The Viewpoint: Fintech and insurance – a dream team

When a forecast on the development of the embedded insurance market appeared in December 2020, an outcry went through the industry.

The prediction: the potential market value of companies that enable embedded insurance solutions is expected to reach a staggering $3 trillion by 2030.

A figure that would make any insurance chairman's eyes water.

And, that this study was effective is shown above all by the fact that even the most recent publications cannot do without the figures that were predicted here.

This may not have been the starting point of embedded insurance, but it triggered the development significantly, and today not only are the many insurtechs competing for market share, but also the established insurers have understood that a new market has just opened up.

However, the idea of embedded insurance solutions is not a startling innovation; financial and banking products that are coupled with insurance have been around for decades, for example, traditional credit cards from various companies such as American Express, Lufthansa, and Deutsche Bahn have long had insurance built into their product.

But, not as a completely digital solution.

Why is it still a hot topic even though such solutions have been around for years? The advent of Banking-as-a-Service (BaaS) players and general technological progress now enables the even deeper integration, bundling and embedding of insurance services in other contexts and products.

Additionally, a suite of digital banking solutions seems to be a good starting point for combining financial services and insurance products.

Such a combination can offer benefits for both customers and insurers. After all, these are often financial assets that need to be covered by insurance. And then why shouldn't the protection take effect immediately after acquisition?

What is embedded insurance?

By embedded insurance, most companies understand the seamless integration of insurance products into third-party value creation processes with the aim of optimizing the customer journey in line with regulatory requirements.

In addition, the direct linking of insurance products with a core product or service – so-called bundling – and the improvement of the usual annex sales through data and technology are made possible by the native integration of insurance solutions into existing product landscapes.

Now in simple terms, embedded insurance is part of a larger shift toward contextualized financial services. It's about making insurance more affordable, more relevant, more personalized, and available to people when and where they need it most.

Therefore, almost any consumption-based everyday situation can be linked to a suitable, demand-based insurance product - quickly and easily in the age of digitalization. This is the basic idea behind "embedded insurance”.

Challenges of the insurance industry

The last 10 years have seen the emergence of new and digital insurance companies – so-called Insurtechs –, and U.S.-based Lemonade Insurance was the talk of the town when its IPO announcement was released.

But, most Insurtechs have only been founded in the last five years and are only now in the scaling phase.

So it's time to put our finger on the wound, because neither the incumbents nor their young challengers have the resources to tackle this huge market on their own, especially in a tough economy.

On the one hand, traditional insurers and reinsurers – often multi-million or even billion dollar companies – are struggling with their legacy IT infrastructure, slow development processes, and are under pressure to improve the customer experience.

Furthermore, optimizing and digitizing an insurance solution can take up to 24 months – a real pain point and a small eternity in today's digital world, where customers are looking for on-demand services and a frictionless customer experience.

On the other hand, insurtechs are investing heavily in building their respective platforms and launching strong products, but there is a lack of trust building here – switching insurance doesn't really seem to be popular, especially among the large target group of baby boomers.

The market will certainly change in favor of insurtechs, but that will take time.

However, a partnership with a Banking-as-a-Service provider (BaaS) – can accelerate this process, for both incumbents and insurtechs.

Emerging ecosystems between fintechs and embedded insurance providers

Already in 2019 KPMG published an article stating that partnerships between insurers and technology companies are increasingly common. Building strong ecosystems in the API economy connecting digital banking and insurance will rather become the standard and is happening right now.

In addition to the technical advantages and new digital infrastructure that insurers benefit from in such a partnership, in the case of BaaS providers there are a number of benefits that result in an optimized customer experience.

A good example of this is co-branded debit cards, which can be issued to either the insurer or any company, as the desired insurance can either be embedded in a customer journey or integrated directly into a card or plan. The latter means that the end customer does not have to worry about insurance, as it is seamlessly integrated into the purchased service - for example, when buying a car.

No wonder Tesla is already doing this and has big plans for embedded insurance.

Embedded insurance and BaaS solutions: a great combination to strengthen customer loyalty

A situation familiar to anyone who has ever rented a car on vacation: long lines, fumbling with passports, a lot of paperwork and in the end waiting until the fax has gone to the insurance company, because after all, accident and theft insurance are particularly useful when on vacation.

In the digital age, this would no longer need to be the case, as the insurer could perform an identity check immediately after the car is booked online. All insurers have to do is to implement a fully digital Know-Your-Customer platform.

The benefits are obvious: insurers can identify new customers on all occasions and even for on-demand insurance products, leading to an increase in conversion rates. As a side effect, this will also help prevent insurance fraud and is fully compliant with EU law.

And, customers will feel much safer since they are immediately connected to the insurer and will know that the cover is booked and working. A huge advantage for building a trusting relationship.

Catching the wave and reacting to global financial trends

Moreover, the combination of embedded insurance and BaaS enables insurance companies to respond to trends. Keywords: consumer lending and buy-now-pay-later (BNPL).

The global BNPL landscape is changing rapidly as many different types of organizations adopt seamless, alternative payment methods for an ever-expanding range of goods and services.

And, therein lies the untapped opportunity: embedded insurance products can be bundled with almost any BNPL offering. For example, the online purchase of a bicycle could include integrated shipping, product and warranty insurance, as well as additional heart attack coverage (starting from a certain age group).

Additionally, smart insurers should consider the relevance and usefulness of alternative payment methods such as BNPL for many of their own products and services, and pursue consumer influence as part of a user-centric approach to product development.

Evolution through the symbiosis of insurers and a BaaS provider thus brings benefits to both players and opens a new revenue stream that cannot be achieved on its own.

In the end, the new technological capabilities address a problem that insurance companies have been facing for a long time: Insurers, by definition, have only few touch points with their customers. Once an insurance policy is in place, in most cases there is no further interaction with their customers until coverage is needed.

By offering an additional financial product that reinforces customer engagement on an almost daily basis (such as a credit or debit card), customers become much more aware of the brand and develop a stronger association in a short period of time.