Embedded Insurance: Challenges and Opportunities

In this article we discuss the growing phenomenon of embedded insurance (insurance taken out as an addition to another main commercial transaction) and some of the key regulatory and commercial issues that arise.

Emerging technologies are facilitating partnerships between insurers and non-insurance brands to create value and opportunity.

This is particularly the case with embedded insurance, which is insurance purchased as part of, and an adjunct to, a commercial transaction relating primarily to another product or service. So for example, a customer purchases tickets to a music concert and as part of the process is offered insurance cover paying out in the event that they cannot attend for certain reasons such as illness or transport delays.

It can therefore be seen that embedded insurance displaces the more traditional arrangement where insurance cover is taken out as a “second step,” after the underlying asset or event is confirmed. Many are familiar with the idea of embedded insurance, and it is not new, but there has been a step change with the use of technologies such as Big Data¹, artificial intelligence (AI) distributed ledger technology, APIs² as well as cloud platforms. Together these reduce cost and allow for the easy movement of data between systems and different parties in the chain which has significantly increased the opportunities in this field.

An example here is Cover Genius, a leading insurtech company specialising in embedded protection, which has developed XCover. This enables Cover Genius to distribute any line of insurance or other types of protection and handle claims in almost any country, currency or language, all through a single API. Embedded protection is provided for several industries including airlines, travel companies, financial services, logistics, ticketing, gig economy and benefits companies.

Regulatory and supervisory considerations

It is obvious to say that the regulatory landscape for embedded insurance is complex, and the legal and the diverse regulatory requirements of each relevant jurisdiction must be taken into account. Some examples of particular considerations follow below.

Licences

There is a general prohibition in most jurisdictions against a person conducting certain activities unless that person is appropriately licensed, and the role of all parties involved in the distribution of the embedded insurance product must be considered carefully, including whether they require licencing. If the retailer of the product is subject to a licensing regime then in practice this can cause a tension – retailers which are not used to financial services regulation can be reluctant to obtain a licence, yet some form of licence/authorisation is necessary for the product to be distributed in the way in which the parties intend.

Remuneration

Remuneration is typically seen by insurance regulators as something which might influence the performance by a regulated intermediary of its obligations to the customer. The remuneration payable to parties that participate in the distribution process of insurance policies is often subject to rules to avoid any conflicts of interest. It is common that there are, to a greater or lesser extent, requirements around disclosure of the remuneration payable to the various parties in the chain of distribution of insurance policies, which might limit the nature, amount or the timing of the payment. Understanding how these operate in each jurisdiction is of key importance.

Consumer protection

As by definition, embedded insurance is not the primary product being sold to the consumer, they may pay little attention to the details of the insurance policy that they are being sold during the process. The purchaser might not have otherwise sought out the insurance, and they may not consider the terms of the cover, such as the excess, limits or exclusions and whether it truly meets their needs. Due to the relatively quick nature of the transaction, they might not take time to consider or investigate whether they could already have cover under an existing policy. Insurance products can be complex, and are of course being sold in this scenario without financial advice. 

This means that some jurisdictions have put in place consumer protection requirements in relation to embedded insurance.³ The aims of such protections are clearly laudable, but they must be balanced so as not to stifle the benefits of embedded insurance. Embedded insurance often gives consumers a welcome opportunity to consider the purchase of insurance, where they otherwise might not have turned their mind to doing so, or would not have had the opportunity.

Another issue is that the customer might be seen on one view as not having a truly free choice of supplier. In the UK, from the point of view of the FCA, it is likely that more thought will have to be given, for example, to the fair value element of the Consumer Duty where the customer is unlikely to be undertaking an exercise of considering different insurance providers in respect of the cover.

It is also important that the customer is not specifically required to take out the insurance product as a condition of acquiring the goods or services in the primary transaction. This has the potential, amongst other things, to raise competition law concerns.

Intellectual property and data

Embedded insurance involves (at least) an insurer, a technology provider and a non-financial services intermediary. The protection of each party’s intellectual property in the value chain is of paramount importance, and this can involve a number of complexities where insurance is involved. Each party needs to be clear what intellectual property was owned by each party prior to the collaboration, and how any joint intellectual property created as part of the collaboration will be treated. Similarly, the data generated as part of the agreement can be very important. The agreement between the parties needs to address amongst other things what will happen if the agreement ends, who has the right to the IP and the data and other information needed to service the contracts of insurance. 

Concluding comments

Globally, many jurisdictions are approaching embedded insurance with caution as regulators and industries seek better to understand and appreciate the opportunities and to assess the corresponding risks it brings to consumers and to the economy. Consumer protection via regulation will always be key when considering novel combinations of technology and financial services. Nonetheless, the regulations need to be drafted and enforced in a manner that manages these risks but does not stifle innovation, as embedded insurance often results in consumers being offered the opportunity to mitigate their risk with insurance, filling what might otherwise be an insurance gap. Embedded insurance is undoubtedly an important tool in the market.

This article was co-authored by Dr Anthony Tarr.

Footnote

1. Big Data refers to the enormous datasets which insurers have been collecting for many years and can now augment with other datasets and analyse for insights relevant to particular categories of risk, the risk profile of individual insureds, potential fraud and for targeted personalised marketing.
2. API is the acronym for Application Programming Interface. The API enables companies to open up their applications’ data and functionality to external third-party developers and business partners, or to departments within their companies. This allows services and products to communicate with each other and leverage each other’s data and functionality through a documented interface. Programmers don’t need to know how an API is implemented; they simply use the interface to communicate with other products and services. For more on the technical aspect see, generally, “IBM Cloud Education,” 19 August 2020 https://www.ibm.com/cloud/learn/api.
3. For example, see the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Australia) which implements an industry-wide deferred sales model for add-on insurance; in effect, introducing a four-day pause between the sale of certain primary products and the sale of associated embedded insurance products, the purported reason for the requirement being to help individual customers make informed decisions when purchasing insurance.