Why embedded insurance is still better than transactional for financial services
In a nutshell
- Many traditional banks and mature neobanks are looking toward transactional insurance to drive down cost.
- The right user data is key to making add-on transactional insurance work, but said data is difficult to harness. That, combined with long-held user behaviour and complex regulation, make transactional insurance even more of a challenge.
- The best way to drive revenue and user retention is by making embedded insurance work for your users and business.
- A successful embedded insurance program involves a targeted strategy, relevant products and an effective distribution model that aligns with your users and business goals.
Data is everywhere. In 2021, the volume of collected data on the internet increased by 37% over 2020, reaching 74 trillion gigabytes.
There’s been exponential growth in not only the amount of data, but the type of data, being processed in various industries. And this is particularly true when it comes to financial services.
The problem for many in this sector is that this data remains vague and difficult to harness.
And because of that – along with a host of other reasons such as complex regulation, long-established user behaviour and increasing competition – it’s tough to get insurance right.
I know what you might be thinking: we already have insurance embedded in our payment cards or subscription plans, and it comes out of the company’s pocket. Transactional or standalone insurance would drive down that cost.
But doing so might be more of a challenge and end up costing more than you think.
Luckily, there’s a better way to do embedded insurance. One that works for you and your users so you can achieve the goals that really drive your business forward – one that’s more than a cost.
Different types of insurance financial services companies can offer
Let’s start with the basics. Financial services companies can choose from three different insurance distribution models: native embedded insurance, add-on embedded insurance and standalone insurance.
We define embedded insurance as a tech-powered insurance solution that enables any business to incorporate insurance as an add-on or native component of its value proposition.
Embedded insurance as a native component of your core offer
At Qover, we’ve seen both fintechs and banks have a lot of success from fully embedding insurance as a native component of their main product or service.
One example is someone paying for a monthly Revolut subscription which includes purchase protection on anything they buy with their card – thus encouraging them to use their Revolut card more.
Embedded insurance as an add-on to your core service
Add-on embedded insurance (or embedded transactional insurance) is distributed via a B2B2C model, often as an upsell/cross sell when the user is making a purchase or just after. It is complementary to a business’s core product or service, and can be added to your offering at no additional cost.
And finally, there’s standalone or non-embedded insurance, which isn't related to a specific life event or transaction.
One example might be an online marketplace where users can choose to buy a variety of policies, like phone or pet insurance.
We generally recommend that companies start by natively embedding insurance into their offering, particularly if they’re less established and need to build up rapport with their users before selling insurance outright.
In fact, we’ve already outlined our best practices for fintechs.
But we increasingly see banks going about things the wrong way: either by jumping into transactional insurance too quickly or viewing embedded insurance as a burden rather than an opportunity.
Why transactional insurance is so hard to get right
As more and more banks and fintechs pivot from a growth strategy to a revenue-led one, transactional insurance looks more and more attractive.
After all, the cost is on the end user rather than the brand.
That is, if you actually manage to sell insurance contracts. Here are three reasons why transactional insurance remains a challenge for financial services companies.
1. It’s hard to change user behaviour.
Simply put: people aren’t used to buying insurance from their bank.
If I’m buying a new phone, I’d most likely insure it through the seller, manufacturer or even my service provider before going to my bank.
Convincing people to buy insurance from you involves more than just sticking a banner on your app or website, it involves offering the right product at the right time and place for your users (more on that below).
2. Distributing insurance is complex and highly regulated.
Insurance today is how the payments and identity sectors were five or 10 years ago. Regulation is now starting to come into effect, making things even more complex than they used to be.
There are many factors to take into consideration when it comes to regulation and compliance: your status not only influences your ability to distribute insurance, but also how and where you can do so – not to mention the various rules applied per region.
Insurance is a highly regulated and localised industry, especially when it comes to transactional insurance.
In the UK for instance, those distributing transactional insurance need an insurance distribution licence – unless they go through a regulated entity like an intermediary.
Although the Insurance Distribution Directive has harmonised things across the EU to a certain extent, each country can choose how exactly it’s applied. On top of that, each country has its own set of local laws and requirements that insurers must meet and comply with.
3. Policy lifecycle management is tedious.
In addition to regulation, companies often underestimate what happens after launching an insurance program.
Once they’ve come up with the right insurance strategy, product and distribution, it doesn’t always guarantee an immediate payoff.
Transactional insurance comes with lifecycle management, which can include policy renewals, cancellations, claims and more. Not to mention marketing, performance tracking and customer support.
You have to build brand awareness over time, communicate clearly to your users and market your insurance offering.
We’ve seen many companies come back to Qover after trying to tackle all of this themselves.
4. Competition is ever-increasing.
Banks are dipping their toes into additional services, fintechs are popping up left and right and digital darlings are striving for super app status.
Growing your user base might have been the goal until now, but as banks shift to a revenue-driven mindset, retaining users has become the name of the game.
After all, according to Harvard Business Review, acquiring a new user is 5 to 25x more expensive than retaining an existing one.
And what’s the point of having all these users sitting around if they’re not actually using your services?
If your audience isn’t engaged – i.e. using their payment card, depositing money into their accounts, upgrading to a higher plan or buying additional services – then your revenue isn’t growing.
If you really want to engage with your users and make sure they stick around, then transactional or standalone insurance is not going to do much to move the needle.
A well-thought-out embedded insurance strategy with built-in coverage that makes sense for your audience? That’s the path to success.
How to make embedded insurance work for your financial services brand
Whether you’re new to embedded insurance or looking to up your game, creating a winning strategy involves the following key principles:
1. View embedded insurance as a business opportunity rather than a burden
Insurance products as we know them today are complicated and hard to understand. They come with confusing fine print and clunky claims processes. What’s more, it’s often disconnected from our everyday lives and digital expectations.
Embedded insurance addresses these issues head on by being connected to the brands we know and love. It makes it easier for companies to add value to their communities through insurance experiences that customers can easily understand and benefit from.
It’s also a way to can engage with your users in the long run – after all, if they have an incident, they go back to you to file a claim.
This enables you to drive loyalty and engagement throughout the customer journey and reinforce the user behaviour that you want (even more so if you provide a smooth and convenient claims experience).
The key to really making embedded insurance work for your business is having the right strategy: one that is crafted specifically for your customers and business needs.
2. Embed insurance as close to the point of transaction as possible
How do you convince buyers to switch from their current insurance? By attracting them at the right time.
Behaviour might be different buyer to buyer, which is why embedding it as a native feature of your ecosystem is the best way to go. That way, there’s no need for additional steps for users to benefit from their coverage.
Once you’ve set a solid foundation, then you can move into transactional or standalone insurance to further reduce cost.
In that case, you need to be as relevant and timely as possible. And that means embedding it as close to the point of transaction.
The further you are away from the transaction, the harder it is to sell insurance. We’ve seen increased user engagement for our partners when they offer transactional insurance at the right time.
In an ideal world, you could harness user data to cross-sell insurance based on their purchase behaviour.
For example, let’s say a user recently bought a new iPhone. You could follow up that purchase with a push notification or email saying: ‘Your Apple iPhone comes with a 1-year warranty – extend it up to 2 years with our phone insurance.’
The caveat here is that in today’s world, this data remains vague. A bank might be able to see, for example, whether its users are getting their paycheck deposited into their account or using their payment card to pay for their bills or other purchases.
But without specific data on purchases or detailed user behaviour, selling transactional insurance in a meaningful way remains a challenge.
At the end of the day, if your insurance offer isn’t closely tied to a transaction or when insurance is most important, it’s not going to differentiate you from other providers.
3. Build an insurance product that matters
At its core, insurance is an emotional value add. It’s an intangible product that really only matters when something bad happens. This gives companies a unique opportunity to show customers they care and to be there for them in a time of need.
In that sense, insurance goes hand in hand with trust. Customers need to trust that you’ll take care of them when things go wrong. A big part of that is listening to their wants and needs.
In order to make insurance work for your business, you should identify what user behaviour you want to drive and what type of cover can get you there.
A financial services platform that has successfully paired insurance products with its brand narrative is Rewire. One of their main motivations for providing embedded insurance is protecting their community of migrant workers and their loved ones.
By linking embedded insurance to a particular user behaviour, they’re able to drive usage and retention.
As mentioned with Revolut, embedding purchase protection into their payment cards encourages users to use their Revolut card more, particularly for bigger purchases.
The right insurance partner can advise you on which products make the most sense for your audience, but you can give your program an even better chance for success by gathering data from your customers directly.
One example is a simple survey, which can help you gauge what their appetite for insurance is and what they expect from your brand.
In a survey we ran with a remittance fintech, we found that 60% of respondents would use their account more if offered insurance coverage.
Not only did this identify that insurance could play a key role in driving user behaviour, but when we dug into the different types of cover, we found that users were particularly interested in protection against job loss, for example.
The more your product makes sense for who you are as a business, the more meaningful and relevant your insurance program will be.
Seizing the opportunity: orchestrating embedded insurance at scale
Embedded insurance is a surefire way to not only keep users, but to encourage them to use their cards more or upgrade to a higher plan with better coverage. All of this drives revenue for your business.
If you’re going to do insurance, then you need a targeted strategy, relevant products, an effective distribution model and a top notch claims experience – all of which should flow across multiple countries and align with your users and business goals.
Only then can you offer a value-added service that truly matters to your customers.
None of this is easy. Creating a powerful and seamless insurance experience across borders requires a sophisticated orchestrator who can not only provide the missing parts, but handle the entire value chain.