August 22, 2022
By Aleksandar Totev

Over the last decade, we have witnessed a dramatic take-off of innovation within the insurance industry. Traditional business models are being disrupted, value chains redefined, and products completely revamped, and insurance is finally starting to catch up. For instance, only 15 years ago we had to pick up our stationary phone, call the restaurant, ask them for their menu, and pay upon arrival. Now our meal is at our fingertips, just a few clicks away, while we are being spoilt for choice.

In recent years embedded insurance and parametric products have become increasingly popular and are trending topics in the industry. But in reality, they have been around for years. Today, they are proliferating, powered by innovation and fuelled by technology. Each one on its own unlocks significant value for insurers, businesses, and consumers, however, the combination of the two is truly powerful.

Parametric Insurance

What is Parametric Insurance?

Parametric insurance, until recent years, has been almost exclusively covering massive risks such as natural disasters and catastrophes, especially in commercial lines. The potential damage caused by such events is often very difficult to predict, but parametric products ensure predictability for (re)insurers as they cap the maximum losses. For insureds (normally big corporations and governments), they provide them with a secured compensation paid out quickly in times of need.

How Does Parametric Insurance Work?

So how does parametric insurance work in practice? It is not meant to and does not indemnify the full loss experienced by the insured, but rather pays out a predefined amount of money based on a parametric trigger or condition (usually based on objective numerical data), which automatically activates a payment once fulfilled. This might seem like a complex concept, but in reality, it’s simple.

Think of a farmer who gets paid a predetermined lump sum in case the average summer rainfall is below a limit leading to poor harvest, or a passenger who receives compensation to soften the inconvenience of waiting and to cover some refreshments at the airport, in case their plane is delayed by more than 30 minutes. Let’s have a closer look at the latter. Have you ever experienced a flight delay? - most probably yes. Traditional travel insurance or European regulation covers transportation delays but only after at least 2 hours. If one then wants to claim, numerous forms must be submitted and compensation will hopefully arrive within a few months. With parametric insurance, the claims process is fully automated, eliminating the need for claim submissions and evaluations and compensation is automatically paid out in a matter of minutes.

Parametric Insurance Today

Today parametric insurance is becoming increasingly mainstream, entering personal lines of business. How? The vast and inexpensive availability of real-time data, technological capabilities to process and analyse real-time data quickly, and the infrastructure to execute claim payments in a matter of minutes with very low transaction costs.

These all enable parametric insurance at scale, making it more accessible to the broader population. We see it across multiple lines of business. For example, parametric flight delay or weather insurance products already compensate consumers for unpleasant experiences during their travels or long-awaited holidays. Additionally, some insurance players are already experimenting with parametric health insurance and we can only expect it to become more commonplace, given the abundance of health data powered by health technology (IoT and wearables).

Parametric insurance will further establish its place in consumers’ everyday lives because it brings significant value to them and the respective insurers. Insurers realise substantial cost savings on claims assessments and settlements, as the need for assessment is eliminated and settlement is completely automated. Parametric products are also easier-to-understand for consumers due to their “if-then” nature, lack of “grey” areas and numerous exclusions. This further allows insurers to reduce costs, by minimising the need to educate consumers about the products. For consumers, parametric insurance removes the hassle of claims submission and ensures speedy, often immediate, payouts, contributing to a much more positive overall experience. Lastly, we can expect incumbents to pass some of their cost savings to their customers in the form of cheaper premiums, meaning consumers will receive more value for their money.

Embedded Insurance

What is Embedded Insurance

Embedded insurance is all about distributing insurance solutions (traditional or innovative) at scale through third-party businesses. It is embedded within the purchasing journey of the underlying product or service it is related to and can take shape in the following ways:

• As an add-on (a tick box at the end of the customer journey before checkout),
• A bundle (included in the price of the underlying purchase), or
• A transaction-triggered offer (insurance recommended post-checkout).

Similar to parametric insurance, embedded solutions have existed for decades in various shapes and forms. Think about the life insurance offered with your mortgage (i.e. traditional bancassurance) plan, the travel insurance bundled with your credit card, or the additional insurance options at the end of your car-rental checkout. Accessing a large customer base through a third-party business has been a prominent part of the distribution strategy of incumbents for years.

The Driving Forces Behind Embedded Insurance

So, if embedded insurance has been around for a while, why do we only see it gaining so much traction and attention recently? It’s the result of a few main factors blending together – customers demand it, businesses across various industry verticals understand its value, insurers realise its potential, and technology enables it. Let us elaborate on each point.

Customers demand it:

Today’s customers are tech-savvy, have fully digital lifestyles, and are used to seamless experiences at their fingertips. The insurance industry has been significantly lagging in its digital transformation journey, especially when compared to sectors such as communications, mobility, e-commerce, or even the broader financial services. Consumers have been tough on traditional players, with the insurance industry consistently ranking as a laggard in customer experience in engagement surveys. Insurers are well-aware of the changing consumer sentiment and understand the importance of innovation, investing significant resources in it. That notwithstanding, they lack agility, burdened by layers of bureaucracy and legacy IT systems.

Incumbents aside, up-and-coming Insurtechs, with digitally native and lean organisations, have been quick to innovate and address consumer needs. They have responded successfully to the customer demands for simpler products, increased engagement and personalisation, and fully end-to-end digital journeys, leveraging data and technology to revamp value chains and insurance solutions. Such Insurtechs share the same DNA and customer-centric focus of today’s highly digital businesses and platforms, leading to natural synergies between the two and fuelling the rise of embedded insurance. A number of leading incumbents strategically partner with or invest in innovative Insurtechs to fast-track their own digitisation journey and capitalise on the innovation wave.

Indeed, according to Companjon’s pan-European consumer survey, ease of purchase, timing, convenience, and fully digital and highly automated end-to-end (E2E) customer journeys are the main reasons for winning consumers’ trust in insurance.

Businesses understand its value:

The benefits for businesses distributing embedded solutions are two-fold – it reinforces their core value proposition and is a sizeable ancillary source of revenue. Zooming in on the former, innovative embedded insurance products add a safety net to the end customers’ purchase, differentiating a business from its competitors, an example of this would be an outdoor activity provider offering protection against rainfall during the allotted time of the event. Today’s consumers have a myriad of choices at their fingertips, switching costs are negligible, and businesses which fail to address all of their customers’ needs or trail behind competitors in terms of comprehensive offering risk losing competitive position.

Furthermore, today, embedded insurance is all about customer experience and engagement in order to significantly increase the number of positive interactions with a business’s website/app and increase consumer stickiness. Both of which contribute to competitor differentiation and enhanced customer acquisition and retention.

Moving on to the latter, with each policy sold, businesses earn a commission fee. Embedded insurance, with its simpler-to-understand products, relevance, timing, and smooth customer journeys, leads to substantially higher conversion rates, ultimately bringing larger ancillary revenue streams to the business or platform distributing it.

Insurers understand its potential:

Embedded insurance can help insurers drastically reduce distribution costs, strengthen their brand, and enhance product development. In recent years, the insurance industry has been under significant pressure to cut costs, driven by the persistent low-interest-rate environment, greater price transparency requirements, regulatory demands to pass on savings to consumers, and the drastically leaner cost structures of Insurtechs (allowing them to offer more value to the policyholders).

Embedded insurance allows both incumbents and new digital players to access a large customer base at a fraction of the traditional cost. By partnering with large digital businesses and platforms, insurers could immediately distribute products to millions of customers. The beauty of such digital B2B2C distribution channels, compared to those more traditional ones, is that the customer acquisition costs decrease with each additional customer due to very strong economies of scale. Embedded insurance enables insurers to engage more with their customers, boost positive interactions, and strengthen their brand image. Lastly, more interactions mean more data, which can be leveraged to offer more personalised products and prices.

Technology enables it:

Today’s state of technology and digitisation is the key that enables embedded insurance to be the seamless link between insurers, businesses, and customers. Standard Application Programming Interfaces (APIs) together with the abundance of data and availability of analytics tools, the high automation of processes and customer journeys, and the smooth integration and exchange between players, all aid in the development of innovative products. Modular technology architecture allows for rapid advancement and integration of various third-party service providers, decreasing the operational burden and freeing insurers’ capacity to focus on product innovation and value creation.

To sum it up, embedded insurance presents a new era of unmatched value for consumers, it is the fuel that can turbocharge an entire business, and the key to insurers’ success in the 21st century and beyond.

A Powerful Pairing: Embedded Parametric Insurance

Bringing it all together, we can expect to see embedded parametric insurance become prominent over the next decade. It is a win-win-win situation for insurers, businesses across various industry verticals, and end consumers.

For insurers, the powerful combination drastically decreases customer acquisition and claims assessment costs and substantially grows conversions through simpler products and smooth customer journeys.

For businesses, embedded parametric insurance ensures a stable ancillary revenue stream, increases customer engagement, and significantly lowers the risk of overloading their customer service centres with enquiries about insurance products and claims complaints.

Lastly, consumers can finally enjoy a seamless and fully digital experience they are used to in other aspects of their lives and extract more value for their money through personalised insurance solutions, lower premiums, and instant and automated payouts.

Companjon

At Companjon, our mission is to enhance our business partners' customers' lifestyles by offering fast and full-customised embedded insurance solutions. To learn more about how we can offer peace of mind to your customers through our unique insurance solutions, schedule a discovery call with one of our team members.