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Exploring Embedded Life Insurance to Fix the Coverage Gap

Someone looking up their life insurance options

In the U.S., there is a notable insurance protection gap affecting millions of people. By definition, this gap is defined as the difference between those who need insurance and those who don’t have it. This need is not simply a pipe dream by those companies selling insurance. Filling the insurance protection gap would actually be beneficial to individuals and society in the long-run. Unfortunately, there are many obstacles that make purchasing insurance difficult and unpleasant. And this is a reason many believe an embedded insurances model is ideal.

The embedded insurance model is part of a larger trend known as embedded finance. In essence, the embedded insurance model includes opportunities for consumers to purchase insurance when engaged in other commercial activities. But it’s more than just greater visibility. These offerings are also more flexible, personalized, and easier to understand. And best of all, they often result in lower costs not only for buyers but for insurers and third parties as well. Exploring this new way of attracting consumers to the insurance products they need highlights how quickly the insurance sector is changing.

“The way people buy equipment and insure it, like a Tesla car, for example, has changed. Companies have all sorts of different types of insurances that cover them, and the IT sector works with really long warranties,” Eddie Pacey, Fellow of the Chartered Institute of Credit Management (FCICM)

Problems With Existing Insurance Models

For the most part, none of us like to buy insurance of any kind. Life insurance is no different. The policies are often complex, and the actual products usually expensive and inflexible. This is why there is such a tremendous insurance protection gap today. Worldwide, it is estimated that this gap is about $20 trillion annually. In addition, this figure has doubled since 2000, highlighted how ineffective current insurance models are. Many thus hope that an embedded insurance model may be the answer to a system in need of significant change.

The key issues of the current insurance system can be assessed from supply and demand problems. On the supply side, the costs of distributing policies are quite costly. Partnering with insurance sales companies and efforts to educate and sell to a consumer base is inefficient and expensive. Likewise, these systems fail to supply insurance analysts with ample data to offer better risk products. On the demand side, consumers are flocking to buy insurance. This is especially true when offerings are complicated or cover more than they should. Like real estate and healthcare, insurance systems need to change.

“Insurance is a good example of a product that’s made by our internal applications team. We make the insurance product and connect it to the car, look at the data, calculate the risk. This is all [done] internally — basically [it’s an] internal software application.” – Elon Musk, Founder and CEO of Tesla

How the Embedded Insurance Model Works

As the name implies, the embedded insurance model offers consumers insurance products at the time of another purchase or activity. This has been made possible by technology advances that enables digital bundling of insurance with other products. Bundling of insurance products is not new, but doing so through technology is. For example, purchasing travel insurance at the time of travel, or getting car insurance when buying a Tesla matches relevancy, need, and interest. This is what technology offers, and it’s why it can reduce the insurance protection gap. (Read more about how a certain virus made travel a bit more complicated in this Bold story.)

Someone looking up their insurance options
The insurance protection gap for those who most need it is glaring, but what if coverage was embedded in retirement plans?

An embedded insurance model isn’t simply a way for insurers to better move their products. However, it does dramatically reduce their costs of distribution. But these models also offer new opportunities for third parties to gain new revenues streams. It also allows them to enhance their value proposition to their customers, especially if the offering is personalized. By expanding sales that reduce the insurance protection gap, society also prospers over time. And because these models use AI and modular software, insurers collect larger volumes of data. Ultimately, this will lead to less costly and more personalized insurance products as well.

“Ideally, you need to automate the process so there’s no touch. If you start having to speak to customers individually about the insurance before they buy, there would be no profit to make, basically. And that’s why fully embedded insurance is all about using technology to provide insurance as part of something else.” – Janthana Kaenprakhamroy, CEO of UK insurtech company, Tapoly

Companies Already Engaged in an Embedded Insurance Model

Many businesses today have already jumped on the embedded insurance model bandwagon. As noted, Tesla routinely offers auto insurance when customers buy their car. Carvana does the same thing online. Walmart provides those buying pet food or filling their pet’s prescriptions options for pet insurance. And companies like Uber are working with insurers to create more flexible, personalized insurance products for their millions of drivers. These efforts can reduce the insurance protection gap because they meet customers’ needs more precisely. They also offer the products in a context where they are more likely to appreciate their value.

The expansion of the embedded insurance model to include life insurance is therefore a no-brainer. Online finance companies could include embedded life insurance offerings in their planning services. Likewise, other third parties that deal with healthcare, travel, and debt management could do the same. By creating life insurance products that are simpler, more flexible, and more relevant to a situation, sales will increase. Technologies allow the development of these types of products and platforms today. So, expect life insurance models to soon move in this direction as well.

Tapping Into an Untapped Market

Life insurance markets aren’t new, but the insurance protection gap in this sector is growing. But an embedded insurance model has the potential to change this trend. Based on analysis, insurers estimate that 50 percent of Millennials will purchase life insurance in the next year. If so, then this will represent a multi-trillion-dollar boom for the industry. But life insurance companies will need to educate them and connect with them in the right way. Third parties and embedded insurance offer the best hope in this regard. And if done well, not only will the insurance protection gap decline, but revenues for many stakeholders will increase.


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