Transcription:
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Patti Harman (00:07):
Hello and welcome to this edition of the Dig In podcast. I'm your host, Patti Harman, editor in chief of Digital Insurance. Insurance coverage is constantly evolving to keep up with customer needs, new technology and emerging risks. As carriers change their coverage options, pull out of high risk areas or identify new exclusions, policy holders are looking for different insurance alternatives to help mitigate their exposures. Today we're taking a look at embedded insurance, how it works, what it covers, and why it's becoming a more popular choice in some instances. Joining me is Andy Watts, business development director at INSTANDA. Andy has several decades of experience and insurance and particularly in the technology sector and can share what he's seen from a global perspective since he's based in England. Thank you so much for joining us today, Andy.
Andy Watts (01:05):
Hello Pat. It is a pleasure for you to invite me and for me to be on this show today.
Patti Harman (01:11):
So let's just start with an easy question and I was wondering could you kind of give us an explanation of embedded insurance and what does that mean from your perspective?
Andy Watts (01:22):
Yeah, sure. So embedded insurance is a type of insurance that is seamlessly integrated into a customer's buying experience, whether it be through a product, a service, or a platform. So historically insurance has been sold as a standalone product in itself, but embedded insurance is when it is bundled with another primary product or service, making it convenient for the consumer to obtain that coverage. So the model simplifies the insurance buying process and often leads to higher conversion rates since the insurance is typically offered at the point of sale when another purchase of a product or service has been transacted.
Patti Harman (02:03):
Okay. You've touched on this a little bit, but what are the advantages to purchasing embedded insurance then for the customers?
Andy Watts (02:09):
Wow, but the customers, I mean the first one sticks out is convenience. Embedded insurance is seamlessly integrated into the purchase process of a different product or service, and then the insurance is aligned towards that of act or service and then it eliminates the need for a separate insurance transaction so the individual that a consumer, the customer can make it easier and faster for them to obtain coverage. So convenience kind of sticks out. There's plenty of other advantages as well. So instant coverage, I mean imagine if you buy something and then take it home and then try and find some insurance for it, you've had a period where it hasn't been covered, whereas with embedded actually you can make it the moment you've completed that transaction, that insurance is then covering you from any of those risks. You would hope also too, it being aligned in an automated way, which is typically the one way of doing things that there's a cost efficiency.
(03:07):
So for the consumer, actually they can typically have confidence that they're getting a solution at the right price because there's no other distribution, there's no other kind of added costs associated with it, and so therefore there's efficiencies that can be passed on to the consumer. I think also from a perspective of either buying insurance, actually if there's a prime brand or service that's being bought, then that insurance can sometimes benefit from the trust that exists with that product and that service so that trusted brand can be incorporated within the field for it. So therefore actually the confidence that the insurance is going to work can be increased. I think also there's the fit to need. If you go and buy some insurance, you think, well, is this the right insurance for the product I've bought? Whereas if you've got embedded that thinking it's been done for you because actually they know what is the product that you are buying or the service that you are buying, and therefore they've orientated the insurance appropriately to those conditions, so therefore the customer can be confident that they're getting the right solution as targeted for them and increasingly could be more personalized for their own circumstances.
(04:23):
I think also as we mentioned earlier, with convenience, they don't have to go and buy some insurance later so they can reduce the amount of effort that they put into the process because it's not something for them to follow up separately. It's all kind of happened. So I think if you take all those things collectively, then it really is about peace of mind, isn't it? It's about knowing you're covered immediately. If you're getting a good price, you've got the right trust with the organization, you're putting it through and it hasn't cost you a lot of effort to get done. So that's why the coverage is so on the rise.
Patti Harman (04:57):
I particularly like the fact that it's immediate coverage because if you're making a large purchase, that can become really important because you don't want to have a period where you're, whatever it is that you've purchased is not protected. And I think sometimes people get so busy and they're like, oh yeah, I need to follow up on that. I need to buy insurance. So again, that ease and that continuity I think makes a really big difference.
Andy Watts (05:24):
Yeah, you're right.
Patti Harman (05:27):
You've discussed a number of benefits. Why do you think this type of insurance is growing an adoption from both a carrier and a policyholder perspective, and are you seeing that customers are really comfortable with purchasing this type of coverage since it's still rather new?
Andy Watts (05:46):
Yeah, I mean it is interesting, isn't it? I think one of the reasons why it's growing is because connecting systems has become easier to do. So you can look at insurance. In the past, all the business processes within an insurance company happened within the four walls of that insurance company. Obviously they've now gone through a period where they've opened up their systems and they've put in digital processes and they've exposed those processes to agents and consumers in the outside world if you like. And as a consequence for that to be able to hook them into other products and other services for which insurance is appropriate has become an easier thing to do. And so there's more of it about is one of the reasons why is happening more. And I think that will continue that rise, especially when you orientate yourself towards new products and new services that actually insurance will start being embedded rather than being separate and coming from an older model as it happens on the existing insurance.
(06:47):
I think also we in standard commissions, some customer insight in December of last year, so relatively new kind of view and we polled 2000 people, a thousand in the U.S. and a thousand in the U.K., and one of the questions we asked them was how comfortable, if at all, would you fill with your insurance being bundled into related product purchase? So with the exact question that we're asking ourselves here, and it is interesting the response because it's slightly different in the U.S. to the U.K., we're not quite sure why, but in the U.S. about 44% feel comfortable and another almost 30% on top of that are neutral. So they're neither comfortable nor uncomfortable. So you've got over 70% of the U.S. population based on this sample kind of said they're fine with it. In some of them cases they're comfortable and only less than 18% being uncomfortable.
(07:43):
And in the U.K. the numbers were actually about 34% were comfortable and 33% were kind of neutral, so about 67%. So a little lower in the U.K., but actually in terms of feeling uncomfortable, a similar number less than 18%. And what we also did an analysis by age, which reveals something because actually what you see is the younger you are, the more comfortable you are with it. The older you are, the less comfortable. So you would think now we don't know the stickiness of that. So as they get older, will they retain their comfort well as the new service? We probably would expect them to do so, but we're not entirely sure. But so we think the general trend is that the people that are comfortable with it is two thirds, three quarters almost, and it's probably a growing number of people that are comfortable with it. So that adds to the reasons why insurers and product providers, because it's now easier for them to snap the processes together to make these things work, they can also see a fairly receptive market for it. So those two things combined is really kind of fueling the growth in embedded insurance
Patti Harman (08:53):
Based on the results from your study, do you see its use expanding and becoming more mainstream in the future as people become a little bit more comfortable with It
Andy Watts (09:04):
Absolutely is the answer to that. I can read the market assessment from whether it's reinsurance companies or consultants, and they all have slightly different numbers associated with the growth of embedded. I mean, one of those actually says that by 2032, maybe as much as 60% of property and casualty insurance will be through embedded. Now, I think that's maybe at the optimistic end of the projections, but nonetheless, they're all looking at between 25 and 35% compound annual growth rates associated with embedded. And we can think of some examples why that might be the case. So you look up, most lease cars in the U.K., as an example, they don't include the insurance, but we can see that changing. We can see actually the provision of a distributor associated with a particular manufacturer. Well actually, here's the lease fee and it includes insurance. So over time, most insurance might become a bit more of a commercial lines product where it's sold, the insurance has an arrangement with the manufacturer rather than the insurer has a direct arrangement with the driver that will further be elaborated when we move to self-drive vehicles or when the car's doing some of the actions.
(10:22):
Now actually you're asking yourself, well who's the driver and who's responsible? And it might be the software in the car. So you're starting to blur the boundaries. So hey, that's one particular example, but I think a good one where the whole model of insurance will change over the next 5, 10, 15 years. And I think the naturally set up for embedded, so the answer to the question, is it going to expand, become more mainstream? We asked is yes.
Patti Harman (10:47):
Wow, that's pretty amazing that there are so many possibilities and when you're talking about the cars, I have been covering autonomous cars for several years now, and you're right, one of the biggest discussions will be if there is an accident or if something happens, who's going to be liable for that? So it's interesting that the software could be liable for that.
Andy Watts (11:13):
Very good. I mean the connected car has got a whole load of knowledge and understanding about what's happened. And so in the insurance process, in terms of the claim and the fixing and looking at fault, then that connected car opens up all sorts of possibilities as well as telematics around improving driver behavior. And so there's all sorts of good reasons why the insurance model will change.
Patti Harman (11:41):
So we've mentioned cars, but are there certain products or purchases that you think lend themselves to embedded insurance coverage then?
Andy Watts (11:49):
Well, I think historically there's in some ways while embedded a technological way, is a relatively new thing, certainly in the scale that's happening, there are certain products that have kind of been embedded for quite some time. So like retail product extended warranties for example, they've probably been around for 50 years and when you buy a product you can bought buy an extended warranty, which is full insurance. Maybe in the old days you were writing out a form and filling it in, whereas now it's much more digital. So I think retail product, extended warranties clearly is a place where that's going to continue to be used. And I think especially when you move into electronics and gadgets, smartphones, laptops, tablets, wearables, these are complicated expensive devices and actually the risk isn't just I've dropped it into the bath, can I replace it? There's personal data on them, there's all sorts of other additional risks associated.
(12:45):
So they also appeal towards having embedded insurance associated with 'em. I mentioned earlier about car leasing. Car rental already is embedded. You generally get insurance with it, although they try to sell you more when you pick the car out. But I think the lease cars, the growth in lease rather than owning has been a big trend in the last few years. And so I think insurance has rattled in that. As we previously mentioned, travel insurance already quite well served. Airline tickets, cover trip cancellation delays, lost luggage, all those things are very good examples. But then also we move towards that finance and online services. Online services is a good one because when I book a ticket for a comedy show or a theater or a football match or something, then there's a little thing, do I want insurance on this? Now that's pretty typical, whereas a few years ago probably didn't see it so often. So then you can move into identity protection for prevention, life insurance when you're doing a mortgage application and we are looking to borrow some money then actually making sure that that's all part of the process. So I think if you look across the span of products and services, there's a lot here that is already being done that suits it and there's some areas that will be emerging and new. And so there's plenty of options for the insurer and to work on and for the benefit of the consumer here.
Patti Harman (14:08):
There really are a lot of options. Excuse me. What are some of the more unique uses maybe that you've seen for embedded insurance? I mean you just mentioned life insurance, which really surprise me, but are there other things that you're seeing where it's like this is an area that we hadn't covered before, but now whether it's technology or just the ability to price and bundle coverage better, is there anything that's a little bit more unique that you're seeing?
Andy Watts (14:37):
Yeah, I mean there's interesting things talking about connected cars. We can also think about IOTs as an example. So you've got companies like Nest offering their own insurance coverage for customers who use their smart home security systems. So suddenly, you are seeing you can integrate the insurance with the technology and we're seeing much more of that IOTs and wearables and linkage to insurance because ultimately it's going to change the dynamics of the way the insurer behaves because the insurer will be, I mean historically they were there to pay out money when something went wrong. As we move forward with much more integration with technology, their mindset will be how do I stop those things from going wrong? And that's the loss avoidance part of the equation. And so I think there's a natural marriage in certain places. So I think something like Nest Home Insurance, suddenly that's, Hey, how can I advise my customers to improve their security, make some change, see where the weaknesses are and reduce the assurance, reduce the loss avoidance.
(15:49):
There's just no loser in reducing loss avoidance. Everybody wins in that kind of space. So I think IOT's, wearables is a subject in sound, right? But nonetheless, it kind of crosses that boundary. Another one of our clients specializes in drone insurance. Now, drone insurance probably didn't exist 10 years ago, but still wasn't particularly pervasive. But it gets you thinking this is an area where already we see opportunities growing. Certainly our client has aligned to new and emerging risks. So I think we can answer the question linked to what's interesting that's happening against existing products. But also what's interesting that might be around the corner because drone rental companies, well probably you're going to lend it out with some insurance, aren't you? Because that sounds like a good idea. And then you've got service agreements with delivery companies. Well, this is going to get longer in drives.
(16:42):
I mean, goods will be delivered using drones much more frequently than that's an emerging technology. Where's Amazon Prime going to go as an example. And then when you think of that, you think to yourself, I'm not just insuring the drone, I'm thinking of third-party property liability. I'm thinking damage to the package. You don't turn up. So suddenly you're thinking I could actually price that on a transaction basis and then make that automated. So I think what we'll see with embedded will be aligned to new industries and new risks providing tailored coverages as those new services develop.
Patti Harman (17:21):
I've been covering the insurance industry for about 30 years and it's so exciting to me to see how it's evolving and changing and how coverage is adjusting to new risks and just new areas for policy holders. And it just is very interesting to me. One of the big things within the insurance industry or that we're always emphasizing is the importance of relationships. And so how is the adoption of embedded insurance changing that relationship between carriers and policyholders because all of a sudden they're purchasing it at the point of sale as opposed to having to go to a specific carrier or an agent or broker for that? So how is embedded insurance changing that relationship?
Andy Watts (18:10):
Yeah, I mean probably multifaceted, if I'm being honest. It's an interesting area because in some cases the insurer gets pushed a bit to the background. So the embedded insurance part of the equation, we were talking earlier about motor insurance as an example. If a car dealer that's aligned to a particular manufacturer is selling a car, then it also wants to sell some insurance as part of that transaction. You take BMW, their BMW, flex car insurance for example. Whereas if you look inside, it's obviously actually Liverpool, Victoria LV equals the insurer underwriting it, but that's not necessarily obvious in the early part of the presentation of it. So in some ways, the insurer, because it's the secondary purchase, might get pushed to the back a little bit. In other cases, actually the insurance brand can be front and center and maybe they can benefit from having some brand recognition associated with the primary product provider if you are the insurer associated with Apple or some, because there's plenty of other brands out there that are sexier than an insurance company that have people's allegiance towards.
(19:33):
So I think it's a bit mixed. So it's certainly going to change the relationship. I mean, ultimately we talked earlier about convenience at the point of sale. Now if that as a brand promise follows through when it comes to the claim process and the servicing side of it, that is also done as smoothly as the upfront, then actually it's going to enhance the view that the consumers have of insurance. It's there to sort me out when I've got problems and it's easy and it's seamless. I mean, when have you associated insurance with easy and seamless? I mean, generally they're not in the same. I mean, we do our best and we've done our best, but we're at the point where we are able to deliver on these promises more readily because of this connection. So I think it's actually a mixed bag in terms of the relationship. In some cases it will push the relationship to the back and in other cases it'll bring it to the fore. So I think it's catalyzing on what's relevant, and it is certainly though an opportunity to increase customer trust and engagement by being seamless and simplified because complicated and difficult are not things we want to hang out on.
Patti Harman (20:47):
Very true. Do you think then that it's changing the expectations of consumers and are they really going to be able to see if it really does improve the insurance process for them?
Andy Watts (21:00):
Yeah, I mean, we talked about the benefits of the point sale and all of that's kind of be relevant, seamless integration, convenience, efficiency, personalization to the customer need, especially good fit to the prime product or service ultimately being the right solution at the right time. That's the trust of it. But that's the upfront part of the equation. All that's good. But I think there's also, you expect the insurance product to be good value for money. As a consequence of that, if there's one thing that consumers might be hesitant about is actually is this good value? Because I'm not going through a pool of insurers and picking the cheapest one, I'm picking the one that's in front of me that's convenient. So I think they need to live up to the promise about the fact not to abuse the situation because no one wants buyer's remorse to then go later and find out they could have got the same insurance at half the price because when all the convenience was there to have it done in the first place.
(21:57):
But I think we're definitely in the age when the end-to-end insurance service has to be joined up and seamless and convenient. And so I think there needs to be the follow through on the promise. People are naturally wary of something that's easy to buy but hard to cancel or difficult to change or hard to claim against because it looks like they've put the balance of weight on the wrong end of the scale. So I think with this new technology, there is no doubt that there's equal opportunities for us to follow through on the promise and fulfillment of insurance as there is in terms of the acquisition process. So I think that's how consumers, that's their expectations. And if 72% of us clients that are positive or mutual around embedded, if that number's to grow, then the follow through as an industry has got to kind of support that. I think so.
Patti Harman (22:51):
Yeah. And that kind leads into my next question, which is what are the benefits to insurers for offering embedded insurance? Does it expand their customer base? Does it give them more visibility? And then also is there a downside to offering it for them as well?
Andy Watts (23:09):
Yeah, good question, Patti. So on the benefits for the insurer then, hey, yeah, you're right. You've got your opportunity to increase market reach, driving up market share. Typically, you can often have higher conversion rates. There's that cost efficiency because you're not going through another, you're going through an existing channel and an existing touch point and you've got the opportunity, although complex to enhance your brand value, you bring that more to the forefront. Although as I've said earlier, that's not always the case. So there's lots of super benefits to recognize for the insurer, the potential downside, I mean there's a few, I mean there's managing the partnership, so that can be complex. Maybe you need to work with like-minded brands, that's probably part of the equation because you're going to develop some collaboration and you want that to be conducive to good outcomes. And I think the technology integration is so much easier now as you pick modern technology, but if you've got older legacy systems, then actually sometimes it's going to be a bit prohibitive.
(24:20):
The set of fees are expensive or they can take too long and the cost of change can cause tension. But I think that's addressed if you use Modern Tech because then you can make changes quicker and deploying them faster and much lower costs. So that's probably the answer to that. Potentially margin dilution, typically the brand's prime brand is going to be wanting a bit of the revenue share as a consequence of this. So you may have to take some cut of the revenue, but hey, that's compensated by having a committee brand with a channel where you're going to be putting a load of numbers through. So that increases the adjustable market. So that's addressed by that. But to be honest, I think the biggest downside associated with embedded is not being in it because I think as time progresses, the standstill option of not participating in embedded insurance means your addressable market is likely to shrink. And so therefore the items I mentioned about managing the partnership, picking the right companies, technology, making sure it's not too costly a margin, all these things are addressable, can have good outcomes as a consequence of addressing it, just things are a bit difficult, but the upside is so rewarding that actually not participating unless you've got an ultra niche product that's on the side that actually doesn't suit to embed in somewhere like that. But if you're not in that space, then actually the biggest downside is not participating.
Patti Harman (25:54):
Wow, that's a very clear way to kind of outline the benefits and the downside. We have covered a lot over the last few minutes. Is there anything about embedded insurance that I haven't asked you or that you think our listeners should know?
Andy Watts (26:11):
Well, I think mean if I'm going to summarize Patti, then while the projection analysis might differ in the detail, there's general consensus that embedded insurance will grow significantly, and I think you've got to be in it to win it. So I think that involves adopting modern technology, but also there's a change in culture here. There's about insurers needing to move quicker than historically. They do have done being responsive, being a bit more entrepreneurial, that changes the mindset. So it's not just about technology, it's also about people and processes and the culture within an organization. But hey, the opportunity is ripe there. So I think insurers have moved in the last 10 years quite actively towards more open technologies and extending their processes outside of their boundaries and providing end-to-end digital processes. This is a natural extension of that capability. So there's nothing foreign, but it's here and it's obviously going to be a big part of the market.
Patti Harman (27:14):
Wow, what a great discussion. Thank you so much for joining us today, Andy. Thank you for listening to the Dig-in podcast. I produced this episode with audio production by Wyn Weis, Jean-Marie. Special thanks this week to Andy Watts of INSTANDA for joining us. Please rate us, review us, and subscribe to our content at dig in.com/subscribe From Digital Insurance, I'm Patti Harman, and thank you for listening.