What do we mean when we talk about Embedded Insurance at Apollo?
One of the hottest topics in Insurance and for some time has been Embedded Insurance. However, the term embedded insurance means different things to different insurance companies. Some believe embedded insurance is any form of insurance integrated into a different product, financial platform or otherwise. For Apollo, we deem embedded insurance as something that is fully integrated into a product and service so that is not visible to the end customer. It is a trusted part of the overall product and service. Anything outside of that feels like an optional add on or affinity insurance. Affinity partnerships in insurance have been around for many years and in many cases still add frustration to consumers, who typically are not motivated to buy insurance. Affinity may very well be a good solution for very simple insurance but embedded insurance presents a significant opportunity for the more complex insurance risks. Whilst the evolution of insuretech has increased the ability for companies to embrace this form of insurance, the fully embedded model we focussed on is still in its infancy, but we believe is the largest growth opportunity and is full of attractive traits.
Why the hype?
At its core, embedded insurance allows insurers to access new customers more efficiently and importantly at a lower cost. It can facilitate a better customer experience and target customers with a better personalised fit from a product perspective. It can ultimately help a company grow its market share within its sector as it elevates their product above its competitors by creating increased trust vs those that do not offer an embedded insurance solution.
Why is the fully Embedded Model more attractive than Affinity?
Affinity Insurance still has very high distribution costs owing to the high level of customer engagement required. Typically, companies that want to offer insurance in this way, purely do so as a source of revenue and as such it comes with high acquisition costs for insurers. Despite slick user experience (UX) and seamless digital integrations, the high level of client engagement continues to result in poor customer experience. The simple fact is most people do not like buying insurance! You are providing an on-demand insurance product that is rarely in demand. These factors can lead to low take up rates and adverse selection (since the product is only taken up by the worst performing risks). This exposure for Insurers tends to make innovation in this form of product distribution slow.
Apollo focusses on fully embedded insurance opportunities as there are many advantages to that model and many of the difficulties with affinity described above do not exist.
Benefits of a fully embedded model:
• Allows companies to build trust in their product/ platform with their customers
• Increased levels of customer engagement with companies
• Leads to increased product innovation, bridging true insurance gaps
• Less adverse selection for insurers
• Shift from personal lines products to commercial products (reduced conduct risk)
• Greater alignment between company and insurer
These benefits are why Apollo 1971 started with a focus on the sharing economy. That industry was one of the earliest adopters of fully embedded insurance solutions as they realised it was a vehicle for trust in a much-needed disruptive model.
As well as pure distribution, companies can take risk and this can align all parties to embrace risk management and detailed risk modelling. Companies are more willing to share data as a result and therefore embrace data driven models. Affinity approaches can be very market share driven and as such they can be price driven. Also, as they have a high level of client engagement, they want simplistic models and often do not use all the data they have available.
The key differences between Apollo’s definition of Embedded Insurance vs Affinity/On-Demand products are highlighted in the table below:
| Embedded Insurance | Affinity / On-demand |
|---|---|
| Bridge true insurance gaps | Tend to be market share plays of existing products |
| Used to grow trust and customer engagement | Used to grow revenue for companies |
| Large alignment between companies and insurers | Lack of alignment between companies and insurers – typically Price driven |
| Companies can take share of the risk | Companies rarely take any risk |
| Companies can embrace complex rating models | Simplistic one size fits all models |
The embedded insurance opportunity is huge. However, there can be downsides for the ultimate customer. It can create over insurance if many different products and services come with insurance integrated that are similar and over-lapping. This is what Apollo focus on true insurance gaps and have limited interest in insurance distribution plays designed just on capturing market share of existing products.
An example of the power of Embedded
Let’s focus on a ‘New Mobility’ use case, an area where we see significant digital partnerships between large platforms or marketplaces, Insuretech’s and Insurance carriers.
A large last mile delivery company wants to launch in the UK. Their mission is to be the platform of choice for connecting independent contractor (IC) drivers who have their own vehicles to merchants who want to distribute their product on-demand to nearby customers. A simple insurance programme for this company at launch would be to purchase a corporate insurance programme to cover their liabilities and require all drivers to bring their own commercial insurance. Prudent risk management would be then to check each driver’s insurance to make sure it provides the required coverage. This can be both labour intensive, whilst potentially creating insurance gaps and a lack of control.
As the company becomes more sophisticated, collects more data on its operations, raises more capital to support growth, it may consider creating a more robust insurance programme. At this point, the company can consider building an insurance programme to offer to its ICs, or create an embedded insurance programme for all ICs as part of the service provided by them as a platform.
If they build an affinity scheme for the drivers, whilst the UX may be far improved, the driver still has to go onto the platform, opt-in to the insurance, and then pay for a product they don’t really want. A barrier for driver growth still exists. It also means that there will likely be insurance gaps between what is the driver’s responsibility and what is the delivery company’s responsibility as a platform. This cross-over can lead to overlapping insurance that can create disputes between the insurers of the different policies.
The more comprehensive coverage would be to purchase an embedded programme covering the delivery company as a platform and all IC drivers. As they mature, the delivery company could realise that whilst under the affinity model, they are not paying for insurance directly, they are ultimately paying more to their drivers who need the insurance. Indirectly they are funding insurance. By embedding insurance instead, the delivery company benefits from economies of scale. They’re then able to build sophisticated rating models based on their data to further optimise the insurance cost, which they can then ultimately use as a strategic advantage against their competitors. The delivery company benefits from more robust coverage and by lowering their internal administration and resource burden as there is less of a requirement for checking multitudes of insurance documentation from third parties.
At Apollo 1971, we believe that the fully embedded insurance solution here shifts insurance from a necessity purchase to one of huge strategic value that can differentiate companies form their competitors and elevate trust with their regulatory stakeholders. That is the sort of strategic partnership that Apollo ibott 1971 was built to foster.
By Chris Moore, President, Apollo ibott – Commercial