Embedded insurance is the future
Offering insurance online via partnerships and as a supplementary product over platforms other than your own delivers a competitive advantage for any insurer with a compatible product portfolio, because the demand for this so-called embedded insurance is increasing. This is also shown by the study Europe Embedded Insurance Business and Investment Opportunities 2022: two thirds of respondents stated that their desire for insurance as an add-on product had increased moderately (29 per cent), strongly (27 per cent) or even very strongly (10 per cent) over the past two years.
‘Insurance is no longer a standalone product, but is always part of an overall process,’ states a paper by Bitkom e.V., which deals with use cases relating to embedded insurance. This sentence clearly shows that embedded insurance is no longer a niche issue, but rather a strategic necessity. However, embedded insurance is still often seen only as a digital variant of so-called annex sales. In this article, we discuss why embedded insurance is more than that and how it can succeed in positioning itself for the future.
Annex versus embedded insurance
Mark Klein, CDO at ERGO Group, describes Annex as follows in the Bitkom paper: ‘Annex stands for: You buy a product, a smartphone for example, and the insurance can be taken out directly as an accessory to a transaction. This is convenient and customer-oriented, because the customer is spared a second customer journey.’ (ERGO 2023). The benefits for insurers are obvious: they can open up new customer groups and offer insurance on new platforms.
Unlike annex insurance, where the insurance is a separate product that can be added as an option, the idea behind embedded insurance is deep integration into the main product. Insurance is firmly embedded in the main product and, if you mean embedded insurance in a narrow sense, is ideally provided automatically and without much extra effort from the customer. This enriches the main product and the customer journey of the partners or retailers. A fitting example is Tesla’s car insurance solution: when you buy a Tesla, you receive the in-house app, through which you can register, configure the car and take out Tesla telematics insurance by ticking a box. There is no re-routing outside the app and customers see the insurance as part of the car. Thus, the degree of integration is very high and very close to the customer journey. This is currently only available in the USA, but will soon be rolled out in Europe as well. Tesla plans to generate around 30 per cent of its sales through insurance.
However, it is not enough to attach old product structures to new partners. Embedded insurance is about working closely with the retailers or platform and working together to rethink and innovate your own processes and products. Offering insurance as an integrated ‘add-on’ product meets customer needs: a survey conducted by insurance broker Hepster showed that 92 per cent of respondents had already actively made use of integrated insurance during an online purchase.
With embedded insurance, the customer journey shifts from the insurer’s side to the partner’s side. This has consequences, as customers hardly perceive the insurance product as such, but rather think of it as an additional service. This raises the question of whether insurers will be forced into a purely risk-bearing function in the future.
Insurers only as risk bearers?
Besides the aforementioned advantages of embedded insurance, such as new customer access and new sales channels, there is always something negative about it: insurers fear that they will be pushed into a role of dependency and lose contact with customers. Depending on the degree of integration of the insurance products with the partners, the insurer loses important contact points for customer communication and support. Especially in the case of fully priced embedded insurance solutions, the insurance product is part of the retailer’s product, and the insurers are no longer present for the customers. It is only in the event of a claim that the insurers act at all and have their first and only contact with the customer. This can be problematic – it is important to build strategic partnerships in which, as already mentioned, products and processes are jointly developed and improved and all partners play an important and secure role in the cooperation. Then you no longer have to fear a loss of the customer interface so much, or you can also offer new services and make better use of contact points (more on this under ‘New competition = new opportunities’).
Where individualisation meets standardisation
If insurance products have to be closely aligned with the core product or service of the partners, this can lead to an erosion of profit margins. Such large-scale adjustments entail additional costs, whether through individual product development, increased risk assessments or special pricing strategies. The fact that insurers will increasingly find themselves in a B2B role in embedded insurance and that the partners maintain direct contact with customers also puts them in a somewhat stronger negotiating position.
The solution to the problem may lie in standardisation, but this too has its risks: highly standardised insurance products become interchangeable. This makes it more difficult for companies to stand out from the competition. In a market where many providers offer similar insurance products, this can lead to a price war, which in turn affects margins. If standardisation also extends to the partner interface, this theoretically enables the partners to quickly replace insurance partners.
Insurers therefore face the challenge of striking the right balance between standardisation and individualisation. They need to be standardised enough to provide lean and fast processes and still maintain a profit margin. On the other hand, they must be individual enough to remain unique to their partners. This tightrope and close and long-term cooperation on an equal footing are the recipe for successful embedded insurance models.
New competition = new opportunities
In addition to these challenges, however, there are many opportunities, especially for sales. Instead of seeing themselves as sellers, intermediaries can broaden their role and position themselves as risk managers. This means that they offer not only insurance products, but also preventive services and advice on risk reduction. In this way, they can, for example, help companies identify potential hazards at an early stage and implement appropriate protective measures. When offering cyber insurance via partners, customer contact is established through a prevention check by specialised employees in their own channels. At the same time, the procedure contributes to risk-reducing prevention and creates customer contact that takes place outside the scenario of a claim.
This expanded approach can help intermediaries create greater value for their clients and consolidate their position in the value chain. In a digitised world of insurance where products are often directly embedded, the transition from a pure seller to a risk manager could be the key to lasting success for intermediaries.
Experienced processes versus customer-centricity
Supplementary insurance has been around for a very long time; it is not a digital invention. For instance, there are products and services that function as mass customer business, but are not very transparent or service-oriented. Insurance as an annex to, for example, new glasses or a technical device is often not explained further by service partners, so many customers do not know exactly what the insurance covers. In some cases, such insurance solutions only offer real insurance coverage in the first few months. In some tariffs, the compensation is reduced to a small percentage of the purchase costs, so the premiums exceed the maximum compensation if an insurance claim is filed. Due to a lack of quality assurance or the absence of advice, customers often pay insurance premiums for years without actually being covered by the contracts. Other policies continue to be paid by customers due to automatic renewals, even though the insured property no longer exists.
In the event of a claim, the insurance company steps into the picture – with a service that customers perceive as unsatisfactory.
On social media, negative experiences spread faster and over greater distances than before digitalisation. This can lead to an above-average loss of image for products with a low premium.
In order to achieve lasting positive effects for customers, processes, insurance products and consultations should be made simpler and more transparent. For example, a company or intermediaries could approach customers proactively when insurance coverage is no longer sensible – on the one hand, there is a duty to advise and on the other hand, services should not be inferior to ‘classic’ products and customer focus should be strengthened in order to deliver positive customer experiences and strengthen customer relationships.
Embedded insurance is more than annex sales: embedded insurance means technology, cooperation, new products and letting go of well-known and proven processes. Sales can counter the dreaded loss of the point of contact with customers by means of services and prevention. This is also urgently necessary so as to not completely abandon customer contact. At the same time, insurers are facing a host of new challenges: in the end, product solutions are only as good as the cooperation between the insurer and the partners or retailers. Customer satisfaction also benefits from transparency. In addition, the competitiveness of the developed solutions is reflected in both the technical infrastructure and product design. The aspect of customer satisfaction through transparency in the offer is very important. However, it will not be easy to find the right path between standardisation and individualisation.
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