The embedded opportunity beckons to insurers
Act soon, and boldly: EY research indicates that up to 30% of insurance transactions will be embedded by 2028.
Embedded insurance offers a huge potential growth opportunity and a strong prompt to innovation for an industry that needs both.
But embedded insurance also poses a significant competitive threat, especially for incumbent carriers that struggle to drive change at the scale or pace necessary to stay ahead of both traditional competitors and new market entrants.
The bottom line is that insurers that can’t self-disrupt effectively — and soon — are the most likely to be disrupted as the era of the Internet of Things and digitization-driven embedded insurance advances.
While forward-looking insurance executives recognize the urgency, recent conversations across the industry suggest that many carriers may underestimate both the upside growth opportunity and the downside risk.
For instance, some insurers seem to view embedded primarily as a new distribution channel or merely an extension of existing point-of-sale offerings. Others assume that companies from other sectors will have to rely on existing underwriting capabilities and models, and thus will have to turn to incumbent carriers.
Our perspective has been reinforced by our engagement with automotive companies and those in other sectors that are taking bold and strategic action to make insurance an essential part of their offerings. The most promising solutions will embed coverage and risk prevention services deeply and seamlessly within rich and personalized customer experiences. Many of these companies have customer bases that are larger and more engaged than those of insurers.
EY market research and analysis has found that up to 30% of all insurance transactions will occur via embedded models within five years. If this sounds like a large figure, consider how customer needs are evolving, new risks are emerging, and even the assets insurance is meant to protect are changing dramatically. From electric vehicles and smart homes to gig working and cyber threats, few insurers have adjusted their offerings to reflect the full possibilities of digital enablement in how we live and work today.
Auto insurance: The front line for embedded coverage
The automotive sector presents the most revealing example of the stakes insurers face. Manufacturers are looking at embedded insurance as just one element within a network of services that includes payments, maintenance offerings and mobility subscriptions rather than traditional ownership models. The top automotive brands are well established and well capitalized, inherent strengths as they seek to expand their trust-based customer relationships.
Perhaps more importantly, they are well attuned to the idea that they must continually enhance and update their offerings to satisfy ever-rising customer expectations. And they are well accustomed to tech-driven disruption, which explains why they are moving quickly to adapt to the new era of mobility, with its electronic and autonomous vehicles, and ride sharing.
With individual vehicles now generating thousands of data points, reliance on historical insurance data to assess and price risk will continue to decrease, with increasing ability on the part of vehicle Original Equipment Manufacturers (OEMs) to personalize mobility services or offer transparent pricing based on individuals’ driving behavior.
They’ll also have more data on the function of individual components and repair and maintenance costs, which should make it easier to design seamless experiences for warranty products and maintenance plans. Further, they’ll be applying the lessons learned by early adopters of embedded insurance and will be aggressive in engaging insurtechs and other partners to access the capabilities they need to succeed.
What insurers can do now
Any incumbent that wants to play a role in the major shift in insurance needs to develop creative strategies for adding value via partnerships with companies that are highly motivated to innovate. Insurance leaders must address two critical areas of legacy constraints: IT systems and organizational cultures.
While many insurers have taken steps to modernize core platforms, most still lack the agility enabled by fully automated and digitized processes. Specifically, legacy systems limit insurers’ ability to increase the velocity, variety and volume of data flows necessary to innovate in the embedded space. Further, insurers need to enhance their solution design capabilities by using modern platforms that provide pre-built components and advanced APIs that support fast, secure data exchange and easy integration with partners.
On the cultural front, organizations must transcend their historical resistance to collaboration with outside companies and carefully assess future relevance of their current business and operating models. They must also instill more risk taking and creativity in promoting innovation. Design thinking, rapid prototyping and more agile ways of working are among the key capabilities in developing and launching embedded solutions. Cultural fit is also an important consideration in assessing new partners.
Due to shifts in consumer needs, pervasive connectivity and other technology advancements, embedded insurance can no longer be viewed as a futuristic strategic consideration. Rather, it’s become an immediate-term priority for insurers. Those that devise the right strategies and take the right first steps will be best positioned to win as we advance deeper into the era of embedded insurance.
David Connolly is a partner and Global Nexus leader at EY. Anudeep Chauhan is managing director of Digital Strategy at EY.
Any opinions expressed here are the authors’ own. These views do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
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