Embedded Insurance 2.0: Helping Insurers Defend Against Disruption

  • Rory Yates, Head of Strategy at EMEA & Asia Pac

  • 22.06.2022 10:00 am
  • #insuretech #insurance

Slow to innovate their products and customer experiences, the simple truth is insurance has long been vulnerable to disruption. New market entrants from insurtechs, tech giants like Amazon, and “greenfield” launches from more traditional insurers are elbowing their way into insurance markets and syphoning market share from more established insurers.

Consider this startling statistic: According to McKinsey, the percentage of customers now willing to buy insurance from tech companies jumped to 44% in 2020 from just 7% in 2016. “[T]raditional insurers must act fast to rigorously optimise their digital services from a customer perspective and seamlessly integrate the digital customer interface into the relevant ecosystem,” according to the report. 

To defend against these more agile competitors and secure their leadership positions, insurers have begun to pursue embedded insurance. That intent on future-proofing their businesses for the long-term, however, will move quickly past embedded insurance 1.0 and establish their 2.0 strategies.

Get Embedded

At its heart, embedded insurance is like an affinity program. Insurers partner with other organisations or businesses to distribute products and services directly to groups of similar people, such as those in unions or fraternal organisations. In the embedded model, the similarity is that they are already customers or prospects of your distribution partner and, more important, ready to buy. 

If you spend any money with customer experience leaders like Amazon or banks like Revolut, you’ve already been offered the opportunity to add an extended product warranty during checkout or to add travel insurance when booking a hotel room or airfare. These are simple examples of embedded insurance that are compelling to buyers because they are contextually relevant and easy to wrap into an intended purchase. 

From the insurer’s perspective, these simple models and insurance products offer comparatively low-cost access to new customers and markets. They also increase operational efficiency through digitally streamlined pricing and purchasing processes. And, because consumer demand is colliding with insurers’ technology, desire, and ability, we’re tantalisingly close to a proliferation of embedded insurance partnerships. Only recently insurer 1st Central teamed up with Cambridge Mobile Telematics (CMT) to bring this capability to all cars via an insurance offering, just for example. 

In a recent analysis of embedded insurance, Simon Torrance, Founder of Embedded & Super App Strategies, projects that embedded insurance could account for more than $700 billion in gross written premiums for P&C insurers alone by 2030, a stunning 25% of the total market worldwide.

In the examples above, the embedded insurance experience is simple. It’s a cross-selling opportunity made all the more attractive to consumers because of its convenience. 

In the next wave – embedded insurance 2.0 – we’re going to see more than just the convergence of insurance with non-insurance products at the point of sale. We’re going to see exchanges of real-time data that impact the price of coverage, mitigate risk, and change the relationship between insurer and insured.   

Embedded 2.0: Closing the loop with real-time data

IoT devices are everywhere: in cars, phones, watches, thermostats, drones, moisture detectors, “tiles,” and thousands of other consumer devices. For years now, auto insurers have been using such devices to price coverage based on actual driver behaviour. 

Now, Tesla and other automakers are using their own native sensors to generate that connected-car data and determine the risk posed by individual drivers and the cost of their insurance policies. And that’s just the beginning. They’re also creating ecosystems to offer personalised advice and goods and services. This entirely data-driven experience is designed to help customers make better decisions, drive more safely, and stay on top of vehicle maintenance. All of which help lower risk and build customer loyalty.

Until recently, that feedback loop to communicate with customers in real-time and mitigate risk hasn’t existed. But using IoT devices and mobile apps, this model is now being adapted to health and wellness coverage via wearables; home and commercial real estate insurance via smart thermostats, security systems, and water-detecting sensors, and soon enough to every other insurance segment.

The success of this model is virtually assured because – from underwriting to claims – it creates process efficiencies through digitalization and automation, and a valuable and very different sort of relationship directly between insurer and insured, benefiting agents, brokers, and other market participants. 

We’ve also seen a successful precedent with open finance, where bankers’ willingness to work with regulators released a wave of creative and connected financial solutions. Insurers willing to take the initiative and work with regulators are most likely to secure a competitive advantage with embedded insurance and benefit from the secure sharing of customer and transaction data. 

The Core of the Embedded Insurance Model

To play in this new space will seem daunting to many insurers. They’ve already experienced the difficulties of offering mobile and portal access to customers, CSRs, brokers, and agents and the frustration of accessing customer information and integrating third-party data into underwriting and claims processes. 

In most all cases, the limiting factor has been the closed and policy-centric architecture of legacy insurance core systems and the terrifying prospect of replacing those systems and integrations. Such digital transformations have routinely been described as “career suicide.” But that’s no longer the only option.

The rise of cloud-native, microservices-based, API-rich insurance core systems (aka coretech) is doing a great deal to de-risk insurance digital transformations. These new digital insurance platforms are designed to be customer-centric, not policy centric, which clears the way for insurers to personalise marketing and sales efforts, cross and up-sell, and launch or consolidate every and any sort of insurance product onto a single platform. This alone offers unparalleled potential for innovation and cost savings to insurers. 

Akin to rerouting the plumbing, microservices allow the implementation and replacement of discrete functionality within the insurance value chain, signalling the end of rip-and-replace fiascos. The benefits of cloud-native architecture offer native and infinitely scalable artificial intelligence (AI), machine learning (ML), and predictive analytics to truly understand customers, adapt to and predict their changing needs, desires, and means, and personalise products and customer experiences. 

Another way to derisk is through “greenfield innovation.” Rather than converting or replacing legacy insurance systems, many insurers are opting to simply launch new products or even new businesses on a fresh digital insurance platform, taking advantage of SaaS’ scalability, configurability, and subscription pricing.

So much has changed just in the past two years. For too long, too many insurers have been limited by legacy systems and thinking. But with cloud-native coretech systems, insurers no longer need to play defence. With cloud-native insurance core systems, coretech, ambitious insurers can assume the aggressive stance and tactics of insurtechs, but with the confidence that comes with deep insurance experience. 

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