The primary providers of insurance usually don’t know who buys their goods. In-house actuaries and product-development teams construct policies, based on some demographics and a sense of whatever pricing is most advantageous. Someone else – an agent, a broker, a bank – distributes the product to their own customers. When a policyholder files a claim, it’s like a first blind date to both sides, and the insurer’s incentive is to minimize the payout.
This arm’s length model is lucrative. But insurance companies can’t pull this off by themselves. They might rely on ideas pitched by reinsurers. Reinsurance companies have a bird’s eye survey of trends, thanks to their role of backing all the primary carriers. They can take a macro view to work out what kind of policy looks like a winner, and they pitch this to insurers along with a pledge to use their capital to back any carriers who bite.
The reinsurers aren’t omniscient: they tend to dangle a big idea before asking the carriers to supplement it with their on-the-ground view. But combining the big-picture view with an insurance company’s sense of its own business has proven a winner for the industry.
This model has its limitations, though. No one still has any real idea of the policyholders. Beyond some simple demographics and contrived personas, every product is still a roll of the dice built on actuaries crunching the probabilities. There’s no incentive anywhere along the value chain to think of customers except as commodities.
Add data
Enter insurtech. These businesses come in many flavors, but one proposition is whether technology can harness enough data to enable a carrier to understand its policyholders, and use that insight to upsell, make itself useful to distributors, and maybe even create brand loyalty. That in turn requires giving policyholders a sense that they’re being treated fairly, and that the insurer understands what they need.
Some carriers have attempted this by building apps designed to integrate with a person’s lifestyle. ‘Wellness’ apps have been popular – with insurers. Feedback from various industry participants suggests to DigFin that these have failed to generate much in the way of engagement or sales. People don’t really want to download an insurer’s app, especially when they can get a lot of the same thing from their iWatch.
The current big idea is embedded insurance. A few tech-savvy players got their start this way: think Zhong An Online P&C Insurance figuring out how to put tiny little policies on top of flights, that pay out automatically if a flight is canceled. The idea is to plant an insurance policy in third-party products or services that people use regularly – from telcos, airlines, hotels, you name it. By relying on non-finance channels, the insurer can reach a different population.
Challenges
Embedded has its own challenges; here are three.
First, an insurer relying on someone else’s digital platform is just a widget provider; most of the fees go to the platform. Therefore the volume has to be so large as to justify the work.
Secondly, the work involved is creating products that function smoothly in these new environments. Actuaries, product people, and salespeople are fish out of water when it comes to designing something ultra-simple and cheap. It goes against the grain of the whole organization.
Third, the insurer needs to interpret the data to know how to optimize the products. That requires an IT architecture and data-governance culture that few carriers possess. It also requires a sophisticated marketing team that understands customer segmentation.
So, actuaries, product, and sales must play second-fiddle to data scientists and marketing teams, to design mass-scale products designed to let a third-party platform keep most of the revenues. All of this while the biggest insurers continue to be, essentially, licenses to print money from the legacy business that follows the mantra: insurance is sold, not bought.
Meanwhile, proving that point, online direct sales of insurance is in a rut. In Hong Kong, it’s actually declined. In 2021, the height of Covid, direct sales accounted for 4 percent of new premiums, according to the Insurance Authority, including from all of those wellness apps and the launch of virtual insurers. That reflected a time when face-to-face business had collapsed. But so far in 2024, direct sales are only 1 percent of premiums sold.
It’s not surprising that embedded insurance has not really taken off in a big way. The main carriers talk it up at conferences to look clever but few of them regard embedded as worthwhile.
Know your customer
And yet—our lives are increasingly digital. For both traditional insurers who aren’t established players in the region, as well as a few startups, embedded offers real opportunity. They’re not just thinking of new distribution channels for insurance policies, though. They’re thinking about entirely new ways to define the customer.
Recall the partnership between reinsurers and primary insurers, that macro, bird’s eye view combined with a carrier’s ground game. Embedded insurance creates opportunities from the bottom up, not with aggregate guesswork but from real-time data of users, be they individuals or businesses, that creates a stream that can be monetized.
The numbers are also starting to look attractive. “Embedded insurance is going to be a $1.4 trillion business over the next decade,” says Raphael Young, head of Asia sales at EPAM Systems, a software engineering business. He says the sector is growing at 27 percent compounded annually.
“This makes consumers’ lives easier,” Young said. “When insurance is embedded, the experts have already taken care of the product idea and the customer journey. The customer doesn’t need to research the terms of insurance.”
By combining insurance with some other activity, the question of ‘sold not bought’ is flipped, and the insurance becomes something customers decide they need. But ‘sold not bought’ is so ingrained in the industry, many executives struggle to wrap their head around an alternative.
This week DigFin will present two use cases, one from Ageas, a traditional insurer, and the other from Yas Digital, a rising insurtech in Asia, showing what is possible with embedded insurance.
