Embedded Insurance – A New Insurance Distribution Paradigm

Embedded Insurance – A New Insurance Distribution Paradigm

By Souvik July 29, 2021 - 3,848 views

Insurance is something that nobody feels to buy and reject as an unappealing hassle, and apparently, it is also creating a protection gap estimated to be $1.2 trillion globally. Some say it is a poor distribution strategy of the insurance sector, while others pointed poor customer experience due to archaic methods. Thus embedded insurance is here to narrow down the protection gap with a new distribution strategy, and why not! “It has indeed created $3trillion market opportunity globally.”

When I came across embedded insurance, it reminded me of my hiking story!  As I was preparing for a short trek in the hills, I decided to make a quick trip to the sports store to get items listed on my planning cart. A monsoon trek can be dangerous, and a hike amidst the ongoing pandemic requires special emergency supplies. So, I took my shopping cart, and while walking down the aisle, my eyes caught an attractive life-size display. As I approached further, I took notice of how the display has been created. A display complete with a man wearing hiking gear standing near a backpack, wearing hiking boots, keeping his multi-tool kit aside, he is boiling water on a hiking stove.

The display gave a whole hiking experience, and the items on display are neatly lined up, thus making my shopping experience hassle-free. The one thing that was not on my list but essential to pack up all the items was the hiking backpack. The display reminded me of it!

When I came back, I realised how the display impacted my shopping experience. The backpack was most vital for my hiking trip but was not on my list. Thus if the display hadn’t been there, I would have had to make an unnecessary second visit to the store. The store ensured a happy customer experience by putting up the display and embedding all items together. This engaging experience is not anymore limited to the retailers. 

Insurance sectors also are coming up with a similar marketing and distribution strategy known as Embedded Insurance. “It can also become the catalyst for larger business model transformation” as stated by Simon Torrence in his blog embedded insurance. 

What is Embedded Insurance?

Embedded Insurance is when you are purchasing a mobile phone, and anti-theft insurance is offered simultaneously. Embedded insurance bundles the protection within the purchase of the product, thus transforming the distribution strategy by offering a niche value proposition to the customer at the point of sale. The urgency of a new distribution strategy came to light when McKinsey reported that “80% of the insurers made a negligible or negative economic profit in the covid crisis and likely to get worse in the future”.

Challenges leading to Embedded Insurance

Insurance is essential, just like the backpack for hiking but not on top of the mind of the consumers, thus leading to a huge protection gap. “Protection Gap” is the gap formed due to the significant differences in economically and socially viable insurance coverages for the individuals, firms and households and the amount of coverage bought by the consumers. 

This phenomenon takes place as consumers feel unnecessary to protect individual items separately. Moreover, it feels overly complicated when done for every item. According to the Swiss re Institute “the protection gap has been doubled from 2000 to 2020.”

According to Simon Torrence, there can be multiple reasons for the rising protection gap related to the insurance supply and demand side. Consumers find insurance to be a complicated, difficult and unnecessary product on the demand side because they see the benefits attached with it as very distant and uncertain. On the supply side, due to high distribution cost and lack of personalised offerings insurers fails to earn the trust of the consumers. 

Embedded Insurance- The Real Game Changer

Emerging technologies such as AI/ML and API enable the insurance sector to discover a new potential path for insurance distribution. According to Hasan Nawaz from HUBUC, “Embedded finance is all about abstracting banking functionality into technology and enabling any brand or merchant to integrate financial services into their suite of product and services via APIs”. 

The importance of embedded financial services is felt in the insurance sector, where insurers can be at the right place at the right time embedding platforms with the larger customer base through API. This is where the digital partners come in to ensure insurers offer relevant products at the point of sale. 

This has also increased the chances of buying insurance. Catching up this trend, many companies such as Amazon, Shopify, Uber, Ola are providing insurance to the customer at the touch of a button. 

Now how these companies are catching up to this trend overnight? The answer is- Application Programming Interface. Partnering with digital partners and insurance partners, these companies use API and the B2B2C model to reach out to the consumer with tailored products. 

Embedded Insurance is gaining popularity as it brings the following benefits to the following stakeholders:

  • Businesses can launch new products by leveraging existing insurance partners. 
  • Customers are enjoying the end to end digital customer experience through insurance solutions.
  • Leveraging existing distribution channels helps in reducing distribution costs as added costs on hiring agents could be avoided
  • Identifying and discovering opportunities by leveraging new data sources to offer tailored products to the customers’ increases retention and loyalty.

Modernising Legacy System with Advanced Insurance Technology

Embedded insurance strategy takes a well built and upgraded IT system to be successfully executed. A legacy system can pose a hurdle to explore new functionalities through API. It is important to have a technological partner who could revamp the legacy system and successfully integrate API. Moreover, embedded insurance strategy is beyond software skills that require the right mindset to assess current capabilities and identify gaps to improve on them. That is where we come in. 

We have successfully revamped and modernised the legacy system and created digital transformation strategies for renowned insurance companies. Click here to book a demo.

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