Embedded, Parametric, Usage-Based. Insurance with Positive Vibes

A Dark Side of Insurance

Insurance, in general, does not evoke positive emotions. As a rule, we buy insurance because either we are forced to do so by law (e.g., motor third party liability), or we take it out in the face of a specific need (e.g., the purchase of a house), or we were seduced by irresistible charm of an insurance agent. We do not like insurance, because we associate it with unpleasant, even tragic situations such as death, illness, accident, fire, flood, bankruptcy. Our contacts with insurers are usually limited to received remainders to pay the premium (which, you agree, is not something that makes us exceptionally happy) or making a claim (which is even a more painful moment). And even if nothing bad happens, the overall perception does not improve, because we have a sense of unnecessarily spent money on something totally of no use. So can insurance be positive at all..? Yes, it can! A new generation of Embedded, Parametric, and Usage-Based insurance, powered by data and technology, is here to help.

Embedded Insurance - Triggers Positive Emotions

The hottest word which made its way into the everyday vocabulary of insurance professionals?is Embedded Insurance. According to some estimations it will generate USD 3 trillion by 2030, which is almost 50% of the worldwide gross written premium today! Embedded Insurance is a smart way of combining personalized insurance with the other product or service offered by a non-insurance company in the frictionless digital customer journey where insurance is contextually linked with the main purchase, easily understood, and accessed by clients. We may say it is “one-stop shopping” or more precisely “one-click shopping.” Some insurance sceptics would say it is too naive to be true – offering customers exactly the insurance they need, at the time they need it, in a way that makes it easy to understand – it is not how insurance works. Insurance is like science. It requires scientists – actuaries, agents, claims adjusters - to explain it. Yet, another science - technology - comes to help and lets the magic happen. The rise of?Application Programming Interfaces (APIs), Big Data, Internet of Things (IoT), Machine Learning (ML), and Artificial Intelligence (AI) that gather massive amounts of data and digest it with the speed impossible for any human, makes it possible. Technology helps to create personalized, dynamic insurance solutions, synchronized with your lifestyle, supporting you daily, and not only in the event of unfortunate events. Examples:

• Bike insurance embedded within the bike rental; a popular micro-mobility service used by city riders. Beautiful views and the wind in two wheels can distract and lead to loss of balance and a fall. The policy added to a rented bike is activated automatically when you are cycling. In case of an accident not only it covers the costs of a broken bike, but also provides a real assistance and medical treatment to you and your broken bones.
• Ticket cancellation insurance embedded in booking services. It guarantees reimbursement of costs when you must cancel your holidays, hotel, flight, or other event for reasons such as getting sick, losing a job, car accident, theft of passport, flooding at home, etc. There are even policies that guarantee good fun or money back if you are disappointed with the event.

Parametric Insurance - Always Takes the Weather with You

There are several pain points in standard indemnity-based insurance that can put you in a cloudy mood, for example, a complex underwriting or claims handling process. The payout from a traditional policy does not happen immediately. It is a costly, long-lasting, and exhausting process causing much tension between the policyholder and the insurer. Parametric Insurance is totally different because it works before a bad event happens. It is based on an objectively observable triggered event (parameter) rather than a claim for a real loss. It basically covers the probability of a predefined event happening and pays out an agreed amount instead of compensating for the actual loss incurred. As the name suggests, parametric insurance pays the benefit when so-called parametric trigger is fulfilled, for example, there is too little rain. Payouts are automatic because it is quick to verify if the observable trigger event (like the rainfall) passed the threshold specified in the policy or not. This type of insurance definitely enhances customer experience because offers the simplified claims process, reduced time to pay and the guaranteed payment. When certain condition is met - be that a weather condition or any other parameter- a benefit is paid. Instead of engaging in David vs Goliath battle for compensation, the customer experience becomes more friendly, direct, immediate, and much more trusted. Examples:

• Travel Weather Insurance. You will receive a guaranteed benefit in the event of deteriorating weather, e.g., a decrease of temperature or a lack of sun during summer holidays and lack of snow during your winter skiing.
• Flight Delay Insurance.?In the event of a flight delay you will be proactively contacted and automatically compensated with a predefined lump sum. The process is fully digitalized and there will be no extra steps (even clicks) in claims handling process.

Usage Based Insurance – Rides with You

There is some injustice in traditional insurance pricing schemes and collective risk models, where premiums depend on a set of declarative, static data such as the age and experience of a driver, vehicle type, engine power, declared by a client when applying for motor insurance. Usage-Based Insurance (UBI) is based on much more accurate, dynamic, and personalized information regarding the actual vehicle usage. From the insured person’s perspective, the benefits of the Usage-Based Insurance are straightforward – you pay a significantly lower premium if you drive shorter distances or use your vehicle in a more responsible and safer manner. The Usage-Based Insurance brings also benefits for insurance companies such as better risk selection, reduction of claims frequency, improvement of corporate image thanks to positive social and environmental impact (less road accidents, reduced carbon footprint). The Usage-Based Insurance was a topic among insurance professionals since decades but it is now when it has gained momentum, accelerated by the rise of new technologies like Telematics and Internet of Things (IoT), often hidden under the hoods of modern vehicles. It has become much easier to track, score, and reward good driving patterns with such data power. Examples:

• Tesla, Volvo, Ford, General Motors, and other OEMs already offer “pay-how-you-drive” insurance policies bundled with their cars. The policies are up to 60% cheaper for drivers who use vehicles safely or cover less distances.
• Uber and Bolt, flagship represents of gig economy that pride themselves on simplicity of the user experience, offer flexible “pay-as-you-drive” insurance which is monitoring when a gig driver is “in service,” and when not, and adjusting premiums accoringly. In the Baltics and Poland, the solution is provided by the insurtech Cachet.

Insurance Walking on Sunshine

Insurance can be more positive. Data and technology harnessed by insurtechs, pioneering insurers, and also non-insurance companies entering the insurance playground, gave birth to totally new concepts like Embedded, Parametric, and Usage-Based Insurance. Those solutions change the fabric of insurance and enable to insure what traditionally is uninsurable. But what is the most important, they enhance the customer experience and make insurance a lovable thing. A policy available on one click, ?a claim paid instantly, a decent cash back that rewards safe driving – those are the bright sides of insurance.