Embedded Insurance: a $3 Trillion market opportunity that could also help close the protection gap



Summary

  • Embedded Insurance, part of a broader movement towards Embedded Finance, is about getting more affordable, relevant and personalised insurance to people when and where they need it most.

  • It’s enabled by abstracting insurance functionality into technology so that many more third-party organisations and developers can seamlessly incorporate attractive risk mitigation solutions into their customer journeys.

  • For insurers it creates the potential for lower cost distribution to more individuals and firms, access to more data to enhance product innovation and reduced underwriting risks.

  • For third party organisations Embedded Insurance can enhance value propositions and create new revenue streams.

  • For investors and tech entrepreneurs it offers opportunities to create valuable new ventures.

  • For society at large it helps close the insurance protection gap – the difference between the level of coverage that is economically and socially beneficially and what’s actually bought.

  • In Property & Casualty alone, Embedded Insurance could account for over $700 Billion in Gross Written Premiums by 2030, or 25% of the total market worldwide.

  • Including aspects of Life and Health coverage, at current insurtech multiples Embedded Insurance could create over $3 Trillion in market value…for those who enable it.

  • All players – insurers, banks, fintechs, investors, non-financial retailers, product manufacturers, service providers, digital platforms and software companies - should look carefully at this fast-emerging space and define strategies of ‘where to play’ and ‘how to win’.

This report is split into four sections:

  1. Context – insurance is something that nobody wants but everyone needs

  2. Embedded Insurance – to affinity and beyond

  3. The ‘Industry Stack’ – fragmenting and transforming

  4. Market Sizing - $700 billion in P&C alone

  5. Conclusion - Options and Actions

(Questions and comments, contact me at simon@simon-torrance.com)

Context – Insurance is something that nobody wants but everyone needs

Insurance is needed more than ever today as the ‘protection gap’ – the gap between the amount of insurance that is economically and socially beneficial for individuals, households and firms and the amount of coverage actually bought – is getting wider and wider.

From 2000 to 2020 the protection gap doubled, according to the Swiss Re Institute, driven by global trends in digitisation, urbanisation, climate change and a lack of effective competition and innovation.

In private pensions alone the Geneva Association, an international think tank, estimates that the gap is over $20 trillion worldwide today, ie. most people cannot afford to live comfortably into old age. And if the main family breadwinner dies today the majority of humanity is not able to maintain its living standards and repay debts. The Covid crisis has exposed and exacerbated this situation.



Source: Mercer Analysis for the World Economic Forum, 2017


If the gap between what’s needed and what’s being bought is so vast, one would think that this is a golden opportunity for the insurance industry. However, according to McKinsey, 80% of insurers made negligible or negative economic profit in the years running up to the Covid crisis and, projecting forward, the situation is likely to get worse.

What we see is a fundamental weakness in the business model of the insurance industry - an inability to effectively match supply with demand.

Why is this?

On the demand side, insurance products are complicated, inflexible, expensive, regularly mis-sold, difficult and annoying to buy (all those forms to fill in), and the benefits to customers are uncertain and distant.


On the supply side, related to these issues, the costs of distribution (of selling products to customers who don’t understand, trust or want them) are enormous at roughly 50% of total industry costs. Insurers are expert at managing risk, but their underwriters lack enough rich, real-time data to be able to create affordable and personalised products that can keep pace with market demands, accelerating trends and the new risks that go with them.

Laws and regulations designed for a pre-digital age restrain them further. And the incentives for traditional sales channels reinforce behaviours that do not encourage customer innovation or value.

I live in the UK, one of the most sophisticated insurance markets in the world. Recently tried to buy car insurance for my 17-year-old son from an insurer I’ve been with for 10 years. They offered me an annual policy of £8000 that was 4 times the value of the car itself. In the end I found a provider that offered an app that tracked real-time driving behaviour at a quarter the price. Separately, I thought I needed some specific top-up health cover and got advice from an agent. After I made a claim, the price of the policy went up by more than the cost of the treatment if I’d got it privately. I’ve since cancelled the policy.

My bank knows more about my assets and income than any other organisation but, in spite of Open Banking regulations in the UK which allow 3rd parties to access my bank account data with my permission, none of my insurers have sought to do so to offer me attractive insurance solutions.

Compared to the 1.7 billion unbanked or the near 50% of the world’s population living on less than $6 per day my protection problems, like yours, are trivial.


The big question then is: how can the insurance industry re-think its business model and deliver greater value to the market, for the benefit of all its stakeholders: individuals, families, firms, its partners, government, and investors, in all corners of the world?


Embedded Insurance – to affinity and beyond…

Embedded insurance is emerging as a new way to distribute insurance services efficiently. It doesn’t solve the protection gap, but it addresses many of the supply and demand issues and could act as a catalyst for wider industry business model transformation.

It is part of a wider movement towards Embedded Finance and goes well beyond today’s approaches to affinity and partner distribution approaches. It is enabled by APIs, modular software and AI and the emergence of new innovative intermediaries (I describe this in detail below).

Specifically, Embedded Insurance means abstracting insurance functionality into technology to enable any third-party product or service provider or developer in any sector to seamlessly integrate innovative insurance solutions into their customer propositions and experiences, either as complementary add-ons to their core offerings or as new native components.

For end users - individuals or businesses - it means simpler and more affordable solutions at the touch of a button, at a moment when it is most relevant. For third parties it means a new way to differentiate, attract or retain users, or generate new sources of revenue.


Let’s look at a few examples.

Ant Group manages a digital financial services platform in China with an enormous user base due to the ubiquity of Alipay and the superapp they’ve created around it. In terms of insurance they spotted a large underserved market in low-income rural areas that traditional insurers were ignoring.

Source: Ant Group IPO filing 2020


Rather than trying to resell existing insurance products from one or two partners they created their own insurtech platform to connect demand with supply in a new way.

Ant Group focuses on understanding the needs of its consumers, educating them about the value of insurance and then designing compelling solutions for them with its suppliers.

Its insurance partners take on most of the underwriting and regulatory risk and deliver products to Ant’s specification. It now offers 2000 customised, affordable and flexible life and non-life products from 90 different insurance suppliers.


Source: Tellimer, November 2020


For example ‘Quanminbao’ is a simple pension annuity product with premiums starting from the equivalent of 15 US cents. Customers receive payment from the Alipay app when they retire. In health, ‘Haoyibao’ provides guaranteed lifetime cancer protection with annual premiums of circa $15 for payouts of $600,000, even for those already diagnosed with cancer or with pre-existing conditions such as diabetes.

Consumers get to understand the value of insurance which increases their adoption and creates opportunities to upsell other solutions with payments and disbursements managed through its superapp platform. They are turning unmet needs into wants.

On the Property & Casualty (P&C) side Ant’s insurtech is itself embedded in Alibaba’s Taobao product market place, providing shipping returns protection products to small businesses for 50 US cents. This has increased trust in Alibaba’s platform which has resulted in higher volumes of transactions. Since Covid, Ant has sold 50,000 new business interruption policies to small offline merchants, offering payouts for very short periods of time as they are needed without long-term commitment.

As a result of this embedded strategy they are closing the protection gap and, as a result, Ant’s insurance arm has become the largest online insurer in China with over 500m customers. Insurers have benefited from low cost access to a large new customer base, proactive assistance in product innovation, better product pricing, improved underwriting results and enhanced claims management through automated servicing and fraud detection using advanced technologies such as Natural Language Processing and Machine Learning. Ant takes 20% of the revenues, its insurance partners keep 80%.

Similarly, in India, where only 3% of the population have insurance, big digital platforms like Amazon and Paytm are starting to bring affordable protection solutions to the market.

Uber is another big online platform with a close relationship with its users including its 3 million drivers worldwide.

At any one time, depending on local regulations, competitive threats and new market opportunities, Uber requires the flexibility to provide its drivers with different types of insurance, benefits and incentives, related to vehicle and personal injury cover, sickness, paternity pay or other income loss.

Some of its insurance solutions are provided to drivers for free, some are invisible, some are optional add-ons. Some are related to when the driver is ‘in service’, some not. Given the size of its driver base, it has the potential to offer more complex products like pensions, life and health insurance in the future, in addition to other financial services like the bank accounts and loans it already offers.

In all cases Uber prides itself on the simplicity of its user experience and requires insurance solutions which are easy to adopt, good value and quick to claim against.

The problem has been that traditional insurers have not been attuned to the need for such flexible, niche products at the speed that Uber moves and within categories that are new to the industry. Drivers are not ‘employees’, Uber does not own a ‘fleet’, its drivers don’t want ‘annual policies’, any downtime is lost income.

As a result, Uber, like other digital native organisations, is increasingly working with a new breed of insurers (‘digital MGAs’ and others) who are providing more relevant solutions that can be embedded more easily in their driver experiences. Here’s an example, from the UK, demonstrating a new 3-minute sign up process: https://youtu.be/eM34tTGMAFE


Like Ant Group Uber provides insurers with access to a large new market, with very low distribution costs. There is clearly a win, win, win here, for users, insurers and platforms like Uber if business models - and digital capabilities - align.


Retailers and Product Manufacturers

As more business moves online a long tail of smaller retailers and product manufacturers with razor thin margins are looking to offer add-on services like theft and damage protection at point of sale. They need to be tailored to the niche requirements of their customers, affordable and flexible. For some, these sorts of ancillary service can equate to up to 50% of their net profits.

In the past, due to the technical and contractual complexity of dealing with traditional providers, only the very largest retailers and merchants and could afford to integrate these types of extended warrantees and only on large value items. Yet Amazon has found that offering warrantees even for $40 backpacks increases their purchase rate. New insurtech intermediaries (described later) are making it easier and cost effective for any online merchant to create similar offers.

Source: Extend

B2B Software-as-a-Service companies like Square, Intuit, Gusto, Xero and Toast provide operational management systems to small businesses in multiple vertical sectors. Given their real-time knowledge of the financial status of their customers they are in a perfect position to add personalised insurance solutions to the range of other financial services they already provide. This adds significant additional revenue for virtually no customer acquisition costs.


Embedded Insurance is about bringing demand and supply for risk mitigation solutions more closely together within contexts that make insurance more relevant, and therefore more attractive.

To understand the breadth of its potential application into the future we can start to ask ourselves questions such as:

  • Who knows more about the risks relating to my health and more relevant mitigation interventions? My insurer who asks me a few generic questions every year in return for a 10% discount on my premium, or a new wellness service that processes data from my Fitbit, ‘23 and Me’, banking transaction data and my medical records (with my consent and control, of course)?

  • Who can offer me life cover that pays out based on the real time value of my assets and my family’s indebtedness rather than based on some generalised situation decades in the future? My life insurer, my bank, my investment advisor, my small business accounting software, or some combination?

  • If I am a small hold farmer in an emerging market with no bank account and a low income, who is better able to engage with me and my peers about affordable weather or injury protection solutions? An insurer, a broker, my mobile phone operator, a remittance provider, a farming equipment supplier, my utility company, my farming cooperative, or WhatsApp or WeChat?

While retailers, manufacturers, airlines, banks, professional associations and others have been distributors of insurance products for a long time, Embedded Insurance has the potential to take this to another level.

BIMA is a great example of embedding affordable health insurance into the mobile telephony ecosystem, closing the protection gap for 35 million Africans today. The key stat is this: 75% of these customers are accessing insurance for the first time.

One of their customers in Ghana sums it up nicely: “I have a very large family and was unable to work due to swollen legs. As a mason I hardly made enough money and owed creditors 1,200 Ghana Cedi. I filed for a claim and received 1,800. I am very thankful.”

No traditional insurer can anticipate the specific needs of a myriad of niche requirements, and it’s not cost effective for them to try. However, others who are closer to customers can, enabled by new technology.

Let’s look at how this is happening in more detail.



The ‘Industry Stack’ – fragmenting and transforming

Technology is modularising and then enabling a re-configuration of the insurance value chain. An explosion of insurtech companies is creating better versions of the elements of the ‘industry stack’ that used to be provided just by primary insurers. Investment in this innovation reached a new peak of $2.3 billion and 5 IPOs in the third quarter of 2020 alone.

As we’ve already seen in the banking sector even balance sheet, solvency and other regulatory obligations can be separated from the stack and made available to the embedded insurance market in the form of ‘License-as-a-Service’ (more on this below).

So, who are the new players in this market?

Traditionally the majority of insurance was sold through agents, brokers, and in some markets by banks and third party affinity partners, using the phone, face to face methods…and lots of paper work.

Online aggregators became popular in some markets by streamlining discovery processes and price transparency.

Insurance products and their delivery were managed by primary insurers, either multinational companies like Axa and Allianz through their local operations or many, many individual local players.

Insurers also sell ‘Direct to Consumer’ (D2C) and many insurtechs do the same, avoiding broker commissions, but incurring huge sales costs.

The distribution of P&C insurance today, for example, is illustrated in the diagram below. While there are in fact quite wide variations within the regions themselves and also between individual P&C product lines, you’ll see that, overall, fully Embedded Insurance (as we’re defining it in this report) is very small today, about 2% worldwide today and even less in Life and Health. (More details in the Market Sizing section below).


Let’s now explore how it could evolve.

Below is a framework for understanding and exploring the changes coming to insurance distribution. It’s deliberately simplified, omitting many of the nuances and complexities that exist by product line and geography. But we can use it to review what’s happening for each of the major constituents, who are numbered on the diagram.


1. Customers – individuals and businesses – are, as we’ve discussed, generally underserved by the insurance industry today as global trends relating to demographics, digitisation, urbanisation and climate change intensify the disruption to traditional ways of living, at rates never before seen in human history. The insurance protection gap is getting larger and we need new ways of thinking about it if we, our children and grandchildren are to live comfortably on this planet. Customers have the closest relationships with organisations they interact with regularly or at important moments in their lives, and these are not insurance companies.

2. As digitisation blurs the boundaries between traditional market sectors new digital ecosystems, orchestrated by powerful platform businesses, are emerging. McKinsey estimate that 30% of global economic activity - $60 Trillion - will be mediated within these new ecosystems by 2025. Amazon, Google, Facebook, Alibaba, Tencent are just the early pioneers. Platform businesses are emerging in every conceivable walk of life, B2B as well as B2C. They win when they efficiently match supply with demand, enable new levels of innovation within a market and solve intractable problems for customers. At scale they generate huge datasets and insights in real time about the activities and interests of their users, creating ideal markets for embedding insurance.

Amazon Pay, for example, announced this week that it was selling auto insurance in India, promising a two-minute sign-up process and no paperwork. “This, coupled with services like hassle-free claims with zero paperwork, one-hour pick-up, 3-day assured claim servicing and 1 year repair warranty – in select cities, as well as an option for instant cash settlements for low value claims, making it beneficial for customers” said a spokesperson.

PingAn is by far the leading exponent of the platform business model today amongst insurers. It has established a portfolio of its own platform ventures in adjacent sectors like telemedicine, automotive sales and real estate. These have attracted huge new user bases and environments in which to embed its financial services products and becoming its dominant channel for originating and maintaining customer relationships. PingAn plays prominent roles in nearly every part of the diagram above, creating spin off wealth management platforms like Lufax (value $36bn), wildly inventive neo insurers like ZhongAn (value $7bn) and technology infrastructure platforms like OneConnect which is used by 1400 other financial institutions (value $8bn with a 17x price-sales ratio). It invests 1% of its revenue each year in technology R&D and is one of the world’s biggest patent holders in AI and blockchain.

During the Covid crisis PingAn persuaded the Chinese government to allow social insurance to be embedded into its Good Doctor platform. It has discovered that 34% of all medical consultations can be done remotely, online, without sacrificing quality. This has led to the establishment of 400 officially sanctioned ‘internet hospitals’, creating a big new market for other embedded finance and insurance solutions.

3. Covid has accelerated the move to digital services for organisations in all sectors, and increased the attractiveness of end user fintechs and insurtech apps. Companies that deliver new value with compelling user experiences are winning market share across all sectors. Customers spend more time with them and, like the platform businesses which many of them aspire to become, they provide an ideal new channel for insurance products. Startup insurtech app Thimble, for example, offers on-demand insurance to micro-businesses. 75% of its customers have never taken out business insurance before.

4. Physical products, machines and, in the not-so-distant future, human bodies are becoming more connected and smart, generating new levels of data that, combined with AI, can support, for example, the wider adoption of parametric insurance (claims paid out instantly based on pre-set parameters).

Those who make the physical products are looking to embed more added value ancillary services. For example, at a Tesla earnings call earlier this year Elon Musk said: “We’re building a great, major insurance company. If you’re interested in building a revolutionary insurance company, please join Tesla. Especially if you want to change things. This is the place to be. We want revolutionary actuaries.” He said that insurance could deliver 30-40% of Tesla’s total value in the future.