What embedded models can — and should — replace
For decades, insurers have sold their products via joint ventures or other partnerships with manufacturers and other companies. These distribution arrangements have been suboptimal in many ways, due to undifferentiated features, high costs and fragmented customer experiences. Asset owners are increasingly aware of the risk to their brand from the disconnect between business value of their customers and the underwriting risk they represented to an insurer. Because partners’ incentives weren’t necessarily aligned, customers frequently saw limited value; consequently, adoption rates remained low.
Increased digitization has exposed these shortcomings and motivated more non-insurers to explore embedded insurance. Typically, these brands enjoy higher levels of trust, have larger and more loyal customer bases, and face fewer legacy issues than insurers do. These are huge advantages for any company looking to expand its portfolios of offerings.
Ultimately, rather than acting as minor distribution channels for insurers, non-insurers want to take control of the product and overall experience. They have the capacity to build stronger value propositions and orchestrate the necessary ecosystems to deliver higher standards for customer centricity, reduced cost of insurance and increased pricing accuracy. To be clear: These are not InsurTechs; rather, they are well-established and well-capitalized brands accustomed to leading their markets. They will be aggressive in engaging InsurTechs and other partners to access the capabilities they need to succeed.
For insurers to compete with embedded offerings, on their own or with new partners, they will need to address various interconnected concerns and challenges, including:
- Undifferentiated products that aren’t based on the latest data or most useful insights, lack key features, or are delivered via subpar experiences
- Higher costs, both in core operations and across the value chain, with multiple intermediaries adding 30%–40% to costs
- Too little automation and too much manual processing
- Limited adoption rather than systemic use of artificial intelligence, machine learning and other enabling technologies
- Legacy system limitations in integrating the velocity, variety and volume of new data flows necessary to innovate in the embedded space
There’s no underestimating the last point: Replacing legacy systems is not an option for most insurers, given the high costs, and meeting the pace of market changes on legacy systems simply will not work. Thus, insurers need to develop entirely new ways of engaging in solution design and development, based on modern platforms that provide pre-built capabilities, make it easy to integrate with partners and support fast, secure data exchange.
Other impediments to agility and responsiveness must be addressed. For instance, most property and casualty (P&C) insurers have yet to refine their offerings or underwriting models to account for the dramatic changes in mobility, including the rise of electric and self-driving vehicles. Similarly, relatively few commercial insurers have developed protection solutions that reflect the huge proportion of balance sheet value that is now linked to intangible assets (e.g., brands, patents, intellectual property, networks). Nor have they embraced data streams from sensors to transform their offerings to include sophisticated risk prevention services. The bottom line is that insurers have a great deal of work to do in prepping their tech, teams and operations, regardless of their embedded strategy.