While I've been a proponent of embedded insurance, as have many others, an article published recently should cause some pondering. The article argues that embedding insurance is really just a way to pester customers to buy coverage they don't need.
"You aren't going to take a chance on dinging that rental car, are you?"
"Yes, we just recommended that laptop you're purchasing, but, you know, that model breaks down a lot, so we highly recommend buying a warranty."
"Your trip isn't covered. Are you sure you don't need travel insurance? Are you really sure? Really? We'll give you one more chance...."
The article took me back to the arguments I heard in the early days of mobile phones, in the early to mid-'90s, when carriers talked about how great it would be for, say, coffee shops to know that a customer was walking by and to be able to ping their phones with a coupon for a latte. So many people rejected that idea as nagging, even stalking, that carriers backed off.
I still think embedded insurance, done right, can make the purchasing process more efficient and take out costs while expanding the reach of certain types of insurance, both existing types and potentially new ones. But it's worth looking at the counterarguments, if only to make sure that embedded insurance is, in fact, done right.
Ian Gutterman, founder and CEO of Informed Insurance, makes the argument against embedded insurance in two parts, first laying out why he believes it's bad for consumers and then explaining why he thinks it's even bad for insurers.
"Almost every type of insurance being offered as 'embedded' could easily be bought separately. We are not talking about creating new types of insurance for novel risks. It is mostly auto, pet, comp and warranty.
"The main reason they are being repackaged as 'embedded' is because the insurers realized they are bad at selling them on their own. The hope is by using a middleman they can catch you in a weak moment where you might buy pet insurance from the pet store that just sold you the puppy.
"It’s emotional manipulation rather than truly addressing a need."
Gutterman notes that proponents of embedded insurance often argue they're just nudging people toward coverage they need but says, "more often than not, the motivation is what is good for the corporate interests rather than the consumer."
Despite that emphasis on corporate interests, he thinks that embedded insurance is bad for insurers, too, at least in the medium to long term, because it makes their insurance a commodity that can be swapped out for someone else's at any moment.
"When you choose to be an embedded insurer, you are... a nameless, faceless entity. The customer doesn’t care who you are. They attribute all the value they perceive from the transaction to the retail brand that you partnered with.... [And] more often than not, the retail partner couldn't care less if another insurer stood in your shoes....
"You don’t have to be a game theory expert to understand how this will end. Distribution partners will demand bigger and bigger pieces of the pie. If you don’t cut them another slice, they will drop you for another partner."
He also warns that embedding the insurance could lead to adverse selection:
"The partner will want to sell your product to every customer since that is incremental fee revenue for them, even the ones with a high likelihood of a claim or willingness to commit fraud. Unless you demand they receive a healthy chunk of their payment as profit-based contingent commissions, they won’t care about your loss ratio."
Gutterman says embedded insurance will only work if it provides three things:
- "Better coverage than available in traditional channels
- Lower price than in alternative channels
- Easier buying process with clear explanation of why it’s a good price and offers better coverage"
That's a pretty daunting set of arguments.
But before you give up hope, I suggest looking at a piece that Chris Bassett, a senior director with Capgemini Invent, published on ITL in January. He says embedded insurance won't fulfill its potential if the coverages being sold are only the sorts of point-of-sale products that Gutterman disparages. But Bassett has high hopes if embedded insurance moves to "point-of-design."
"The opportunity lies in exploring the affinity between the insurance solution and the non-insurance product and how we can build unity in a singular value proposition. Doing so requires introducing insurance at the point-of-design, rather than as a bolt-on at the point-of-sale."
As potential examples, he suggests:
- "Connected home solutions with advanced safety and maintenance features built into the property that detect and automatically manage risk (turning off appliances or mains supplies and automatically contacting emergency services)
- Personal vehicles designed to support wellness-focused internal recreational spaces as an extension of a bundled life, health and vehicle insurance package
- Sports equipment (shoes and clothing) with sensors woven into them that monitor performance and health as an extension of a goal-directed training and wellness package that includes personalized life and health insurance risk mitigation and protection, and that connects to a branded community of similar users."
For me, Gutterman describes a scary series of potential land mines, while Bassett lays out a way to start navigating through them. But I encourage you to explore further, both with the full pieces I've linked to here and, perhaps, with some of the other smart pieces on Gutterman's blog.