Robin Merttens & Simon Torrance: Insurance - to Embed, or not to Embed

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The attraction and vast potential for ‘embedding’ insurance products has made it one of the hottest topics of 2021. 

Robin Merttens chats to Simon Torrance on Podcast 144 about the opportunities offered by embedded insurance and insights from the InsTech London report, Insurance: to Embed or not to Embed.

Talking points include:

  • The definition of embedded insurance
  • Embedded success stories from around the world
  • Why customers like embedded solutions
  • Third-party distributors and platform business models
  • The challenges facing incumbents

If you like what you're hearing, please leave us a review on whichever platform you use, or contact Matthew Grant on LinkedIn

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Insurance: to Embed or not to Embed will be available to download from the Reports section of our website from 9am on Thursday 1 July. The report takes an in-depth look at what embedded means in practice, the emerging opportunities, and the companies who are making it work.

You can join Robin at 12pm on 1 July as he discusses the findings from the report in a Live Chat with Franck Pivert, Chief Revenue Officer, Wakam; Jean-Charles Velge, Co-Founder, Qover; Louisa Murray, Chief Operating Officer (UK & Europe), Railsbank.

Continuing Professional Development - Learning Objectives

InsTech London is accredited by The Chartered Insurance Institute (CII). By listening to an InsTech London podcast, or reading the accompanying transcript, you can claim up to 0.5 CPD hours towards the CII member CPD scheme.

The Learning Objectives for this podcast are:

  • Understand what embedded insurance is and how it differs from some pre-existing solutions
  • Realise some of the opportunities embedded insurance offers and its value in the future
  • Recognise how incumbents could benefit from embedded insurance and what is holding them back

Let us know you have listened to this podcast and if your organisation is a member of InsTech London you will receive a quarterly summary of the CPD hours you have earned.

To help us measure the impact of the learning, we would be grateful if you would take a minute to complete a quick feedback survey.

Insurance - to Embed, or not to Embed - Episode 144 highlights

Robin: We can’t go very far without discussing what embedded insurance is. What would be your definition? 

Simon: It’s part of a broader movement towards embedded finance. Technology has become so sophisticated now that it's possible to abstract many more aspects of financial services into technology. To take those capabilities, put them into software, and allow other people to embed those capabilities into their services. 

When I use an Uber, I don't have to get my credit card out to pay for it. That's all being worked out in the background. Uber has embedded payments into their experience for me and made it very easy, and it’s part of the reason why we use Uber. On the other side, they've also embedded insurance into the driver’s experience. As part of their contract with Uber, they have insurance built-in. 

Technology allows any organisation to become a seller, distributor, or creator of insurance propositions, and do it faster and more easily than was possible in the past. That is the notion of embedded insurance. It's other people embedding insurance into their propositions, enabled by technology.

Robin: People will say “that's what affinity schemes were”. What makes this different? 

Simon: It's happening much faster and on a much bigger scale. For example, a small bicycle retailer, which insurance companies would ignore via their affinity schemes, can add on warranties or insurance at the point of sale and make money from doing so. 

At another level, big organisations like Uber or Amazon can now be in control of the type of insurance they offer to customers. Technology allows them to combine their customer data with the data an insurance company needs for underwriting to create personalised, cheaper types of insurance. 

We've had affinity schemes and distribution through big brands in the past, but now even the big brands can create smarter, cleverer, more sophisticated insurance propositions much faster. 

Robin: The insurance industry has always relied on third parties for distribution. It’s been crucial to the way insurance is sold. What we’re talking about here is a technology and data-enabled way of doing that. It’s about embracing retailers as friends with big customer bases and the ability to sell and bringing them into the way we distribute. 

Another point that irks me is the suggestion that we’ve done this before, and this is PPI all over again and it leads to misselling. Embedded is completely the opposite. It’s about ensuring there's a match between the product and the requirement, using the data to ensure that the right product is sold at the right time in a way that makes it easy to buy.

Embedded still has regulatory requirements. The technology still has to deal with KYC issues, it still has to ensure there's a suitability match and that the proper pricing documentation is issued. But behind the scenes, it’s facilitated and seamless, rather than the grind we put customers through right now.

Simon: One of my favourite examples that brings this to life is the Alipay app in China. There are hundreds of millions of people in rural China with no insurance protection. Insurance has never been able to reach them. What Alipay can do, because it has daily and constant interaction with that audience, is act as an intermediary between its customers and insurance companies.

Collectively, insurers have created 2,000 microinsurance propositions and offers with Alipay, who can engage with the end-user for them. As a result, they've signed up something like 104 million new customers for basic cancer, accident, and other types of coverage. 

These new powerful distribution partners, the digital platforms that people are spending more of their lives in, are in many ways the new power brokers. They can say to 40 insurers ‘this is what we need from you’. That is a very new control point in the market. 

Robin: When we started writing this report, I assumed it was only relevant to smaller, simpler insurance products, but we came across lots of interesting, more complex products. I like one that Azur do in the US fix-and-flip market where developers get a quote for builder’s risk at the point of applying for a bridging loan. It’s an example of that right thing, right time aspect. “Here’s your loan, do you want builder’s insurance? Because if you do, the price is this”.

There's another one called Gaia in the IVF market which provides an insurance scheme that reimburses customers for IVF failure. The customer can buy into that as part of the onboarding for IVF treatment and advisory services.

Simon: There’s another interesting example around software platforms like QuickBooks and Xero that support small businesses. They have a constant connection with SMEs and where they offered credit in the past, they’re now offering insurance. 

If a company has just hired another 10 people or taken on more sites, the software platforms can suggest workers compensation or liability insurance to support that. A trigger has been created at the point of need, before the point of awareness and point of sale, and that's interesting for companies to get into that stage of the lifecycle of a sale.

Robin: You’ve come up with some figures on how big an opportunity this is. How seriously should the insurance industry be taking this? 

Simon: They should take it very seriously. I did some market forecasting and tested it with people in the industry and came up with a figure that said in P&C alone, we’re going to get to about 20% to 24% of distribution through this mechanism. What I mean by this mechanism is super-automated embedded insurance, not just an affinity deal developed in an analogue way. 

24% of total P&C is about $700 billion so it’s quite significant. The market opportunity is for organisations that can enable it. These are software businesses that can enable this to happen, and they tend to get a multiple of at least five times the revenue or the GWP and that gets us to a figure just over $3 trillion. That's new businesses enabling embedded insurance, just in P&C.

Those businesses could be new ventures from incumbents, they could be existing insurtechs that are already doing this, or they could be companies that don't even exist today. All companies need to work out where to play and how to win in this emerging market. Looking at payments and banking, Stripe enables embedded payments and lending and is worth $95 billion. That's more than Goldman Sachs and it's only about 10 years old.

Robin: We’re starting to see regular unicorn valuations for insurtech businesses and the ones getting those valuations are the deeply disruptive ones with propositions that will really change the insurance industry. Most of them are what we at InsTech London have started to call “technology-enabled MGAs”. 

These companies have the tools to exploit these opportunities while the incumbents don't, but there's a danger associated with giving up a large part of the value chain. Effectively, by not having the right technology incumbents are giving the ownership of the customer, the data and the administration to someone else and only keeping the provision of the regulatory capital. That's a dangerous place to be.

Simon: This comes back to platform business models, which are the most powerful in the digital world. Apple has apps which people use, but it can't create all the apps itself, so it harnesses the ingenuity of the rest of the world to create solutions through its app store. Amazon did the same. They used to retail products and take on the inventory risk, but customers wanted more than they could provide or take the risk for, so it created a marketplace. It’s the same with Google and Google Play and so on.

That whole principle is quite a big shift, particularly for the incumbents who are used to a very linear way of delivering solutions. The digital MGAs are much more dynamic and able to offer new solutions that others can’t, but even they need to open up to third parties to complement their skills. 

Lots of people that you've interviewed for the report can see they're solving a short-term problem of digitising the process and dramatically reducing the costs, but they recognise that they're going to have to open up and be stronger aggregators as well as solutions.

Robin: The industry needs to get its head around the super apps and big platforms like Amazon, Google and Apple. Perceptually, they’re seen as a huge threat, but that's slightly overdone. Eating up a lot of capital to step into a regulated world when they could just extract the best bits is likely to deter them from being actual insurers, at least in the medium term. 

Simon: They’re doing that in banking. They don’t want to take on banking licences, so they use embedded banking services. Google Pay is offering more and more financial services, starting with payments and commerce and then banking, but it backs off the bank accounts to local banks because it doesn't want to have that regulatory oversight. 

Insurance will be next. The big opportunity is for companies that can create something that's easy for them to plug into and that can orchestrate multiple suppliers. 

Robin: What is it that holds the incumbent insurance companies back? There are a handful of companies that are absolutely on this and in the report, we talk to Wakam, MAPFRE, Liberty Mutual, Swiss Re, but I don't sense big enthusiasm overall. Why is that? 

Simon: Because for the leaders, this is not their world, they’re not technologists. If we look at the board composition of the biggest insurance players, there are lots of insurance people and lawyers, but where is the person who spent 30 years at Microsoft? Most leaders are caretaker managers, hired for a short time to clean things up and make things efficient. They're judged by metrics, which are not very conducive to a 10-year horizon to make a shift that completely changes the business. 

That's a fundamental challenge, but there is a way forward for these companies and I always use Ping An as an example. It decided it was going to be a digital business, changed everything, and is now the biggest, most valuable insurance company in the world.

It means saying, “we're going to become a digital company because the world is going digital”. We have this enormous protection gap and the world needs insurance. It needs better, more cost-effective insurance, but the supply side isn't getting it to the world. That's the big opportunity, so if a leader has a passion for making the world more resilient, or closing the protection gap, using digital technologies is a great way of doing so.

Robin: The thing that made me challenge or question why this is not being enthusiastically embraced is the thought that every party in the value chain benefits from embedded insurance done well. The customers like it because they get what they want and distributors like it because it's another revenue stream. It's a big opportunity for insurtech and insurers should love it too because it's a fundamentally better and cheaper distribution model. 

Insurers that are stuck on legacy technology have two choices. They can go and partner with someone who can provide the technology and risk giving up an important part of the value chain, or they can go and rebuild their technology. 

That’s a big cultural challenge and Wakam deal with this nicely in the report. They rebuilt their technology, but that was only half the journey. The other half of the journey was a cultural one. When people bring companies things that they don't understand, they can't say “we don't understand that and it doesn't fit with our products.” They have to ask, “how do we make this work?” 

Simon: Trying to turn the supertanker around is quite difficult and takes time. One of the ways that Ping An became so successful is by creating a whole set of separate ventures away from the core. Separate equity structures that attracted entrepreneurs who had done successful digital ventures in the past. Those acted as speed boats to grab new market opportunities quickly. 

I'm doing quite a bit of work with companies on how they can do new ventures that tackle whitespace digital opportunities, and how they can use the assets of the core to drive demand for the core business as well. That's the way of thinking about it. Potentially creating channels to grow the core business while optimising and improving the fundamentals that they need to get right. That’s how I try and speak to people about being able to grab opportunities quicker.