Embedded insurance is poised for exponential growth

Among the emerging trends on the financial services horizon, embedded finance may end up having the biggest impact on the industry’s makeup and infrastructure. Embedding large-scale insurance and banking products or services at the point of sale could not only disrupt longtime distribution channels over the rest of this decade, but may also result in the creation of an entirely new set of alliances with nonfinancial services partners—many of whom may be unfamiliar with the transactions they are facilitating.

There are already many bullish predictions being circulated about the growth potential of embedded insurance. Forecasts for embedded sales of property and casualty (P&C) insurance alone by 2030 range from US$70 billion¹ in the United States to US$700 billion globally.² Deloitte predicts that if as much as 20% of the US personal auto market goes the embedded route by 2030, at least US$50 billion in premiums could be diverted away from the industry’s traditional distribution channels.

Embedded insurance as a concept is nothing new. For years, tourists have routinely added travel insurance when purchasing airfare, while consumers have added warranty coverage when buying major appliances. What’s likely to change rapidly is the volume of insurance premiums for major lines built into another type of third-party transaction, with potentially vast implications for both legacy providers and intermediaries. Including auto or homeowners’ insurance—with the sale of a vehicle or residence—for example, would bypass traditional sellers such as insurance agents, upend direct-to-consumer sales from insurers, or even exclude legacy carriers altogether. 

One way to avoid disintermediation is for traditional insurers to consider collaborating with noninsurance product and service providers to integrate the sale of their coverages into the initial transaction process. In other words, they can follow the adage: “If you can’t beat them, join them.”

First movers may enjoy significant competitive advantages in what could quickly become a game of musical chairs. To avoid being left without a seat in the embedded market, insurers should be actively seeking potential alliances with an embedded partner—or at least consider how they might compete against carriers that do join forces with a product or service provider. 

Auto insurance could see the greatest disruption with embedded sales

Out of all the insurance coverages being sold to individual consumers and business owners, those with the most to lose or gain from a boost in embedded sales are likely in the auto insurance industry. US personal auto insurers wrote US$267 billion in premiums in 2022,³ accounting for nearly two-thirds of the personal lines segment and one-third of all P&C direct premiums written.⁴

Such sales make up the majority of the books of business of many national brand insurers, with 68% of the industry’s auto premiums coming through direct-to-consumer sales or handled by their exclusive agents.⁵ Independent agents account for 32% of the market, with auto insurance being their biggest single volume generator, averaging 18% of their total book of business.⁶ Embedded sales would bypass these traditional channels and instead filter volume through auto dealers and manufacturer websites. 

If as much as a fifth of personal auto insurance is embedded in vehicle sales by 2030, the source of many of those premium dollars for carriers may simply be swapped from current distribution outlets to auto dealers. However, legacy insurers themselves could be left out of the loop if auto manufacturers start up their own embedded underwriting operations. 

Selling insurance at the time a vehicle is purchased is already more the rule than the exception in some countries, such as India.⁷ But while the concept may still be relatively new in the United States, there are already multiple test drives underway. 

Tesla was one of the early entrants with its 2019 launch of Tesla Insurance, offering policies for certain models in a growing number of states priced according to how drivers perform on the road as monitored by the vehicle’s sensors.⁸ Other auto manufacturers have followed suit, including Ford Insure, which is partnering with Nationwide Insurance.⁹

Meanwhile, Root Insurance, an InsurTech startup, is working with Carvana to embed its auto coverage along with the sale of used vehicles. Together, they are integrating the entire transaction—from quote to payment—within the platform’s checkout process, with customer information prefilled so that a buyer may skip data entry and jump directly to customizing coverage.¹⁰

“Talking to consumers at the time when they really need insurance—like when they’re purchasing a vehicle—is a lot better customer experience than being bombarded with advertisements to try to get somebody to a website [that describes] a product they’re not very excited about in the first place,” according to Root Chief Executive Officer Alex Timm.¹¹

Potential obstacles to embedded sales

The road to widescale embedded finance in general likely faces several possible speed bumps, particularly from a regulatory perspective, since the consumer business hosting the embedded transaction “will, in effect, deliver the financial service to the customer … [and] will have significant control and influence over the customer digital experience,” according to a recent Deloitte UK report.¹² The result will likely be a shared-responsibility model when it comes to compliance in areas such as data protection, privacy, and consumer complaints, the UK report noted.¹³

For example, auto dealers offering coverage as part of their embedded insurance sales pitch will likely have to be trained and licensed as insurance agents in each state.¹⁴ In addition, insurance regulators may raise questions about transparency in how embedded coverage is priced, as well as whether customers may feel any pressure to buy insurance from the auto dealer to get the best deal on their vehicle. 

Maintaining alliances and partnerships could pose other practical challenges, such as the following scenarios: 

• What if a customer is dissatisfied with how their claim is handled by the insurer whose policy was embedded in the vehicle’s sale? Will that reflect badly on the auto manufacturer?
• What if the customer buys or already has an additional vehicle from another auto maker? Will embedding insurance in the second vehicle’s sale keep buyers from getting the discounts and service convenience provided to those bundling coverage for multiple cars?
• What about those who bundle auto coverage with their homeowners’ insurance purchases in return for a premium discount—a very popular option in the current US market?¹⁵

Another potential risk of embedded insurance is that it might weaken direct consumer relationships with a carrier, with buyers opting for solutions embedded in the platforms of their preferred e-commerce, product, or service provider, rather than the insurer. Ultimately, such ecosystem relationships could become a more significant factor than the breadth of an insurer’s products or services in winning consumer loyalty. 

These are just some of the challenges that may surface for insurers. But given the huge growth potential of the embedded market, “playing it safe” by not engaging early on could end up being the riskiest move of all.