EMBEDDING THE NEED TO SAY “NO.” OR NOT
Embedded insurance is not really new, but it’s re-emerged with new capabilities
[I]t’s telling that embedded insurance has had its biggest impact on insurance
for property and vehicles being shared or rented,
transactions that do not involve long-term relationships.
By Joseph S. Harrington, CPCU
If you’re old enough, you’ll remember a dramatic announcement from April 1998: Citibank and Travelers Insurance were merging. “Banks in insurance” had arrived in a big way, many believed, potentially posing an existential challenge to independent insurance agents and brokers.
You may also remember the sequel four years later: Citicorp spun off its Travelers unit, which merged with the St. Paul Companies, a property/casualty insurer. There were several reasons for the split, but they mostly came down to the same question: Why would a high-yielding financial institution get into a heavily regulated business that generated much more modest yields?
Of course, it was all about distribution and commission income, not underwriting.
One could say that “bancassurance” (to use the European moniker) was an early form of “embedded” insurance, in which the sale of insurance products would be embedded with other financial relationships. With all the information financial institutions had on household and business finances, combined with property and driver data becoming available online, P-C production costs could be cut dramatically, allowing banks to reap fee income while leaving underwriting risk to traditional insurers.
No preference allowed
Well, nothing is ever as easy as it sounds, and there were many challenges to establishing agencies within financial institutions, including licensing and market conduct concerns. But there is also an abiding characteristic to P-C insurance relationships that makes them unique in the world of commerce:
In P-C insurance, you have to be prepared to disappoint even your best customers at a moment of distress.
A bank can offer loan forbearance to big depositors, and favorable deposit rates to big borrowers. Manufacturers of vehicles and equipment can offer all manner of preferential treatment to buyers who use their maintenance services.
Not so for P-C insurers. At the moment of truth—a claim—a P-C insurer must adhere to the terms of policy contracts without discriminating on the basis of how profitable a customer is. Although this is technically a matter for the insurance carrier, whoever sold a policy cannot escape the impact on a customer relationship.
If you’re an auto dealer, do you want to tell buyers that the actual cash value of that totaled vehicle is considerably less than what they’d been led to believe in the showroom? If you’re a banker, do you want to explain to mortgagors why their dwelling limit is less than their market value, and why they may be underinsured for their loss?
Agents and brokers understand that nobody who markets P-C coverage can avoid these questions. You can’t just collect the commission and shift the blame without jeopardizing your livelihood.
What embedding enables
The questions mentioned above take on renewed timeliness with the emergence of “embedded” insurance, defined by InsTech London, a major insurance technology entity, as: “abstracting insurance functionality into technology in a way that enables any third-party distributor (usually product or service providers in other sectors) to seamlessly integrate insurance products and solutions into their own customer propositions and journeys.”  In short, technology now allows insurance to be sold effectively along with the products insured.
As we’re all aware, risk-related data is now communicated instantaneously from sensors “embedded” into vehicles, structures, and personal property through the “Internet of Things” (IoT). Whether it is how fast one drives, how hard one brakes, the temperature of an engine, pressure within machinery, indication of water leaks, or increases in humidity—you name it, and “there’s an app for that.”
As in the past, vendors and analysts see great potential for coverage priced based on “real-time” risk data provided in a customer relationship. For example, major automakers have launched insurance products based on data they derive from vehicles they manufacture. InsTech London projects the global market for embedded insurance will reach $722 billion by 2030.
Some unavoidable questions remain, however.
We have to assume that those car manufacturers have considered how they will respond when a customer who buys the highest-end vehicles, with all the optional features, and the top-level maintenance program, is identified by telematics to be a menace behind the wheel. How will that customer react if he or she is cancelled or non-renewed? How will it go down if your own sensors prove your customer was at fault in an accident?
Similarly, how will it go if data from technology used to establish and price coverage is used to limit the payout on a property claim? If you sold the insurance, you can’t just blame the carrier. So far, it’s telling that embedded insurance has had its biggest impact on insurance for property and vehicles being shared or rented, transactions that do not involve long-term relationships.
Transferring risk management
If embedded insurance proves to measure up to the bullish expectations of its proponents, it will be because it has an important quality not previously available to P-C insurers.
To state the obvious, P-C insurance has involved the transfer of risk since its inception centuries ago. While risk management services were developed as value-added features, the owners of property have been principally in control of the attendant risks.
Embedded insurance expands on the traditional role of insurance by transferring risk management along with the risks. At the very least, embedded sensors alert risk-bearing entities to growing hazards, allowing them to contact insureds to recommend steps to avoid or mitigate losses. Beyond that, technology now enables such measures to be implemented remotely, even by artificial intelligence.
These new capabilities do not eliminate the questions we’ve considered regarding the role of risk in customer relationships. Embedding insurance does not eliminate the need to say “no” or “not that much” to good customers. It does, however, reduce the number of occasions when a loss disrupts a relationship, as well as the severity of each disruption.
Therefore, “embedded insurance” is not another “hot topic” that will cool off. It marks a fundamental shift that will change expectations for agents, brokers, carriers, and risk managers.
 For this and subsequent references, see Joan Cuscó, “Embedded Insurance: The New Hot Topic,” Insurance Thought Leadership, Aug. 8, 2021; accessed at www.insurancethoughtleadership.com/embedded-insurance-the-new-hot-topic/
 Ibid., also Paul Carroll, “The Real Threat to Auto Insurers,” Insurance Thought Leadership, Dec. 20, 2021; accessed at www.insurancethoughtleadership.com/the-real-threat-to-auto-insurers/
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.