By Murat Kilicoglu, Principal, and Ben Malka, Partner, at Cota Capital

Published on Nov. 3, 2023 by Digital Insurance 

Digitalization has revolutionized the insurance industry, transforming the way insurers and brands operate and interact with their customers who can now easily access insurance services through online portals and mobile apps, make purchases, and submit claims. Furthermore, digitalization has improved efficiency in underwriting and claims processing, reducing administrative costs for insurance companies. Overall, the digital transformation in the insurance sector has enhanced customer experience, streamlined operations, and fostered innovation within the industry.

Embedded insurance is one of the most exciting—yet underrealized—digitalization opportunities in financial services.

Embedded insurance refers to integrating insurance products into the purchase of other goods or services. For example, when buying a ski pass, customers may be offered insurance coverage for skiing-related accidents or cancellations.

Despite their vast potential, embedded insurance products have typically underperformed. A good example of this is airline tickets, where only a small percentage of customers opt for insurance coverage when they purchase a plane ticket.

Even though embedded insurance has been around for a while, the reality is that very few businesses use it effectively. Some popular brands like Apple, Amazon, and Tesla are now tapping into embedded insurance, but the market could be so much larger.

Pillars of success

But how do you know when an embedded insurance opportunity will actually work? And how can you best capitalize on that opportunity? As investors in this emerging market, we at Cota Capital have developed a framework comprised of six pillars we use to evaluate the viability of embedded insurance opportunities.

Pillar 1: Find the sweet spot

People typically don’t bother buying insurance for small-value items like, say, a blender they get at Amazon. That’s because the cost of the insurance is probably more than the potential loss and the risk of losing the item is not significant enough to warrant additional protection. But there is a threshold, a “sweet spot,” at which customers will seriously consider insurance because a loss would be financially significant or emotionally distressing.

The event ticket marketplace is a good example here. Now that a single Taylor Swift ticket can cost thousands of dollars, customers are more willing to pay for “peace of mind” insurance to cover the risk of missing the show. After all, tween disappointment is bad enough—you don’t need financial loss on top of that.

Pillar 2: Target big markets

Let’s look at the event ticket marketplace again. This market presents a significant opportunity for embedded insurance due to its sheer size and the number of events taking place worldwide. Every day, countless entertainment events, including concerts, sporting matches, theater performances, festivals and more, are held around the world, attracting a vast audience. Alongside these events, a tremendous number of tickets are sold to attendees, making it a massive market for embedded insurance.

Pillar 3: Have multiple customer touchpoints

Embedded insurance works better when it can be offered to customers at many touchpoints—not only at the point of purchase. Ideally, customers should have the option to buy insurance at multiple points and across multiple channels over the lifecycle of the item they purchase.

Going back to the ticket example, the ticket seller can introduce the idea of insurance even before the customer decides to purchase the ticket. The seller can offer insurance again as part of the checkout process. It can reinforce the offer after the customer has purchased the ticket with follow-up emails, texts or via its mobile app. The goal is to nudge the customer at many points in the journey.

Pillar 4:  Avoid complication

If buying embedded insurance is a 10-click process, it’s not going to work. The experience has to be seamless and fully integrated. The same goes for offline scenarios. The sale must be fully integrated into the experience. Think renters insurance, for instance. If renters can simply check a box to add insurance while signing the lease form, it’s super-convenient and seamless. Streamlining the process this way can significantly increase the purchase of renters insurance.

Complexity in the insurance product itself can also hinder its suitability. For instance, if you need to collect a tremendous amount of information to decide if a customer is even insurable in the first place, that’s probably not a good fit. The less complex the insurance you’re selling, the more efficient the distribution process will likely be and the better candidate it is for embedding.

Pillar 5: Take advantage of industry standards

While renters insurance is not mandated by law, many landlords insist on it as a condition of tenancy in their building. This creates incentives for tenants to make the purchase. When regulations or industry standards make it mandatory for consumers to purchase a particular type of coverage, it creates a captive market for embedded insurance. If tenants are required to have renters insurance, then this becomes a substantial market capable of generating recurring revenue.

Pillar 6: Price to sell

There are markets that seem perfect for embedded insurance, but yet the offering falls flat. So, what’s the problem? Well, ask yourself if the pricing strategy is aligned with consumer value or focused solely on turning a quick profit?  When pricing is set too high, it reduces demand. Nobody wants to pay an extra $50 in insurance for a product that costs $200. But if the insurance was priced at, say, $10, that would have greater appeal. We would argue that a 25% premium for insurance is too high and 5% is closer to being right. For embedded insurance to work, it has to be priced to match the actual loss experience of the consumer, or it simply won’t sell.

Bridging the gap

Embedded insurance is projected to account for a substantial portion of the insurance market, rising from $65 billion in gross written premiums today to nearly $1.5 trillion by 2032. But this growth hinges on the ability to seamlessly integrate insurance products into various platforms and provide a frictionless customer experience.  

In the past, brands have struggled to integrate insurance products into the user experience. The complexity and costs associated with incorporating insurance solutions limited the opportunity.

Insurance carriers, meanwhile, have faced their own set of challenges. For instance, most lack effective ways to directly reach and engage with certain subsets of customers. They also lack access to real-time data about the behaviors and needs of these customers. These limitations have led insurers to be cautious when selecting the types of embedded products to offer.

Today, the market is crying out for new insurtech companies that can bridge the gap between insurance carriers and brands. By harnessing cutting-edge technology, data analytics, and customer-centric approaches, these companies can facilitate the integration of insurance products into various brand channels, thus substantially expanding the market.

Embracing this paradigm shift and collaborating with technology-driven insurtech companies will be the key to success for all market participants. That’s how embedded insurance can finally live up to its potential, benefiting end customers, insurance carriers and brands alike.