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Arthur D. Little has been at the forefront of innovation since 1886. We are an acknowledged thought leader in linking strategy, innovation and transformation in technology-intensive and converging industries. We enable our clients to build innovation capabilities and transform their organizations. ADL is present in the most important business centers around the world. We are proud to serve most of the Fortune 1000 companies, in addition to other leading firms and public sector organizations. For further information, please visit www.adlittle.com

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In-depth: The global race in embedded insurance, and why insurers must move from an ‘egosystem’ to ecosystem mindset

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Embedded Insurance has emerged as the insurance industry comes under sustained pressure to reform. It increasingly needs to revolutionise the way it conducts business, treats customers, and interacts with regulators. In this edition of China in Focus in-depth we dive into the key issues surrounding embedded insurance globally, with a focus on innovation in China.

Key points:

To understand the current state of embedded insurance, and grasp the complex landscape of brokers, startups, and insurers pursuing this model, it is worth considering how the industry got to where it is now.

Customers are increasingly expecting insurance to become a pay-as-you-go service with an emphasis on tailored protection instead of mass market offerings, while at the same time insurance regulators are concerned with the unbridled growth of investment-orientated life insurance and pay-as-you go products.

Although the notion of embedded insurance is not new, it is now coming of age, in a similar way to how the Apple iPod revolutionised the delivery of portable digital music.

Indeed, the spectrum of embedded insurance propositions is now vast, but the key questions around customer ownership, or at least permission to up-sell to customers, in addition to continued product development initiatives, which will differentiate insurers in an increasingly saturated corner of the industry, remain.

Experience in Asia has demonstrated both the possibilities and potential risks of embracing the embedded path.

The definition of embedded insurance needs reconsideration

Most think of embedded insurance in terms of loss or damage cover purchased with a new mobile phone, travel cover when booking airline or train tickets or extended warranties for consumer goods.

In the case of a phone and consumer goods, these were often offline transactions, but offered at the point of sale. Indeed, the origins of embedded insurance began offline, but current embedded insurance innovation is nothing like those carbon, paper-based proformas traditionally sold to consumers alongside their new electronic goods. Though they are certainly insurance products, the only thing they are embedded in is the past.

The embedded insurance of today is a seamless – or near seamless – customer journey that allows the consumer to make a purchase decision without the need for a hard sell or hard-fought customer acquisition on the part of the insurer.

The reason for this – and the primary difference between embedded insurance of old and new – is that the technology standing behind it today, is fully integrated. It does not require traditional sales, instead it is offered as a feature native not only to the platform being used, but to the specific purchase cycle. In that sense, it is literally a game changer, where the union of data science, artificial intelligence (AI), and real-time communication deliver the coup de grace to traditional insurance sales models.

Embedded allows for differentiation but also collaboration

Embedded insurance is on track to become the norm in future, offering more affordable, relevant, and personalised insurance to people when and where they need it most. The massive growth of e-commerce has seen the application of embedded insurance extend beyond extended warranty and theft protection across many different areas and product types. These include travel and accommodation (flight cancellation, baggage loss, emergency medical, etc), motor and mobility (motor and motorbike insurance), and for banks and financial services (payment protection, buyer’s protection, credit insurance).

A 2020 paper by the Baloise Group noted that: “embedded insurance promises to deliver highly differentiated services or maintenance propositions for its customers.” This model thrives in the B2B2C environment, with lower acquisition costs and particularly high engagement around prevention, encouraging insurers to develop a deeper understanding of both the manufacturer, the supply chain, and its customers.

“But whether insurers are innovating with in-house teams, OEMs, or startups, embedded insurance provides a myriad of ways insurers can work collaboratively on platforms and services to differentiate, scale, and expand their offerings into new and emerging ecosystems,” the paper added.

For example, Chubb Studio doesn’t just provide partner companies with digital access to Chubb’s range of consumer insurance products, including personal accident, supplemental health and life, residential and contents, mobile phone and travel, as well as small business insurance, but it also provides a range of industry specific insights to help its partners optimise the conversion rate for financial services.

Keys to success

What embedded insurance needs is the right product and pricing, says José Neves, solutions and international business manager at Element Insurance based in Germany.

“Nowadays, insurance products follow a modular approach, which means that different coverages can be assembled together to build the final product, with, pricing attached to the item value as a percentage, making it fairer and transparent,” says Neves. “Fully digital, embedded insurance solutions aim for lower operational cost, a fast go-to-market, a customisable infrastructure, and most importantly customer-centric products.”

In the video below, Carlo Bewersdorf, CEO of iptiQ, identifies the four cornerstones of successful digital insurance, “Customer centric tailored propositions [are essential] because we want to build the greatest customer experience based on the data that customers give us to enhance their experience,” says Bewersdorf.


Bewersdorf uses the example of an embedded household insurance product developed with IKEA called Hemsäker that the company hopes to roll out across the countries it operates in. Speed to market and finding a partner so that “integration effort is minimised” are also important, but the most important, says Bewersdorf, “is creating seamless journeys, with analytics based continuous optimisation”.

Taking Europe by storm

Europe is experiencing an embedded insurance revolution. It’s fair to say that some of this will go hand in hand with the freedoms that flow from PSD2 and open banking reforms. These allow consumers to share their personal data with third parties in the confidence it won’t be used for marketing purposes.

There are now many modern digital platforms that can be integrated easily with distribution partners and third-party data sources via APIs. Platform-as-a-service providers such as Qumata, SliceTrovDigital Insurance GroupAddinsurance, and Element, are but a few of the hopefuls aiming to build, grow, or license a platform.

Alternatively, insurers may choose to partner with a managing general agent (MGA) that specialises in embedded insurance, such as ZegoFlockInshurQoverWrisk, or REIN. While most of these are auto/travel based, Qover and Rein have broader aspirations.

A global trend

The use of embedded protection is expected to grow as offerings become increasingly tailored to meet customer needs, as customers are increasingly less interested in blanket policies that fail to address their specific protection needs.

Cover Genius in the APAC region, has seen a 1,900% increase in policies sold through APAC partners like Shopee and Flipkart. And globally retail is only one of the sectors driving growth for Cover Genius, with Agoda, Ola, Pepperfry and Skyscanner all being brought on stream with the InsurTech during the pandemic. During this period, Cover Genius has maintained its delivery to customers by achieving a post-claims net promoter score (NPS) of above +65. By any benchmark, that’s a display of consistent excellence and should be a call to arms for all insurers dragging their feet over digitalisation.

In China, some InsurTechs have developed products for first-time parents, which include coverages for caesarean section, rare infectious diseases, and post-natal depression, all of which have driven demand for historically basic health insurance. Such products are being embedded into women’s health related apps and WeChat accounts with impressive results. However, it is worth noting that some of these coverages are loss making, highlighting the urgency with which many InsurTechs are moving to establish market share primarily.

China leads

 China remains the poster child for this innovative sector. Neves at Element Insurance identifies Ping An as the “leading exponent”, having “built an entire ecosystem with ancillary services around health, wealth management and other areas of convenience for their customers that are relevant to insurance or banking business”.

The embedded insurance solutions integrated into the super apps around food delivery and other services mean the potential in such a large consumer market remains unparalleled. It is also the fastest growing area of embedded insurance, says Neves, forecast to account for nearly 30% of the world market by 2030.

However, current efforts to evolve the embedded insurance market are being impeded by regulatory developments.

Despite this China’s leading internet companies are seeking ways to innovate in the new regulatory environment.

Innolife

Specifically, Innolife has developed a text based chatbot to communicate with users on WeChat before tailoring health, life, and disability insurance policies to their needs.

This, combined with the ease and convenience of delivery through WeChat is diminishing the need for agents or bank staff, which have historically dominated the distribution of life/health products.

Data88

Another interesting use of AI in the health/life space is Beijing’s Data88. Here, rather than engage consumers directly on WeChat, Data88 profiles potential customers on third party platforms and identifies those who are most suitable for specific health insurance policies.

The AI component of Data88 is a machine learning layer that monitors the conversion rate of specific products against specific customer profiles, by observing and gradually optimising the conversion rate across several online channels.

Tesla – The EV revolution driving insurance

Elsewhere, Tesla has good reason to develop its own insurance product, as insuring an electric vehicle (EV) has been unchartered waters until very recently, with little choice from a number of specialist firms.

“Tesla now appears comfortable taking insurance risk onto its balance sheet, with a number of states in the US now offering direct insurance from the company,” says TDI’s Simon Phipps. As a result Tesla should be able to accelerate risk reduction and prevention measures for their customers, while at the same time solving product replacement issues quicker and cheaper than others have in the past. “It is a logical extension as part of their broader ecosystem strategy, and a challenge to the existing market for sure,” Phipps says.

For more on this area, read how Cover Genius has embedded digital insurance into the car purchase customer journey here.

Regulatory rabbit hole

Ironically, though embedded insurance is designed to mitigate risk, it comes with risks of its own. Specifically in the form of hyper-embedded or ‘bundled’ insurance.

To prevent consumer damage, regulation’s role will be to ensure:

– The product is suitable for the customer’s needs

– The product is appropriately priced to meet specific requirements around pricing fairness

– Great care is taken to ensure that there can be no chance of a consumer unknowingly purchasing the product during the sales

– Where there is a secure payment capability, specific issues will need to be addressed if the payment is made to a third party and not directly to the insurer.

Furthermore, when insurance is sold on non-licensed insurance players’ platforms such as an e-commerce or retailer’s websites, there will be an additional risk of non-compliance.

A product for all ages

It is unlikely regulators will tolerate the potential for consumers ‘misbuying’ products as embedded insurance becomes more commonplace. Particularly as this type of product will not be the preserve of digital native Generation Y and millennials. It may seem obvious that digitally native products will be consumed by the ‘digital natives’, but research is showing that older consumers are adopting digital payments rapidly.

Access is a major driver for many banks in Europe to target older generations with education in digital banking. In the UK, NatWest recently piloted a project in areas that had seen branch closures that offered Samsung tablets to elderly customers to encourage them to conduct business online, instead of in person at the branch.

While the frequency of payments made by older people online may be lower than Gen Y and millennials, they have considerably more disposable income, are more likely to purchase protection products (they have more to protect) and have greater amounts of investable money that may be targeted by financial institutions.

From ‘egosystem’ to ecosystem

The term disruptor has been used frequently in relation to digital insurance in recent years, sometimes incorrectly. But when businesses create a model that makes customers’ lives easier, on simple, integrated technology, that automates processes to reduce costs, then it ticks all the boxes for having arrived as a disruptive, digital presence. Embedded insurance has achieved the cornerstone breakthroughs that will deliver successful digital insurance products way beyond proof of concepts, making it a true disruptor.

Now the genie is out of the bottle, incumbent insurers need to get comfortable with embedded insurance and their role around it, broadly, or find a niche sector and stay there. One of the things insurers must reconcile is that they will have to share the customer with the brand through which any product is purchased.

“The notion of having a direct line of sight to, and control over the customer is looking increasingly outdated these days,” says Phipps. “You need to accept that if you’re looking for additional scale through embedding your insurance in someone else’s product, or even distributing via someone else’s platform, that the customer is more than likely going to have more loyalty and interest in that brand than yours.”

Phipps argues insurers need to move more quickly from the traditional ‘egosystem’ mindset, where they think the consumer world revolves around them, to much more of an ecosystem mindset, where insurers are comfortable that they are just one of the links in the consumers food chain.

“In general, insurers have done a bad job of cross-selling, up-selling and developing customer relationships over the years,” he says. “With the advent of new technologies and associated new digital business models, now is the time to explore other routes that may help address these cross-sell and up-sell opportunities. The strategic question for insurers considering the move to embedded, as well as the broader question of distributing through platforms and ecosystems, is whether the benefits outweigh the costs. Is letting go of the front end, and becoming the back-end manufacturer, with no direct consumer relationship or brand affinity, a price worth paying? That’s quite a big strategic question, and insurers have to be prepared to let go of that aspiration of longer-term customer affinity and let the lead brands they’re embedding their insurance in own the relationship. Do you want a larger part of a smaller cake, or a smaller part of a much larger one – or perhaps the answer is to be found in the middle, and some insurers will manage to have their cake and eat it!”


Further resources:

Embedded insurance set to evolve – iptiQ CEO video series

CareVoice global Embedded Health whitepaper

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