Embedded insurance

Opportunities in the personal insurance space are growing rapidly.

This is largely due to the emergence of digital platforms as the preferred buying channel for the new-age customer. In addition, customers, especially millennials and Gen Z, prefer to buy insurance to cover specific risks rather than a generic policy that offers wider coverage and therefore comes at a higher cost. 

Embedded insurance allows insurers to not only launch new products quickly, and at lower costs, but also test the market reasonably sooner in the cycle. All this makes it imperative for insurers to embed their products and services into different customer journeys in third-party ecosystems. Doing this right will require insurers to participate in digital ecosystems, collaborate with cross-industry partners, and offer their products and services on a technology driven as-a-service model. We discuss how insurers can enable such ecosystems and the technology capabilities they need to build to successfully capitalize on the embedded insurance opportunity.
 

Why it is gaining popularity

Embedded insurance offers customers the power of choice, but not at the expense of insurers.

Embedded insurance, whereby insurance can be purchased as part of another commercial transaction—like buying a laptop or a mobile device or availing a loan—is a new and profitable space driven by a demand for covering specific risks, an improved experience, and streamlined risk management.

It is a good option for digital-native consumers who conduct much, if not all, of their business on digital channels. These customers tend to shy away from traditional channels to buy insurance and are far more likely to meet their insurance requirements as part of a single digital journey, without having to interact with disparate entities. 

For insurers, embedded insurance is a means to better their game. Industry players recognize that the existing traditional channels are plagued with the inherent limitations of slow product launches, high servicing costs, and lower brand stickiness. Most of the product bundles in the market today are rigid and do not allow consumers the flexibility to slice and dice the offering and choose the specific coverage or protection they want and pay only for that. Instead, customers are forced to pay for extra coverages, some of which they know they will never require. It may therefore not be economically feasible for insurers to provide individual or specific coverages through traditional channels. 

Embedded insurance is free of the legacy requirements of earlier insurance products and allows consumers to choose, at the point-of-sale, the coverage they require, foregoing unnecessary features, all with the convenience of a one-stop shop and at competitive prices. The opportunities for embedding insurance offerings into new platforms such as e-commerce, online retail, travel platforms, health apps, telecom, and digital wallets are many. This makes, embracing embedded insurance in an ecosystem model, the logical next step for insurers and digital platform providers to target digital-native customer segments. 

Let us see what is in it for each stakeholder in the ecosystem:

Insurers: Access to new consumer segments leads to higher conversion rates and deeper customer analytics from the data gathered from digital platforms results in better risk assessment and offering customization. The opportunity to build partnerships and co-create offerings is another big plus. This model helps insurers increase brand loyalty, reduce the cost of operations, and launch new products quickly and at lower costs.

Insurance-as-a-service platform providers: By providing the base for partnerships with various insurers and digital platform providers such as online retailers, telecom companies, travel and hospitality firms and so on, these ecosystem players connect the end customer with the insurer at the right time in the customer journey. Consequently, they benefit from the leads generated and the policies sold.

Digital partners: A chance to enhance customer experience and generate higher customer lifetime value by embedding insurance into their platforms and/or customer journeys.

Customers: The end user benefits from easy and quick access to personalized insurance offerings, quicker policy issuance, hassle-free payment options, and omni-channel experience.
 

The power of the ecosystem

The key to deploying embedded insurance successfully lies in the ecosystem model.

Digital ecosystems bring together various entities who work together as orchestrators, co-creators, and participants to enhance the customer experience in a mutually beneficial model. To offer embedded insurance, insurers must partner with insurance-as-a-service platforms that integrate seamlessly with digital platforms (see Figure 1).
 

The as-a-service operating model leverages dynamic digital platforms in an agile ecosystem to future-proof business. There are three possible models based on who orchestrates the ecosystem (co-creation is the central theme irrespective of the model). 

Orchestrated by the insurance company: The insurance company determines the product offerings and the functionalities available on the insurance as a service platform that consumers can interact with or choose as part of their user journey.

Orchestrated by an as-a-service platform provider: A federated platform (policy administration system or PAS-as-a-service) model, where the insurance-as-a-service platform enables the creation of products, services, and offerings to be offered by different insurance companies and positioned across multiple digital platforms. 

Orchestrated by a digital platform company: Digital platforms orchestrate the insurance-as-a-service platform and decide which offerings need to be embedded in the consumer journey. The underwriting risk, however, remains with the insurance company.

Risk empowerment, enabling open and transparent flow of information, building a divergent talent pool, and achieving near-zero marginal cost are some areas that will need attention.
 

The building blocks

The right combination of business and technology capabilities coupled with the right product features is critical to success.

Data mastery, product development expertise, and technology integration capability reinforced by effective governance are the key building blocks that will determine the success of embedded insurance initiatives (see Figure 2). These building blocks will usher in a culture of innovation and drive insurers to explore new opportunities with the potential to create new streams of business value.
 

Data and analytics: An embedded insurance ecosystem ought to enable insights-driven decision-making for the stakeholders, at the right time with built-in security and data privacy. Data analytics must come with plug-and-play components within the platform, as well as provide the ability to push new, innovative products to market at an incredible pace.

With digitalization of the consumer finance industry, data analytics facilitate the formation of ecosystems between different yet cohesive businesses. And when data flows as easily as possible between stakeholders within the ecosystem, it becomes significantly easier to position offerings at the correct price point to a targeted and identifiable customer segment.

Integration dynamics: Data integration capabilities are a critical capability for the platform’s success. The ecosystem must have the capability to integrate with diverse technology landscapes of insurers, digital platform providers, and insurance as a service. The technology landscapes may range from legacy mainframes to microservice-based new digital systems. The integration technology dominion should be able to handle APIs from traditional batch jobs to data streaming to delivering data and insights in a pluggable and modular fashion.

Insurance as a service: This enables a sustainable competitive advantage with radically shorter go-to-market cycles for new products—launching a new insurance product can typically take 10 to 12 months but only a few weeks on a digital platform with shared data and resources. The platform orchestrator must provide the capabilities for insurers to innovate and experiment to introduce simple insurance products and services. The insurance-as-a-service platform must offer services such as product management, sales, distribution, pricing, underwriting in a modular format to allow insurers to choose the capability that will attract a larger number of ecosystem participants to the platform. 

Innovation and governance: Designing a framework underpinned by machine-first principles for all the building blocks of the platform along with appropriate tools will be vital to ensure effective governance. In our view, an embedded insurance platform must be built in stages. Implementing an agile strategy that sets out key milestones such as a trustworthy product roadmap, cocreators and participants to be onboarded at each stage, and so on will be critical to the success and maturity of the platform. 

Regulatory authorities revisit their policies on data protection requirements periodically, to tighten the controls for data handlers and processors across geographies. However, data analytics is a vital building block from both an operational platform ecosystem and a customer experience standpoint. To ensure compliance with privacy mandates, data privacy by design is a prerequisite to creating a business model based on specific demographics which anonymizes customer data.
 

Critical success factors

The success of the embedded insurance model is a function of the value gained by all three players—insurers, insurance-as-a-service platform providers, and digital partners.

Unless the value delivered to these three players remains consistent, the model will not be sustainable from a business perspective. Embedded insurance products need to be offered at the right time and at the right touchpoint as they exist in a specific digital moment at the point-of-sale—they lose business value very quickly, which translates into missed opportunities. 

This will necessitate insurers to:

• Embrace a purpose-driven approach as opposed to a one-size-fits-all strategy for product management.

• Personalize products for all customer segments to ensure best-in-class experience.

• Repurpose the processes and IT spends to enable cocreation and innovation.

• Build modular and pluggable architecture with a platform mindset to enable easier access and integration across the ecosystem. 

• Measure the value derived by the various participants in the ecosystem through analytics.

• Ensure the ability to accommodate the different pace of adoption of the platform model by various ecosystem players.

• Build the capability to rapidly attract customers.

• Adopt agile methodologies as it is a key component for success, along with close collaboration with other ecosystem players.

• Ensure effective coordination between ecosystem players, aligning resources, priorities, and objectives.

However, a note of caution: embedded insurance may not represent large revenue streams overall, at least initially, but agility can create novel revenue streams while simultaneously pleasing a fast-moving transactional customer base. It should also be noted that embedded insurance, while largely transactional in nature, still creates a new customer base for which other products and services can be developed and relationships strengthened.
 

Fresh thinking, new opportunities

Embedded insurance requires a mindset shift – from scarcity to abundance.

In an industry weighed down by legacy systems and traditional practices, embedded insurance creates a space for innovation and the creation of new, streamlined products. By moving marketing and frontline billing to digital channels, insurance companies now have a golden opportunity to test, revise, and perfect products, make better risk assessments, and potentially reinvest these learnings back into their traditional products.

Nothing can stop an idea whose time has come, and embedded insurance has the potential to transform the insurance industry significantly in the coming years. At the convergence point of technology, incumbent insurers, and a new generation of customers, the stage is set for a new embedded insurance approach—one that provides a win-win, low-cost distribution to an unlimited number of customers in real-time and at scale. Insurers must take action to build the requisite insurance-as-a-service platform and digital capabilities to capitalize on this opportunity.