Koen Knaepen | 9 December 2021
Embedded Insurance is fast emerging and seems to be the trend on everyone’s mind. Based on our experience in delivering these new distribution channels, what are the lessons learned from practice, and what did we take away for future successful projects in embedded insurance?
Before we start, a clear definition: embedded insurance is the integration of insurance distribution into a platform from another sector. One familiar example is cancellation insurance on airline tickets. Usually through an opt-in, you purchase protection to get your money back in case an unexpected event, such as illness or accident, should prevent you from flying.
Whilst emphasis often lies on the technology used, “Embedded Insurance” has some features that are not quite compatible with how “classic” insurance distribution works. Prominent themes in the insurance sector such as data protection, distribution legislation, consumer protection, fraud prevention etc. become very dominant in the setup of the project, but in essence, as important as they are, these issues are mostly implementation matters. The first question remains how you can really create new value in a project around embedded insurance.
Focus on your partner’s business model
The raison d’être of embedded insurance is its added value for all parties in your partner’s value chain, not just the insurance company. Of course, first and foremost there is the end customer but all parties in the value chain should benefit.
Facilitating the relationship between the parties of the platform is often the most important driver. This can be done, for example, by compensating the mutual claims that may arise between the participants. To deliver good insurance products and related services, it is crucial that you know very well the business model including the delivery model, earnings model and USP of your partner.
This doesn’t only benefit sales, but also helps to evaluate the risk you are taking. After all, on most platforms the selection of customers happens organically, especially given that many platforms, such as AirBnB are Peer2Peer platforms. Small adjustments to the model can ensure that you greatly reduce the risk of adverse selection, because the clients with a higher risk profile are not attracted.
Embedded Insurance is supra-national
Although theoretically this is not a feature of embedded insurance, we see that most examples of embedded insurance cross country borders. The internet is international, and soon your partner will want to roll out to other countries.
The rapid roll-out to all countries where potential customers are present is still a challenge for most projects. After all, management structures usually use the countries as an important dimension for steering. When volumes are low and risks are high in one country, there is a risk of losing sight of the bigger picture. And in many management boards, there are certainly still cold feet about operating in countries where there is no presence.
Moreover, despite European harmonisation, the practical implementation of European legislation is still done country by country. Your partner’s customers are increasingly international, and do not want to be confronted with different conditions or prices in each country. Setting up your product so that it complies with the various national legislations is therefore a difficult feat every time. This is already an expertise in itself where a lot of legal knowledge must be combined with practical experience in insurance processes so that you get a workable solution that is scalable.
The name of the game is agile capability building
Most insurance markets in Europe are saturated and have been using essentially the same dynamics for a long time. Because embedded insurance is almost always linked to innovative solutions, the certainty of success, and thus volumes, is far from guaranteed.
This demands a culture shift within insurance companies. Business plans and (traditional) project management as the main decision-making tool are much more effective in predictable environments as compared to embedded insurance. Although words like ‘agile’ and ‘lean’ have become part of the management vocabulary, transformation is costly without much guarantee of success. Therefore, it is best to look more at capabilities which are built into a project rather than return and growth in the short term.
How deployable and profitable are these capabilities across different projects without losing agility in the project itself? Building a platform that can do everything, often means years of investment. Make sure you hire an experienced business architect who can help you look beyond the projects to the models you want to serve so that capabilities can be reused. Make sure that every opportunity that comes along does not burden your own organisation and systems with extra complexity. Focus remains a critical success factor.
Embedded Insurance is not an alternative insurance distribution
A common mistake is that embedded insurance is seen as an alternative insurance distribution. But it is much more than that. By thinking of it as an alternative insurance distribution, you approach it as such and you end up with nothing more than an alternative channel for your existing products.
The rise of direct insurers and bancassurance has shown that building an alternative channel does not happen overnight. It entails risks such as channel conflicts, insufficient knowledge of insurance distribution and high marketing efforts. Very quickly, the cooperation model will slip into a normal insurance channel and will also have all the characteristics of one without necessarily enlarging the market.
The conclusion is that you will incur a lot of costs to get your turnover through an extra channel. You will only have higher complexity and more competition (between channels) which will lower the price and your revenues. This model is only profitable if your partner has such a high performance or influence on the customers that you can quickly gain market share in the existing market, and thus take it away from your competition.
Most of the time, seasoned intermediaries are armed enough to avoid this danger because they can usually provide a more complete product and service offering which is a more attractive proposition to most customers.
Simplicity makes the difference
In most models of embedded insurance, cost of acquisition is one of the key drivers. In concrete terms, this means that if the conversion of website visitors to customers is hindered by the insurance proposition, the advantage of embedded insurance disappears quickly.
Therefore, products must be so simple that the added value and service are immediately clear. Extensive terms and conditions with many exceptions, long underwriting processes and complicated tariff structures usually do not contribute to a successful sale in the partner funnel.
Claims handling is also important here. Claims handling that does not meet customer expectations, fast and simple, will quickly lead to negative reviews on the website and thus negatively affect customer willingness.
Loosely Coupled Integration is key
The challenge of embedded insurance is to reconcile the complexity of an insurance administration with the speed of change typically more present in your partners. Most of the models that you link to as an insurer are still under development. You will therefore frequently receive requests from your partners for adjustments and changes. On the other hand, you will also have to provide new combinations of guarantees all the time. Sometimes these are in a classic insurance administration in different back-office systems, and even in different teams.
Soon you will find yourself in a situation where the insurance complexity and the complexity of your partner become completely intertwined. Especially if your partner’s model is still evolving, this can quickly lead to high maintenance costs, while you are not yet getting the expected volumes.
Therefore, it is important to understand your partner’s model and to design the link on his side in such a way that it is independent of your back-office systems. Usually, the business concepts used are very stable. AirBnB will change a lot, but it will remain “bookings” at heart. In e-commerce, “purchases” will always be the central concept. Make sure that your integration layer connects to these concepts and makes the translation to the classical insurance objects such as insured object, policies, and so on.
Spending time on this exercise will quickly pay off. Don’t forget that from “Quick and dirty” only dirty remains with time. And with every new country roll-out or additional service, you will carry that cost.
Regulations are not prepared for embedded insurance.
As a key challenge in being ‘supranational’, regulation (in Europe) is not prepared for the concrete examples we see regarding embedded insurance. This means that a compromise must always be found between what is already allowed and what is not yet clearly prohibited.
Especially in the areas of consumer protection, tax treatment and insurance mediation, the legislator is still focused on the classic insurance distribution model. Some creative interpretation of legislation will therefore be necessary. After all, most constructions have never been tested in concrete court cases.
Besides creativity, the robustness of the construction must also be tested. What happens if one element of the construction breaks down? It sounds a bit like war language, but as long as legislation is not fully in line with the “new” economy, it is necessary to have a good line of defence for the constructions you set up.
Insurance companies are used to working with greater certainties in this area through prior reviews with the government. Given the supra-national and innovative nature of these projects, this is more difficult, and one has to accept more uncertainty. Part of the line of defence is always to put the customer’s interests first. Small print and double meanings will be punished mercilessly in this environment.
Have these 7 quick lessons sparked your interest? Are you exploring embedded insurance as your next venture? If you want to talk to someone who has worked on embedded insurance in practice, don’t hesitate to get in touch for a forum where your concrete project can be tested and your questions be answered.