The Knotty Question about Embedded Finance

Embedded insurance is a rather controversial discussion to have. When you are successfully running insurance businesses across Western Europe you tend to sideline the topic. The region is the world’s second largest insurance market. It features some of the highest penetration rates. So why risk to become irrelevant with seamlessly embedding protection into purchase journeys of customers?

There is only so much insurance you need. Western European countries like the UK, Ireland and France hold front-runner position in penetration in direct gross premium written per GDP. Nevertheless, growth rates have been steady over the past decade across the key insurance markets in Western Europe. They are mainly driven by the non-Life insurance segments. While Life insurance penetration has been declining in some markets, growth rates in Property and Casualty remain between 3 and 6%.

So why would insurers stop selling insurances to customers directly and, instead, embed the risk coverage as an integrated feature of a product, service or platform. Embedded insurance fuses protection into the customer journey and moves primary insurers into the background.

Insurance - higher acquisition costs than any other industry

There is a seemingly straight answer: insurance has one of the highest cost of acquisition of any other industry. For an average retail customer it may take up to seven years to become profitable to the insurer. Cost to acquire a new customer can be seven to nine times higher than to retain an existing one. For analysts, there is no other industry pressured till date to bridge a similarly vast gap between a low-interest product and high-effort customer acquisition.

This is, to some extend, owed to the complexity of many insurance products. Value (and acquisition cost) is created when advising customers to select the appropriate coverage. Every interactions counts. Did you know that, with the few interactions insurers own, increased engagement between the company and the insured can double or even triple customer satisfaction.

Embedded insurance, made of frenemy material

To open up alternative avenues to customer access, embedded insurance is an important option. Anyone working in the industry will have cautiously observed how large tech players such as Amazon and Apple expand into financial services.

Amazon offers protection without ever becoming an insurance. The global reach of these companies offer unchallenged access to data and growing customer pools. They address consumer needs in a way that insurance companies cannot compete with. Undeniably, this is serious competition to the established primary insurers. But do they have what it takes to become your frenemy?

Few established financial firms - such as JP Morgan, Western Union, American Express - have partnered to deliver financial products to Amazon customers and expand their customer reach. And give up part of the value chain.

Th knotty question about direct-to-consumer channels

For most other carriers loosing access to customers and direct engagement in a trust-based business model is considered rather uncomfortable. It will rapidly reduce actors such as primary insurers to their core, such as product innovation and underwriting. As such, the key question of the industry remains on how to develop and expand its direct-to-consumer channels cost effectively.

Today's insurers primarily consider two options:

• Mobilising agents and brokers to sell more products. This, however, is often excessively expensive. Cross and up-selling endeavours requires heavy training investments and digitally supported sales processes. In addition, the industry is expecting increasing regulatory pressures on harmonised and high selling standards which drives additional costs of distribution.
• Buy or partner with new digital-direct insurers with direct customer touch-points and fully redesigned customer acquisition journeys. These, however, show disappointing trajectories. A large part fail to become profitable over reasonable time horizons. In fact, share prices of new digital business models like Root, Oscar or Lemonade (graph below) have been deteriorating over the last few months and have recently dropped to their lowest levels ever.

As a comparison, B2C and B2B2C models reported high losses over the past years while B2B software businesses have remained rather stable. B2B models managed to succeed in enabling the digitisation of the traditional insurance value chain. They progressed faster than primary insurers managed to digitise their chain end-to-end.

About embedding insurance, or rather choosing the right partner?

Embedded insurance needs to be considered, after all. While large insurance groups embrace the opportunity to collaborate with InsurTechs - which do not disrupt the entire insurance value chain yet specifically attack, disrupt or improve parts of it - disintermediation will inevitable advance.

And yes, there are retail examples where both parties win when partnering on embedded services: Starbucks & Spotify, Apple & Mastercard, Uber & Spotify, Amazon & American Express, Nike & Apple. Why not in Finance? With the ramp up of digital customer journeys across industries, selective disintermediation makes sense when it opens new distribution channels, significantly improves customer experience and drives innovation.

Clearly, it only works when you are willing to challenge current views on and on those customer segments and triggers in the journey for which you claim brand, ownership and control. Personally I believe that the knotty question is not about embedding insurance. It is about having clarity on your data strategy and defining the right level of partnership for which embedded services will tap into sizeable growth.

A good read (9 megabyte though): Drake Star InsurTech Report 2022

Mirjam Bamberger is member of the Management Committee of AXA's European Markets & Latin America. Until January 2022, she has been?CEO of AXA Luxembourg and CEO of AXA Wealth Europe. Prior to this she served in various roles as a board member of AXA Switzerland, having completed 15 years of international trajectory across US, Asia and Europe in High Tech and Financial Services.