Why we’re excited about embedded insurance in 2021
By: Jessica Bartos
Tags: VC, Tech, Insurance, Venture Capital, Insurtech

By contrast, the status quo insurance purchase asks the customer to provide data about the risk in a separate process. In the first place, the data entry process creates friction in buying insurance. Further, this data often has limited fidelity to the truth as people forget information (what material is my roof made of? how much is that jewellery worth?), misunderstand what the insurer is asking (just what is a BS 3621 lock?) or do not report things correctly (have you really never smoked?). And importantly, the data is not updated in real time; it is based on static, historic demographics than actual risk behaviour in real time.

Digital platforms have much more data about the underlying insured risk than the insurers can get via their questionnaires. With embedded insurance, this data could be provided to insurers directly and with much greater accuracy than going via the customer. For insurers, big data can be used to improve underwriting, risk selection, risk monitoring and fraud prevention. Further, behavioural data can be gathered over time, creating potential for usage-based insurance products (a growing field estimated to be worth $25bn already) and new approaches to risk analytics in general. In the long term, we are believers in the power of data to drive innovative ways to think about insurance risk.

3. Trust

Third, digital services command high levels of consumer trust. Tech companies have created superior customer experiences and developed powerful brands, manifested in their sky-high NPS scores. Digital services have an average NPS of 75 vs an average of 30 across various lines of insurance.

Digital services have far higher NPS than insurance (Source: public information)

By contrast, insurance brands are weak and command little customer loyalty. For instance, in the UK, 73% of consumers are looking to switch their insurance provider.

Consumer willingness to entrust Big Tech with insurance has been rising even prior to the Covid-19 induced explosion of digital services. (Source: Edelman and The Geneva Association)

Embedded insurance presents an opportunity to arbitrage this trust gap between insurance and digital. Insurers can piggyback on the positive customer experiences and brands of digital platforms to get better distribution and differentiate. In turn, the tech players get to leverage their hard-earned brands into additional high margin revenue streams and a longer, deeper relationship with their users. As early as 2018, we started to see green shoots of consumer willingness to buy insurance from Big Tech, but we expect this trend to accelerate dramatically.

Finally, injecting more trust into the insurance customer journey, by wrapping it in well-loved brands, should generally encourage more people to buy coverage. At the moment, 2/3rds of consumers believe insurance is doing its utmost to avoid paying claims. Low trust undermines a customer’s intention to seek insurance at all — a loss for the ecosystem as a whole.

Poor communication causes the insurance industry to be poorly understood. Most people have had a negative experience with insurance. (Source: Edelman & The Geneva Association)

4. Communication

Finally, tech players are fluent in “millennial” and command high frequency, positive communication channels with their users.

Millennials and younger generations now make up over 50% of the US population. However, this generation is the least engaged with insurance. According to Gallup, Millennials are twice as likely as other generations buy insurance online and yet are the least satisfied with existing digital insurance options. This explains how new entrants like Lemonade reach multi-billion dollar market caps ($9bn at the moment, up almost 200% from its IPO price), not just on the basis of their written premium growth but due to the promise of unlocking the Millennial insurance consumer. Meanwhile, digital services speak to Millennial and Gen Z cohorts natively, building brands and experiences that naturally delight them.

A second advantage for tech vs insurers is the frequency and tone of their communication. Digital platforms often have multiple, positive touchpoints with the consumer through the life cycle, whether its recurring monthly purchases or daily health data tracking. By contrast, insurers typically only interact with their customers in annual renewals or in claims, usually through conducted through paper or phone. Often, a consumer’s interaction with their insurance is negative as it is centred around a claim or something that has gone “wrong.”

Again, embedded insurance offers a way to bridge these disparities. Insurers can leverage tech’s communication channels and style to boost engagement with their customer base and expand the market by adequately catering to younger generations. Frequent, positive communication channels between an insurer and the insured also unlocks the potential for more active risk management and prevention of claims. Via digital services, insurers could gather real-time data on incoming risks and warn customers in advance to take actions. For instance, when a storm is coming, insurers can send a reminder to park your car in the garage or check that your roof is in good shape.

And digital services win as well with by leveraging their existing assets to enhance their overall value proposition, keep customers tied to their ecosystem, and add profit streams.

What will 2021 bring for embedded insurance

With digital consumption unexpectedly accelerating, new and greater risk protection gaps are arising. Embedded insurance creates a win-win proposition for both tech players and insurers to better protect consumers and strengthen value propositions. Tech players’ control of the customer journey, their data, their trust, and the lines of communication make them best placed to bring insurance into the 21st century.

Insurers represent 10% of the Fortune 500 and industry net profits were over $100 billion in 2019 in the US alone. Yet there has been minimal innovation and a glacial pace of transition to a world of digital consumption. If insurers don’t innovate, someone will come after those profit pools. As Jeff Bezos famously said, “Your margin is my opportunity.” And insurance presents a world of opportunity — for those ready to embed it in our digital lives.

2021 will be the year when embedded insurance starts to come into its own. There is an emerging class of insurtechs tackling this challenge across a range of insurance lines, including Qover, CoverGenius, Kasko, Tapoly, AP Intego, Wrisk, bsurance, Cybersmart, Extend, Anorak Life, and Hepster, amongst others. With Stripe, every company can now offer online payments. With Klarna, every company can offer buy-now-pay-later. We’re excited to find the start-up that enables every company to offer insurance.

Please reach out to jbartos@albion.vc if you’re working on embedded insurance and approaching your Series A!