One of the current top talking points across the insurance industry is embedded insurance. The industry loves a new bit of jargon it can latch onto, and embedded insurance is the latest fad. It has been embraced with enthusiasm because it offers great hope of new, more profitable business.
Definitions vary but, at its simplest, embedded insurance is cover that is integrated with, and sold alongside, another product, such as a cars, mobile phones, travel or expensive white goods. It is sold through non-insurance channels, a variation on white labelling that has been part of the insurance distribution model for decades. With the ability to integrate and transfer customer data at the press of a button it suddenly offers huge growth potential.
It is especially attractive because it sits well in the world of apps, making it easier to reach millennials and Generation Z.
According to ratings agency AM Best, embedded insurance is one of the most powerful new business growth elements. A recent white paper from the agency estimated it to have the potential to grow to a US$3.7trn (£3.3trn) market globally.
With potential like that it is hardly surprising that the industry is rushing to embrace it. In this haste however, it may be overlooking some of the challenges it poses.
While the technology to make it work seamlessly may be new, the concept is not. Insurance has been embedded with some products for decades, often with disastrous results. Payment protection insurance, extended warranty, travel insurance – all have been “embedded” with other products before. And all have been regulatory and reputational disasters for the insurance industry.
The biggest challenge with the new generation of embedded insurances is going to be ensuring it stays on the right side of modern – and more rigorous – regulatory regimes.
While it has the potential to get insurance cover into the hands of people who need it, embedded insurance could also easily become opaque, over-priced and over-sold.
We live in an age of greater transparency. This means customers will expect to know how the product they are buying is priced, who provides the different elements of it, including the insurance. The regulator will certainly expect this to be made clear. Burying the details of the insurance deep within wider product information might be tempting…but it would be wrong.
One theoretical attraction of embedding insurance in another product is that it can be bespoke to that particular product and customer. This should make pricing more accurate. This will need sophisticated systems to deliver and those system are certainly available. It will require clear protocols about ownership of customer data and permissions to share with everyone on the supply chain. Any fudging on that count will quickly start ringing regulatory alarm bells.
If accurate bespoke pricing is delivered that will be a big benefit, but the industry will have to guard against the temptation to take advantage of the potential opaqueness of the arrangement to overload prices. The past track record of some parts of the industry leaves a little to be desired on this count.
Making sure the right product gets in the hands of the right customer without over-selling is another potential pitfall. Mobile phone insurance is already often sold unnecessarily as the customer may already be covered on an all-risks household policy, usually for much less. Embedding insurance in a wide range of consumer products greatly expands the potential for this sort of over-selling, whether deliberate or unintentional. Again, if it starts to happen on a large scale, expect the regulator to step in.
Are there enough conversations going on in the industry about these dangers? Probably not.
More work needs to be done on where embedded insurance can deliver the most benefits without falling into any of the obvious traps.
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