In August 2023, American insurance carrier Chubb released the findings from a recent survey: Of the 200 financial executives the firm polled, 56% predicted that embedded insurance would drive more than 10% of their company’s revenue in the next three years. At present, only 20% of these executives’ firms derive that level of revenue from embedded insurance products.
But embedded insurance isn’t just the wave of the future. It’s the wave of the present—and companies that adopt these solutions now can help position themselves to increase their customers’ loyalty and grow their bottom line. Still, this pivot must be made strategically to be profitable. Milliman’s work advising insurtechs, ranging from industry-leading electric vehicle manufacturers to digital homeowners carriers, provides strategic guidance to be successful in the embedded insurance market.
What is embedded insurance, and why do consumers demand it?
Embedded insurance solutions are integrated into the sales transaction, so that buying auto coverage, for example, happens at the same time you buy the car being insured. The process is automated, seamless, and often a more positive customer-service experience.
Before the development of embedded insurance, the owner of a new car would have to make a separate call to purchase coverage before driving that vehicle off the lot. Frustration was common. To finalize a quote, an insurer might ask an applicant for obscure details not readily known, such as the vehicle’s trim. Or a form with many questions might request dates of motor vehicle infractions—and prompt accusations of withholding information—if an applicant misremembered the month that a ticket was issued years ago.
Today’s consumers have little patience for these inefficient transactions. In particular, digital natives, who have grown up in the post-1980 world of ubiquitous computers, have a privacy threshold that is different from previous generations. They are comfortable supplying revealing personal details up front, such as their vehicle identification number or driver’s license number. In exchange, they expect an insurer to already have access to the information it needs about their new car or driving record in order to provide a customized, accurate quote. All the customer must do is offer their consent and their payment.
With fewer questions and clicks, the buying process for embedded insurance is shorter. And with less frustration and friction, consumers are likely to walk away with a more positive impression of insurance—leaving them more receptive to coverage updates and future sales.
Technology’s role in the embedded insurance evolution
Recent technological advancements have created the ability to obtain data from third parties and automate the insurance quoting process in a way that can be embedded into the sale of another product or service.
In the past, data about the risk and coverage needs were collected from the customer through questions on an insurance application, and underwriters evaluated a risk over the course of days before confirming that it was acceptable and finalizing the premium quoted to the customer. For homeowners coverage, for instance, that meant relying on the homeowner’s knowledge of construction details and other property attributes before an agent could determine what insurance program the property was eligible for, before the agent could calculate the premium, and before the underwriter could confirm that everything was done appropriately to bind the risk and issue the policy.
Thanks to real-time access to third-party data sources, and the ability to harness this data to apply algorithms to instantaneously underwrite and calculate the premium and issue the quote, embedded insurance became possible. Rather than depending on the consumer to know the details about the risk, more accurate data is used, and the quoting and policy issuance process is reduced to a couple of minutes, instead of a couple of days.
Dos and don’ts for carriers adding embedded insurance solutions
Insurers scrambling to respond to the embedded insurance trend may be tempted to update only the front-end experience that customers see, such as prefilled application forms. While this may improve the sales process, it is not the full embedded experience.
Backend systems must also be modernized to effectively incorporate the new customer data needed to instantaneously underwrite the risk and calculate the premium. This means updating technology to be able to communicate with third-party data systems to collect the data to be used to determine whether the risk meets underwriting requirements, to determine what coverages are needed, and to classify the risk for purposes of rating. For example, what insurance coverage limits are needed for the contents of a property, and will the property’s contents be insured for replacement cost or actual cash value? This is akin to codifying the art of underwriting and is not a small task.
Finally, the insurance product offering needs to be redesigned to offer relevant coverages that make sense to consumers, such as eliminating outdated coverages like silverware and tapestries, and adding new coverage options for laptops, tablets, and other electronics. Without updating the insurance product, the policyholder may experience gaps in coverage.
Retraining current employees to do this work, although good for their retention and professional development, may also be shortsighted. Many insurers find greater success partnering with outside advisors who combine the actuarial know-how, financial savvy, and fresh thinking needed to revamp offerings for a new insurance marketplace.
While embedded insurance may not be universal yet, it is here to stay, and is an opportunity for growth. Carriers who fail to embrace this approach to delivering insurance may be exposing themselves to the greatest risk they have ever faced: their own obsolescence.