Narrowing the Protection Gap with Embedded Insurance
The age of embedded insurance is upon us — one where consumers can purchase insurance concurrently with a product or service. This seamless technology offers protection to consumers as part of their customer journey, provides retailers with an enhanced value proposition, and insurers with access to valuable customer data for future personalized products. Tune in as special guest Graham Gordon, Sapiens’ Director of Product Strategy P&C EMEA joins host Amanda Ingram, Sapiens’ P&C Product Strategy & Marketing Manager, to discuss how embedded insurance offers real value and is a win-win for all in today’s global marketplace.
Amanda Ingram|Graham Gordon
Amanda Ingram: Hello! Welcome to the Sapiens Insurance 360 podcast. I’m your host, Amanda Ingram, Customer Proposition and Product Marketing Manager at Sapiens, and I’m so glad that you’re out there listening; this is where we discuss the latest news, trends, and issues from across the insurance solutions and technology spectrum.
The age of embedded insurance is truly upon us, as companies of all kinds, from consumer products to auto manufacturers to airlines, are unlocking value from weaving insurance into purchase, use, and upkeep of assets and services. This seemingly “one-off” insurance policy is opening companies to a whole new class of insurance customers, and in the P&C market alone, embedded insurance could account for over $700 billion in gross written premiums by 2030, or 25% of the total market worldwide. So is the sky the limit for embedded insurance? Is it an opportunity, or a growing competitive threat as nontraditional players potentially jump into the insurance marketplace?
To help us answer these questions and more is Sapiens’ own Graham Gordon, Sapiens’ Director of Product Strategy, P&C EMEA. Graham has over 20 years of broad experience in a variety of roles in the business arena, including sales support and enablement strategy marketing. Prior to Sapiens, Graham was at LexisNexis Risk on the data products side of their business. He’s been at Sapiens now for two and a half years, leading our P&C strategy team. Today’s topic is “Narrowing the Protection Gap with Embedded Insurance,” and Graham, welcome back to the podcast!
Graham Gordon: Thank you, it’s great to be back!
Amanda Ingram: Graham, this is amazing. This is your third appearance on our podcast. You’re very much a seasoned pro at this point!
Graham Gordon: Maybe but I’m not that old, not that seasoned!
Amanda Ingram: So let’s begin! Talk to us about embedded insurance, the pros and the cons. As we mentioned earlier, it seems that embedded insurance provides an easy “one-off” insurance policy that protects consumers, while also “democratizing” insurance by making it more accessible for all. But all those mini claims and subsequent processing creates a lot of work and overhead, right?
Graham Gordon: Yep. So let’s make this real. So I’ve just renovated my kitchen. I purchased a fridge, a freezer, a washing machine, a TV, a kitchen table. And I also purchased some nice new artwork for the kitchen because I’m rich and famous. Now I don’t bother with traditional contents insurance anymore because the purchase of the insurance at point of sale of the fridge, the freezer, the washing machine, the TV was so easy and I’m not particularly price sensitive, but because the better insurance costs were so fractional.
Yeah, $10 for three years and a $500 fridge, but yeah, so what? But then I had a fire, and first thing I wish I’d purchased the fire extinguisher, but never mind about that because I’m insured. And the problem comes in when I start thinking of this good, [but] oh wait, I now have to make a separate claim for my fridge, my freezer, my washing machine, the TV, the kitchen table and my artwork. I forgot to cover it, dammit. So let’s unpack what I’m saying here. So embedded means millions of embedded insurance policies sold at a very, very low value and a low cost. And that also means there’s going to be hundreds of thousands of claims process where it needs to be close to no cost, admin, overhead, etc. to process them, because of the value of the policies and what they’re covering. And then the final bit of that story is, look, this isn’t going to suit anybody. So the risk for the consumers has to be identified. The artwork, the other things, I forgot about, you know, that’s the coverage gap here. And what I’m saying is the numbers you highlighted earlier, you know, watch out for analysts over forecasting this but it is an interesting place to be.
Amanda Ingram: Wow, that’s fascinating, Graham. And some great anecdotal information there.
Graham Gordon: It’s almost a true story as well!
Amanda Ingram: So Graham, tell me, what do you think the lines of business are the most likely to be impacted by embedded insurance solutions and will embedded insurance distribution reduce the cost of insurance, or would it shrink the protection gap that leaves consumers and business underinsured?
Graham Gordon: Well, let’s stick to a couple of, you know, real stories as well to make it easy to kind of unpack some of the issues we’re talking about. And I think the big question for all of us is, will embedded replace or complement traditional insurance? So I’m a consumer like everyone else. So let’s start with travel insurance because it’s the easiest one to understand. And there’s two stories here. So last year, I had a flight canceled. I had one of five flights canceled last year, by the way. I was on that flight that could not fly over, I think it was Nigeria’s airspace due to the revolution [that] was taking place there. So my flight got turned back around. And now I’ve got travel insurance and they said claim from the airline first, then come back to us. So I claim from the airline, you have to fill out their forms and they rejected it because of the act of war clause they have. By the way, the other four were storm-related, so they are also rejected. Now, ask me about the insurance form I then have to fill it in the second time around. So I’m just not going to do it. I’d like to, but I think I know the outcome already. I’ll get a small partial payment, but I’ve forgotten about it and it’s a waste of money all around. But I am covered for something dramatic, like a health emergency, so no big deal. If I take that story and compare it to what we’ve worked on with one of our customers, actually in Turkey, if I was to buy the same ticket, it’s purchased at point of quote with a ticket sale as a pure embedded insurance product, and there’s a link in the app for real-time flight information.
If there’s a delay for over two hours there’s a payment straight into my account within those two hours. And that covers food, accommodation, and things like that, sticks about $200 worth. If there’s a three-hour delay, I get automatic lounge access. And here’s the difference: if I was their customer, I would not have touched anything. And by the way, I’m still covered, still covered for something dramatic like a health emergency. So take these insurance kind of buzzwords, embedded parametric payment, no proof claim, automate straight-through processing. Which of those stories is best and is that the traditional experience I had? But the first story or the embedded story? Second one. And I think the real question here linking back to that again is what’s the real benefit? The true answer to that is the real benefits [are] for both. For the insurer, embedded is all about data-driven products. They’re automated, they’re lower-cost processing, they’re low-cost claims. And then more critically, it’s an excellent first touchpoint for insurance for a number of consumer segments. I have that as a customer now, I have that person as a customer now. The acquisition cost of that, well, it was someone else’s acquisition cost in terms of the ticket I was buying, and they’re as low as you’re ever going to get. The big question now is, can I walk the consumer up through the more traditional product sets that my company offers, and that’s a big question we’re helping some of our customers with. And then for the consumer themselves, well, look hassle free. There’s no excess, there’s no deductible. So if there’s a benefit to this, it’s a shared benefit and it has to be a good thing, right?
Amanda Ingram: Absolutely. It definitely does. And you certainly managed to bring this to light in a way that makes it easy, certainly for me to understand. As we mentioned earlier, Graham, embedded insurance, it really looks like it’s an enormous opportunity for insurers, but at the same time, could it also be a competitive threat as nontraditional insurgent buyers look to enter the markets. What do you think?
Graham Gordon: I think, well let’s say traditional insurance companies will have a lot to learn from the processes and the mechanisms of selling embedded insurance. And there is an opportunity here and it’s a huge opportunity. It’s not new. But despite the hype, there has not been a major shift in business models toward this model yet, except for maybe in a couple of cases like the extended warranties that now begin to look a lot more like insurance policies then obviously travel we talked about, and then some of the phone gadget, laptop insurance-type products. And so it can learn a lot from that in terms of how to process and automate things. But I think the big one for the insurance companies is this thing called the network effect. So I’m an insurance company and I am selling pet insurance today. And today I’m going to sell it online or I’m going to sell it via an aggregator or an agent or a broker. So effectively they’ve got two touchpoints for the consumer. Now, if I start to embed insurance into products such as, I don’t know, vet subscriptions, food subscriptions, walking services, kennel clubs, breeder services, mobile grooming, and the service platforms. I don’t have a pet, so maybe they’re more. But all of a sudden, my two touchpoints, they have become hundreds and that’s the network effect. So Google network effect after this. And the network effect is something that drives exponential growth for an organization. So that’s huge. It’s just thinking about how embedded can change the distribution mechanics of insurance companies. And I’m really excited to be working on some of those things.
The second area, you know, fast-forward this into the future, where we subscribe to things rather than buy and own them. I always go back to that quote from the World Economic Forum that we’ve all heard of. You know, own nothing and be happy. They’ve backtracked a little bit of that since 2016. But regardless, this is all about motor. So what happens when motor manufacturers start to sell the cars under a subscription service? And by that, I mean you pay $600 or $800 for a car and it has everything in it apart from the fuel, including embedded insurance. And I think BCG talks about the value that’s been driven into this at the moment. BCG tracks investments around 1.6 billion that’s been spent on companies selling like this. Plus you’ve got the car manufacturers themselves. What we can’t get to at the moment is the number of people electing to buy like this or subscribe. Sorry, but we can’t get to some of the electric car sales where this is all happening. And that makes sense. So we think about embedded insurance policies, traditional car ownership, take out the cost of maintenance and fuel, like you have a car with an engine in it and all of a sudden, that insurance is a larger percentage of the total cost of ownership. So I’ve seen figures from Germany mainly, you know, 13% of car sales are electric, 10% of those sales are sold via subscription with insurance embedded. What does that mean? It means for every 100 cars sold, 13 electric and one car’s got a subscription with embedded insurance. So what I’m saying here is, look, the volume is not there yet, but this is the metric to watch very closely as I’m convinced it will change as we go forward.
Amanda Ingram: There’s an awful lot there to think about, isn’t there? And I’d like to explore this a little bit further, particularly this network effect that you talked about. So let’s take this notion of new players disrupting the existing embedded insurance market a little bit further. Is this something that you can see larger consumer companies, especially online companies like Amazon and eBay, etc., pursuing eventually?
Graham Gordon: Well, this is the high value statement of the podcast. I honestly don’t know because they’ve tried before and they’ve largely stopped. Amazon, I thought would do a lot better, but they closed after 15 months last year and now they’re embedded insurance providers is via one partner, same as Uber. One partner equals no choice. And Google has tried to embed in some of their services and stopped. And the banks, well Bancassurance should grow and retail should be back, so they stopped everything at the minute but they should be back and I think they should be back. Why is the big statement? Because we’re fast approaching an AI age and the banks and the Amazons of this world, the big retail, they probably have more data than anyone else on the planet. And if they’ve got more data than anywhere else on the planet, they should be able to use it a lot better. So I’m kind of expecting them after this pause for thought to start coming back into the marketplace, big guns blazing in a year or so’s time.
Amanda Ingram: That’s fantastic. Graham, thank you for that. We’re almost out of time, but I do have one final question for you. What potential obstacles and challenges exist to embedded insurance sales? Are we looking at regulatory issues or potentially the risk of embedded insurance weakening direct consumer relationships with the carriers, particularly as buyers opt for solutions embedded in the platforms of their preferred e-commerce product or service provider? Give me a little bit of thinking around that.
Graham Gordon: Okay. So the best thing I always do is just go back and say, let’s look at this from the consumer, you know, perspective. So we talked about the network effect, we talked about distribution, but long-term embedded insurance may actually limit consumer choice, customer choice. I like it because it’s just convenient. But I’m also presented with a, you know, a predefined set of coverage options. And that lack of variety, I think might be an issue. And I think over time that kind of, you know, lack of variety, lack of competition, might result in higher premiums over time. So that lovely concept at the moment where it’s low cost, good value could be lost. And then I think there’s a huge risk of overlooking alternatives. That’s the protection gap we talked of know right at the start of the conversation, you know, remember my fire, my hypothetical expensive artwork that wouldn’t be covered because I’m so used to, you know, buying embedded insurance at point of purchase of a capital goods or something and buying. And I think that protection gaps are going to become an issue. So from a consumer’s perspective, I can be really tempted to accept the embedded insurance, but I’m also limiting my choice and I’m limiting my ability to explore alternative options and that lack of comparison might result in missed opportunities for me, for better coverage, or more cost-effective solutions or that pathway into a more traditional insurance policy. So that’s the first side of the story. The second side of it is the obstacles for companies that sell embedded and have that kind of, global reach to consumers. I think we’re seeing the EU nation states looking more at the domination of those two or three companies. You know, we always know who they are and almost saying, hey, enough. And I think if they step out of court too far, they’ll get even more attention. How I track this, I do read the analyst reports, but I also look at job openings. And just in case my boss is listening to this, not to move from Sapiens, but to understand, where they’re heading. Because if retailers are hiring insurance executives, you know their direction of travel. By the way, largely not at the moment, but the banks and car manufacturers are.
So what I tell my customers and what I say to them and get a bit of reaction to this is, hey, look, it doesn’t matter. And everyone’s like, what? I go, it doesn’t matter because we can prepare. And this is all about the digital insurance platform story that we’re used to now to configuring, to building, to connecting to the market wherever the market’s going. And that’s a super confident statement to make because of the way that the software is now designed and developed, the no-code configurations, the ease of product design. Yeah, how we can embed it or publish it, omnichannel and design the customer journeys to fit the distribution, the analytics, the AI, whether it’s drive, machine learning or not, as the message is so simple. Number one, you can experiment here without breaking the bank. Yeah, try embedded products, try partnering, see what happens. If it goes mass market, you’re in a really strong place. If it doesn’t, guess what? You haven’t spent too much money figuring it out. And then if embedded does take off the way the analysts are talking about the business, our insurance customers need to pivot or the themes we’ve spoken about today to make it mass market. Well, we can then pivot with speed with it, because that’s the way the software is designed. So it’s an interesting message to sign off with. Slightly probably different than we were expecting to hear. But I think that it’s really important to say, look, we can’t plan for the future, but what we can do is we can react really, really quickly to it.
Amanda Ingram: Right, and that’s been absolutely fascinating. Some fantastic insights, and you’ve given us an awful lot to think about on a topic that I’m sure we’ll be hearing much more about in the insurance market.
Graham Gordon: Absolutely.
Amanda Ingram: We really appreciate you taking the time and spending your time with us today, thank you! To our listeners, as always, thank you so much for tuning in. We love hearing from you, so if you have comments and would like to follow us on social media, please reach out to us on our channels. And don’t forget to subscribe to the podcast and thank you once again for listening. We’ve got more coming, so be sure to tune in next time to Sapiens insurance 360.
