Going digital: embedded insurance

Embedded insurance solutions have been a growing trend for years and many insurers already have said offerings in their portfolios. The concept is the real-time bundling in and sale of insurance covers as part of another product or service, bringing the risk protection directly to the consumer at the point of sale.

With digitalisation, partnerships between insurers, tech companies and non-insurers have enabled seamless addition of risk protection solutions to products that consumers access/purchase online. Some covers leverage usage-based and behavioural data to individualise risk pricing. One type of solution is when an insurer partners with a product or service company in a different sector, which wants to offer white-label and customised insurance services to its clients. The insurance is offered at time of need and by a brand that a customer already knows and trusts.¹ The solutions are easy to understand and customers do not have to seek external insurance advice.

Examples of embedded insurance are policies offered or included when renting properties, vehicles or buying secondhand goods.² Another example is a car insurance available in selected US states offered through an app developed by the car manufacturer. The insurance is based on factors such as driving behaviour and close-to-real-time data that the car’s device can track.³ Pricing does not consider age, gender or claim history.

A Chinese “super app” is often cited as success story in embedded insurance. The app partners with around 90 insurers and offers more than 2 000 risk protection products embedded in other services.⁴ The app company knows its customers, has access to data on purchasing behaviours and, in partnership with insurers, develops tailored insurance solutions, from L&H coverage to product warranties. The group has become the largest online insurer in China. It has more than 500 million customers.⁵

Often embedded insurance solutions cover a low sum insured, meaning that a critical mass of insureds is required for the business to remain sustainable. Without, the low premium volumes will not offset fixed costs from insurers and their partners.

Due to the distribution model (ie, sale as part a company’s core service or product), the embedded insurance offering has to be simple. Oversimplified policy terms could make both consumers and insurers more vulnerable to uncertainties or misunderstandings which could lead to more claims and litigation costs. As consumers get used to a faster and simpler process of buying insurance, the expectation builds that claims and pay-out processes follow the same speed and degree of automation. This expectation may not always be met by insurance companies.

An industry challenge is that if consumers become used to having insurance embedded in other products or services, they may not seek other forms of cover that they need, assuming they are covered when they are not. On the other hand, embedded solutions could also lead to consumer complaints on the grounds of being led into buying unnecessary insurance, or ending up being over-protected by purchasing a cover that is written into another already-owned policy, such as home insurance.