Embedded Insurance: Where insurance is bought, not sold

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Insurance is sold, not bought. That has long been accepted as truth in the industry. Embedded insurance, though, is a strategic play that could make the opposite a reality.

When a digital non-insurance company bundles an insurance product — think buying car insurance when you buy a car, or travel insurance alongside a plane ticket — that’s embedded insurance, and it’s every insurtech nerd’s dream. Embedded insurance presents strategy questions like, Where are the unique corners of the internet where I can sell my insurance? Where are the spaces that don’t have insurance but could use an insurance product? 

We’re only in the very beginning days of what seems to be the moment for embedded insurance. Startups in the space are racing to carve out a significant portion of the $1.3t U.S. insurance market ($6.3t worldwide) by redirecting insurance purchase flows through their own rails. 

The promise is clear: lower CAC, better customer data, and the potential to help other businesses generate ancillary revenue. But let’s not forget: embedded insurance is a distribution play. While the internet is seemingly endless, distribution channels tend to consolidate, meaning embedded insurance may be a winner-take-all market. Which company will make it to the top? 

Embedded insurance presents the future of insurance distribution as it enable companies to meet customers along their journey with the products and services that they are looking for, when they are looking for them. (Rohan Shah, founder, Extend)

Embedded Insurance: What is it?

Embedded insurance is the future-ready technology aimed to solve outdated customer experiences that involve purchasing complex policies as a disconnected second step, created for decades by legacy insurance companies. Instead of being sold as a standalone product, the insurance policy is provided as an integrated component—usually at the point of sale or sign-up. Today's digital-first consumers expect their favorite online brands to embed insurance offerings for all kinds of valuable products and services that they now get online, from extended warranties for expensive electronic products to homeowners and renters insurance or integrated contractors insurance for gig economy drivers. (Darcy Shapiro, COO Americas, Cover Genius)

Embedded insurance is when a non-insurance entity distributes an insurance product. Specifically, when we say embedded insurance, what we’re really referring to are digital non-insurance entities — when Petco offers pet insurance quotes on its website, or when Better.com quotes title and home insurance. Embedded insurance is about easing the distribution of insurance products, where the purchase flow is either directly part of the asset purchase flow or adjacent to it. In short, insurance is sold alongside the thing being insured, for a very short, targeted sales funnel, and an easy purchase experience for the customer.

Embedded insurance has been around for a while now, just by a different name: affinity sales. Extended warranties are a great example of these in a physical format. 

Early digital forms of embedded insurance, or affinity sales, can be seen in travel insurance. Ever since the advent of online travel agencies (OTAs), the end of the purchase flow has offered customers the opportunity to tack on travel or flight insurance (typically backed by Allianz or Zurich). Here, we have a non-insurance entity (the OTA) distributing an insurance product (e.g. Allianz’s travel insurance). 

Looking back, embedded insurance has existed for a long time… we just called it by different names. Affinity insurance solutions bundled alongside other “more pull” products have been around for more than a decade. Getting home insurance on the back of home loan disbursement has existed under the bancassurance model for a fairly long time. (Chiranth Patil, co-founder, Riskcovry)

Not all premiums flow through the internet. In property and casualty markets, direct writers account for 51.4% of all premiums written (those distributed through the internet, captive agents, direct response and affinity groups). Embedded insurance will make up a portion of this 51.4%1. The success of embedded insurance will ride on the success of other digital companies. As more people buy, say, cars online, more people will be funneled into embedded insurance flows.

Why now?

Embedded insurance is riding the coattails of other embedded financial products and the increasing trend of digitalization. Companies like Affirm ($AFRM) are now worth $18b embedding buy-now-pay-later financial products. For insurance, the internet has opened up new distribution channels, especially with verticalized and niche marketplaces proliferating. 

We identify two primary types of embedded insurance companies, which can be segmented in their own respect: 

  1. API-Driven: These companies, like Boost and Matic Insurance, are building APIs that enable other software businesses to plug-in. These, for the most part, are digital MGAs or digital agencies. Just like MGAs and agencies, these companies take a commission on all policies sold. 

  2. Verticalized Approach: These are software companies that own their distribution channel, as well as the rails with which to distribute additional insurance products. We recently profiled Wrapbook, an entertainment payroll startup that also acts as an insurance agency, selling workers comp and related production insurance products. Here, insurance is a secondary business model on top of their primary business model.

Almost any software company can fit in the verticalized approach. A digital mortgage company could open up its own insurance agency and reap the rewards. Tesla has its own specialty insurance for its products. Here, we’re primarily focused on the API-driven embedded insurers. Verticalized startups exist in their own domains and see insurance as ancillary revenue. API-driven embedded insurers are the ones trying to carve out their portions of the vast distribution network the internet provides. 

API-driven embedded insurers take on a few different forms:

  • Digital MGAs: Companies like Boost and bsurance do the underwriting themselves. Via APIs, they’re able to integrate into purchase flows and offer an insurance policy (backed by a specific carrier or capital partner). 

  • Digital Agencies: Companies like Matic and Branch Insurance also integrate into purchase flows via an API. The main difference here is that instead of offering one policy, digital agencies provide multiple quotes, giving the consumer choice. There’s a valid question here: If consumers expect choice, which is the better approach: the digital MGA or the digital agency? 

  • Extended Warranties: Companies like ClydeExtend, and Mulberry integrate into e-commerce purchase flows to offer extended warranties. On the backend, Clyde and Extend administer the policies and handle claims. These startups are not quite MGAs or agencies as they deliver a single policy but they don’t do the underwriting. 

The Pros

Simply put, when compared to traditional distribution, embedded insurance products are better for the insurer and better for the customer. Insurers unlock more data on their customers and access new distribution streams. Customers experience a more seamless buying process that is customized to them. (Steve Rabbitt, CEO, Rein.AI)

The case to implement embedded insurance solutions seems like a no-brainer. Distributors (e.g. the used car marketplace) add an ancillary revenue stream to their business. Consumers get a more personalized quote (theoretically), at a more competitive price and in a more convenient manner. Carriers get greater exposure and more capital in the bank written on promising risk. 

Embedded insurance is more tailored to consumer needs through using on-site context and it improves an insurer’s ability to price. Meeting the consumer where they’re at is not only a better way to capture a sale at a stronger CAC but a better experinece for the consumer. (Brandon Gell, CEO, Clyde)

When it comes to insurance products directly streamlining distribution and getting closer to consumers hits on the exact promise of insurtech: using tech to optimize insurance operations. Innovation in insurtech isn’t necessarily about new insurance products –– it’s using automation to make marginal gains (which do add up in the long run), and better utilizing new data sources for more accurately priced risk. Let’s touch on how embedded insurance delivers those results.

Eliminating Waste: Lowering distribution costs

Embedded insurance eliminates advertising and search costs for consumers. It also cuts down the adverse selection driven by current “shop, swap & save” models. (James Hall, CEO, Salty)

Insurance has historically been an industry where policies are sold. That means employing agents (1.2 million employed in the U.S!) and spending big on marketing. 

The average expense ratio for a P&C premium is ~30%. The costs of administering the policy, acquiring the customer, and other expenses (e.g. investigations) contribute to 30% of your premium. 

Imagine all your insurance premiums being 30% cheaper. Save 15% on Geico? Imagine saving 30%! Embedded insurance cuts customer acquisition costs, though it doesn’t solve the other operational inefficiencies, like claims administration. 

Better Quoting and Underwriting

Embedded insurance solutions exist within the asset’s purchase environment. This could both ease quoting and potentially unlock data for underwriting. 

When tacking on home insurance policies on the back of mortgages, in a digital purchase flow, all the data passes seamlessly for more accurate quoting. New types of data could also be unlocked depending on the platform, such as those that track users over time. 

Let’s return to Wrapbook as an example. Wrapbook is one-part entertainment payroll, and one-part insurance agency. Its primary customers are project-based employees who switch jobs every 3-6 months, opening up a new workers’ comp policy each time. By being the channel for distributing and administering workers’ comp policies, Wrapbook is able to capture which workers file more claims than others across projects and employersIn theory, Wrapbook can be a better insurance agent and turn away bad risk.

Increase the Market

Embedded insurance will lead to a significant expansion of the market for insurance. As a result, consumers can more conveniently and affordably protect themselves, and more attractive risks are to insurance pools. (James Hall, CEO, Salty)

When it comes to non-mandatory insurance products, the more places these products appear, the more opportunities there are for them to be bought. 

Pet insurance has only really taken off over the past few years. Due to its nascency, we’d probably see more new (or recent) pet owners be policyholders versus existing pet owners. 

In 2018, Petco acquired PetInsuranceQuotes.com. By funneling existing pet owners to this quoting platform, Petco can potentially convert more existing pet owners into policy holders. While it may not be a guarantee, embedded insurance does expand the surface area and footprint of insurers across the internet.

The Risks

Distribution is the name of the game with embedded insurance, and it’s a fun game to play. Where can I distribute my insurance product? Or what distribution channels could use an insurance product? Here’s the big risk, though— if vertical software markets have winner-take-all dynamics, won’t the embedded insurance market have the same? And doesn’t that make embedded insurers vulnerable to the whims of the market leaders? 

To phrase it another way, when these vertical markets mature, there may only be a few distribution channels. This will likely lead to a winner-take-all dynamic for (API-driven) embedded insurers. Once you have a Chewy (43% market share) or Petco (41% market share) as a distributor, you have the pet e-commerce distribution channel close to on lock. However, this does give immense leverage to the distributor. As Nikolaus Suhr, CEO of KASKO, puts it: 

Depending on competitive pressures between platforms in monopolistic markets, the platforms may end up extracting high rent. (Nikolaus Suhr, CEO, KASKO)

API-driven embedded insurers then need to constantly expand their channel distribution and add to their product suites that have untapped distribution channels. They need to focus on landing the largest distributor. Moreover,eEmbedded insurers have to figure out how to up- and cross-sell products. Compare this to incumbent insurers, who take on loss-leaders like renters insurance as a way to up-sell other products like auto insurance. 

Some of the incumbents entering the space may be willing to give distributors better cuts because incumbents are financially engineered to be able to take losses at the local level. Some startups like KASKO are focused on just this, by helping larger insurers easily whip up embedded insurance programs.

What’s Next

There are lots of questions still at play here: 

  • Who in the value chain will accrue the most value? The carrier? The embedded insurer? The distributor?

  • Between digital MGAs and digital agencies, which API-driven model presents a more compelling solution for both distributors and consumers? 

  • What happens when these markets mature? Will distributors have that type of monopolistic bargaining power? 

In the coming weeks, we’ll be focused on asking and answering these questions with startup profiles and founder interviews. Subscribe to get these profiles and founder interviews directly into your mailbox!

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Thank you to Rohah Shah of Extend, Darcy Shapiro of Cover Genius, Chiranth Patil of Riskcovry and the rest of the team, Steve Rabbit of Rein.ai, Brandon Gell of Clyde, James Hall of Salty, and Nikolaus Shur of KASKO!

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Here, we can assume that the P&C direct writer proportion will extend to other types of consumer insurance (e.g. life).