Embedded insurance has recently become one of the hottest topics in the insurance industry offering enormous benefits for insurers, customers and third-parties. In brief, embedded insurance is the bundling of coverage or protection within the purchase of a third-party product or service. The example that is most frequently used is when booking a flight, you are offered travel insurance as part of the whole package. There are different types of embedded insurance. The first one can be offered as an opt-in option when buying an item or service. The second type could be included as an ‘opt-out’ option within a purchase. And lastly, it could be ‘invisible’, that means included in the price of an item or service and not having the option to be removed. The drive towards embedded insurance is largely driven by changing consumer behavior and the main benefits for insurers is the potential for new revenue streams and also lowering distribution costs.
Embedded insurance is predicted to grow exponentially over the next decade. According to a recent report by InsTech London, the embedded insurance market is expected to increase to a whopping $722bn in GWP by 2030, which is six times its current size. Furthermore, in 2021 startups in the embedded insurance space raised nearly $800M with notable companies like Extend, Bolttech and Cover Genius. With all of the companies mentioned being founded in the last five years, it is safe to say that embedded insurance is still in its infancy. According to a report by Simon Torrance, truly embedded insurance has just started to emerge and has the potential to grow into a trillion-dollar market.
Embedded insurance offers vast opportunities for insurers. It can lower distribution costs by relying on partners' distribution capacity. Another clear advantage is the third-party’s existing relationship with customers. In this way, the insurance product is offered at the right time and place giving customers more convenience and personalisation. Furthermore, embedded insurance presents insurers with an additional source of revenue and also a tool for penetration especially in rural regions in developing countries. The benefit for society in general is that embedded insurance can help close the global insurance protection gap which has doubled from 2000 to 2020.
In order to tap into this enormous market, insurers need to overcome a number of challenges. The first obvious problem is the legacy technology problem in insurance. The insurance industry has been slower than other industries in adopting modern technology with many companies still relying on outdated legacy systems. Unless insurers innovate their systems, they face the risk of potentially being locked out of the huge embedded insurance market. In order to get the most out of embedded insurance, players in the market need versatile, automated software. Furthermore, as mentioned in the previous paragraph, embedded insurance can be often very high volume and low value business simultaneously therefore insurers need efficient processes to deal with it, otherwise they risk being swamped.
Embedded insurance presents an enormous opportunity not to be missed by insurers. With traditional distribution channels declining and changing consumer behavior driven by the Covid-19 pandemic, insurers need to rethink their business models and explore lucrative opportunities like tapping into the embedded insurance market to stay relevant and profitable. Changing legacy systems and adopting more efficient processes is a must if insurers want to tap into this market as a trillion dollar worth embedded insurance market.