Risk and incentive challenges surface for embedded insurance

As embedded insurance goes from being a nice-to-have to a must-have for carriers, challenges and issues with embedding coverage have become clearer.

While embedding insurance brings carriers closer to where their customers are, it decreases the personal contact that agents have with insureds, observes Sebastian Kohls, associate partner in the New York office of McKinsey. "For many things, we still see a strong preference for talking to a human and so we don't expect the agent model to completely go away," he said. 

Agents, especially servicing small businesses' insurance needs, help them understand the fine print of coverages, according to Scott Whitehead, managing director at Markel. "If you're a small business owner, in particular with a commercial hat on, you're trying to focus on your business," he said. "You're probably not very interested in learning very complicated contracts, all the varieties of coverages you should or you need to have."

For insurers, embedding their coverage in other venues means taking on added risks, as Gabriel Weiss, CEO and co-founder of XN Capital, observes. Embedded insurance deepens customer engagement, he said, but the entity that embeds the insurance actually lowers the risk on its own balance sheet, getting a better loss ratio.

Jeff Yarddis

Trov, an insurtech acquired by Travelers in 2022, offers an embedded insurance platform. With the acquisition, Travelers had a means to engage with corporate partners that could embed its coverage. To proceed, however, the carrier has to ask about companies' clientele, "Who are these consumers? Are they good risks?" said Ryan Duques, assistant vice president, emerging and innovation partnerships at Travelers.

LinkedIn

Numerous elements need to be aligned between the insurer and the venue for embedding, including distribution, infrastructure, operations, claims and risk functions, Weiss explained. "If the incentives are misaligned, at the point of sale and distribution, versus any other part of that value chain, the machine is going to break," he said. "It's going to result in delays at best, inconveniences to your customers or risk bearing entities – or, at worst, it's going to cause a catastrophic financial loss or cause the underwriting premise to basically break apart."

Overall, there is still room for embedded insurance to be a "truly seamless user experience," said Dominique Roudaut, an operating partner in innovation at MS&AD Ventures, speaking with the Open & Embedded Insurance Observatory for its most recent annual report. "However, embedded insurance still has some way to go before fulfilling its potential of bringing value add in each case, and there being no question for consumers as to why they'd need the coverage being offered – across any distribution channel for any underlying product," he said.