connect the dots” and act more human – more like local insurance brokers – offering meaningful advice for appropriate amounts of coverage and coverage mix, as well as complementary products and services, so people can easily make more informed decisions and lead healthier, safer, more economically stable lives.
That’s always been the promise of insurance, and now it’s time to deliver.
Rory Yates, EIS Head of Strategy, EMEA & Asia Pac
Rory Yates has more than 24 years of business leadership experience spanning client, agency, consultancy, start-up, and private equity roles. As EIS’ head of strategy for EMEA and APA, Rory helps insurers achieve their transformation goals and evolve toward ecosystem-based futures via insurance core systems transformation, including truly personalized engagement, taking innovation from concept to market quickly, and growing efficiently.