Embedded insurance is rapidly transforming the insurance landscape. This innovative approach bundles insurance digitally with a wide array of online products and services. Sales of embedded insurance reached $87.4 billion and are projected to increase at a 20.2% compound annual growth rate (CAGR) from 2023 to 2032. This integration allows insurers to partner with businesses selling everything from rental cars and airline tickets to concert tickets and real estate. The process is powered by technology that streamlines underwriting, policy administration, and claims processing.
The tech-driven nature of embedded insurance allows insurers to actively define, monitor, and adjust their insurance products using real-time data. This capability enables quick adaptation to market demands and consumer preferences, an asset in today’s swiftly evolving environment. As a result, insurers are experiencing increased attachment rates (sales) compared to separate insurance offerings. They also benefit from higher margins than traditional insurance, which often carries greater distribution costs. However, traditional insurers looking to offer embedded coverage must successfully address internal challenges and learn to compete with agile, digital-native insurtechs and tech-driven managing general agents (MGAs). They must act quickly to avoid being left behind.
The Challenges of Legacy Technology
The primary internal challenge for traditional insurers centers on legacy IT systems that are inflexible and monolithic. Furthermore, traditional models depend on conventional distribution models, like sales agents, which limits their ability to adjust to e-commerce. Typically, they also lack easily documented data definitions and business application programming interfaces (APIs). This absence makes it challenging and costly to integrate their technology infrastructure with the modern APIs of partners, third-party solutions, and wider ecosystems. Evolving regulatory and compliance prerequisites add another layer of difficulty, especially when insurers embed their products on multiple platforms.
In contrast, insurtech companies and tech-driven MGAs leverage modern, API-driven architecture. This allows for seamless integration with e-commerce platforms and other partners when embedding insurance products. These players harness advanced data analytics to offer highly tailored insurance solutions, supported by streamlined processes that reduce costs and enable competitive pricing.
Two Leading Business Models
Insurers aiming to offer embedded insurance should begin by selecting the business model that best aligns with their goals. Two primary models have distinct roles, responsibilities, and revenue mechanisms.
A Pure Risk Carrier with an Outsourced MGA
In this model, the insurer concentrates on underwriting, product management, and risk assessment, partnering with an external MGA responsible for customer interactions and maintaining relationships with distribution platforms.
The insurance carrier strengthens its core business, enabling product innovation and diversification without directly managing customer interactions. Revenue comes from returns on underwriting risk. The MGA earns a commission on each sale. This commission allows for rapid scaling without financial underwriting risk. It leverages consumer interaction data to improve customer journeys and enhance the ability to drive insurance sales. However, the MGA relies on the insurer for pricing and product innovation.
An MGA and Risk Carrier
In this fully embedded model, the insurer provides both the technology and the insurance products, operating as both the MGA and the risk carrier. This dual role provides comprehensive control over product, pricing, and distribution, in addition to bearing the financial risks associated with underwriting.
In this case, the carrier earns commission revenue from product sales and the returns on capital for carrying the insurance risk. This model demands robust capabilities in risk assessment, claims management, and compliance, making it a more complex, and potentially more profitable, model.
The model offers three primary benefits: the insurer maintains close contact with clients, captures real-time data to tailor insurance offerings, and strengthens its core business. The model also provides a platform to dynamically adjust its offerings and refine pricing models, positioning itself as a fully autonomous insurance provider.
Enhanced Business Capabilities
After selecting the right model, carriers must assess existing capabilities and identify gaps. Businesses should analyze their technological architecture with its distinct layers, each having unique requirements. For example, the engagement platform layer requires front-end capabilities, such as management of a partner portal and orchestration of the customer journey. Both are essential for the smooth onboarding and servicing of embedded-insurance products. A pure risk carrier relies heavily on the MGA to manage these interactions, making these capabilities less crucial.
Other crucial capabilities across the insurer’s layers include:
- Orchestration: Quickly gathering the latest quotes and fulfillment policies from, and managing interactions between, different partners in the ecosystem.
- Data Management: Effectively managing data and using it to handle risk and enhance underwriting processes (pure risk carriers), and leveraging it for customer engagement and core transaction processes (combined MGA and risk carriers).
- Complex Insurance Functions: Handling complex insurance functions like underwriting, claims management, premium payments, and risk assessment.
- Transversal Capabilities: Providing integration management, cybersecurity, privacy, business as usual, and seamless communication. These functions ensure a high level of resilience, security, and regulatory compliance.
A Robust Architecture
To be positioned for success, an insurer’s IT infrastructure must align with strategic goals and be sufficiently resilient to adapt to the embedded-insurance landscape. Several key success factors warrant consideration:
- Partner Integration: A robust IT architecture should seamlessly integrate with external partners through business-friendly APIs and middleware. This integration ensures smooth onboarding and interoperability. It also adheres to regulatory standards and maintains high integrability across platforms.
- Product Modularity: Flexibility is essential to offer tailored insurance solutions. The architecture should be modular, supporting extensive customization and configuration without code changes. This modularity promotes innovation and ensures the architecture adapts to future market needs.
- Process Efficiency: Improving operational efficiency demands automated and configurable workflows that streamline customer onboarding and service delivery. Minimizing manual input improves user experience by ensuring fast, accurate, and efficient service delivery.
- Service Choices: Architecture that offers core capabilities as services provides scalability and flexibility. It should also provide configurable options that meet internal requirements and diverse partner needs. These options enable insurers to respond quickly and effectively to market changes.
- Flexible Setup: Architecture must be lean, with minimal reliance on legacy systems, to promote agility and innovation. This structure assures the system can quickly adjust to new technologies while meeting evolving regulatory requirements.
- Platform Excellence: The target architecture needs to be built with technical excellence in mind. Key elements here include high performance, robust security, and optimized data management. Such an architecture should support advanced analytics capabilities to offer insights for enhanced decision-making.
By incorporating these success factors into their target architecture, insurers can build a resilient, agile platform to meet the ongoing requirements of the embedded-insurance market.
Buy, Build, or Reuse?
The next step involves a practical question: Should insurers buy, build, or reuse components that support their business capabilities? The answer varies based on the business model and influences the insurer’s strategic direction. Each option presents trade-offs.
Buying is the preferred option when speed to market is essential and existing solutions provide the necessary functionality without significant customization. This approach minimizes time and resource investment, however, it may present trade-offs in flexibility, customization, and control.
Building is most suitable when a highly customized solution is required. This approach offers the greatest flexibility and opportunity for market differentiation. However, in-house solutions can be time-consuming and require resources and technical expertise.
Reusing existing assets, like established APIs, modular platforms, and proven components, can strike a balance between cost, speed, and customization.
The Right Vendor
Choosing the right vendor is crucial for a scalable and effective embedded-insurance offering. When assessing collaborators, regardless of whether for embedded solutions or standalone elements, insurers can apply a structured evaluation framework. This framework ensures vendors align with strategic and operational needs.
Evaluation criteria include fit with the insurer, functional and nonfunctional requirements, and cost considerations. Vendors excel in some areas and fall short in others. Often, a trade-off exists between choosing a best-of-breed solution that performs optimally in specific areas and a more cost-effective option that meets essential requirements without necessarily excelling across all dimensions.
Insurers should prioritize criteria that best align with their long-term vision and product strategy while supporting current operations.
A Transformative Opportunity
By integrating insurance directly into the purchasing journey, insurers can enhance the customer experience, streamline operations, improve margins, and become more flexible and dynamic. We recommend insurers take the following steps:
- Reevaluate existing distribution channels to identify opportunities for embedded partnerships that function effectively across digital ecosystems.
- Invest in scalable technology that enables real-time underwriting, automated claims processing, and hyper-personalized offerings tailored to customer behavior.
- Prioritize strategic collaborations with high-volume partners to maximize reach and optimize unit economics.
- Foster a culture of agility, continually refining product structures, renegotiating contracts, and leveraging data-driven insights to improve margins and customer engagement.
By taking bold steps today, those insurers adopting embedded insurance will lead the industry tomorrow.
