Embedded insurance: the path to a global safety net
In a nutshell
- Insurance as we know it today is broken and disconnected from its true purpose of caring and protecting people.
- Insurers should ensure the value of insurance goes back to the end user by maximising their claims loss ratio.
- Embedded insurance can help businesses reach a number of strategic goals and contribute to a global safety net for all.
Everyone pays a small contribution so that when an unlucky event happens to one person, we all contribute to helping them.
In that sense, insurance is all about caring and protecting people so that we can live our lives to the fullest. It’s also about enabling businesses to operate and helping them navigate through the storm. Think about it: insurance saves lives.
And yet, insurance as we know it today is broken. People tend to distrust insurance – no one likes thinking about it.
But why is this? Where did the insurance industry go wrong?
Insurance companies need a different objective
Insurance companies measure their performance through their ‘combined ratio’.
Simply put, this is the sum of all costs related to claims, administration, acquisition and other things like reinsured costs, divided by the total earned premiums.
If the combined ratio is below one, then the insurer made a profit.
The combined ratio is usually split between the ‘loss ratio’ – which represents the cost of claims payouts – and the rest, which we call the ‘expense ratio’. The expense ratio is directly linked to the efficiency of managing insurance and the effectiveness of distributing it.
In this context, a traditional insurance business has the following objective: a combined ratio below 100%, thus minimising both the loss ratio and the expense ratio.
But does this stay true to the core mission of insurance: to care and protect people?
Not exactly. The loss ratio is actually the best way to determine whether an insurance program is generating value for the end user or not. The higher the loss ratio, the more value insurance has and the greater the impact on people’s lives.
Therefore, the only objective insurers should have is: a combined ratio below 100% while maximising the loss ratio.
This is the only way to ensure that insurance companies reconnect to the true purpose of insurance and repair this broken industry.
How embedded insurance helps build a better society
What is embedded insurance?
A lot of people have different interpretations of embedded insurance. Some people believe it only concerns small insurance products such as warranty cover, while others believe it relates to upselling insurance at the point of purchase.
While that’s not entirely wrong, the concept of embedded insurance is much broader than that. Industry expert Simon Torrance defines embedded insurance as:
‘Embedded insurance means abstracting insurance functionality into technology to enable any third-party product, 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.’
In that sense, embedded insurance benefits the final user (the insurance beneficiary) and creates value for the business adding insurance to its offering.
Advantages of embedded insurance for end customers
Insurance will never be easy to understand. After all, insurance stems from protecting you against the obligation you have to repair damages caused to a third party.
The definition of said damages, events and the causal relationship between the two is laid out in the civil code. And of course, each country and jurisdiction has its own interpretation of that.
As a consequence, insurance is inherently complex and will remain so.
Embedded insurance makes it easier for the end user to understand their cover. One example is the cover delivery platforms offer their couriers, such as the program Deliveroo has with us at Qover.
Because the insurance is embedded in their app, couriers are protected the moment they log on for work without having to research their options and decide which cover they need.
Embedded insurance can also close potential insurance gaps. For instance, once a customer buys a bike online, they wait for it to be delivered. In the meantime, they won’t be able to buy insurance for their bike because they don’t know the exact start date for the insurance contract.
But, if the bike retailer embeds insurance into their online shop, this could be a one-click add-on for the customer. That way, the insurance API connects the activation of the contract with the bike distributor’s CRM so that the rider’s cover automatically starts as soon as the bike is delivered!
On top of that, the bike insurance is personalised to each customer because it takes into account the specifics of the bike they’re buying – for instance, if it comes with an anti-theft tracking solution, the cover could be cheaper.
All of this creates a seamless customer experience, like what we implemented with Belgian bike brand Cowboy.
Embedded insurance can also significantly reduce distribution costs – hence reducing the end price and bringing us back to the idea of sharing the risk instead of over-individualised pricing, which goes against the fundamental goal of insurance: increasing cover for all.
Advantages of embedded insurance for non-insurance companies
With embedded insurance, customers are offered insurance at the right place and time, typically when the risk is top of mind. Therefore, it is a very effective channel for companies to generate additional revenue by cross-selling complementary insurance products.
But embedded insurance is much more than a revenue tool. Ultimately, it can help businesses build a unique value proposition to truly differentiate themselves on the market.
All this while enabling them to achieve their strategic goals, such as lowering customer acquisition costs, increasing retention, driving behaviour and building closer customer relationships.
Since a picture is worth a thousand words, let’s illustrate this through our partnership with Rewire.
Rewire is a remittance solution. It allows foreign workers in a given country to easily send money back to their family in their home country.
In a strictly business sense, Rewire aims to increase its app’s usage – basically, that a user only sends money through Rewire each month rather than several other apps.
So the strategic question was: How could a remittance business leverage embedded insurance to increase the usage of its app?
But in an emotional sense, Rewire is also thinking about the needs of its community.
Oftentimes, the foreign worker is the only source of income for their family. And unfortunately, if that worker becomes temporarily or permanently incapacitated due to an accident or illness, then their family will have to fight for their survival.
This is where the ‘magic’ of embedded insurance comes in. By embedding an insurance product that continues to send the family money in the worst case scenario, Rewire gives the worker and their family peace of mind.
And if one of the conditions for cover is that the worker needs to send a certain amount of money per month, then it incentivises usage and helps the remittance business reach its strategic goal.
This is certainly one of the most powerful examples of embedded insurance creating value for both a business and its users, ultimately reconnecting insurance with the virtues of caring and protecting.
What does the future of embedded insurance look like?
We can only dream of a world in which people don’t need to buy or even think about insurance anymore. But with embedded insurance, this world could be made possible – where insurance is embedded everywhere and people are fully protected no matter what happens.
I like to think of this as a kind of social security on steroids – a global safety net anyone can fall back on when needed.
Embedded insurance has the potential to resolve some of life’s inequalities. In its purest form, it’s truly a unique way to protect and care for everyone.
My gut feeling is that by removing all friction in the insurance world – from distribution to insurance being automatically included to whatever else – we would only need a small part of the GDP to build this global safety net.
Let’s think twice about this: could we build a society in which the combined ratio equals the loss ratio at 100%?
That way, we restore the purpose of insurance and ensure that the value goes back to protecting end customers against life’s worst outcomes.