I’ve been meaning to write about embedded insurance for some time. Embedded insurance is everything that is wrong with the startup approach to insurance.
Rather than look at things from the consumer’s perspective and ask how it helps them, embedded looks at things from the insurer’s perspective: how can we sell something to people that they may not need?
Before I get on the soapbox, some of you may not know what embedded insurance is. This is just a new term for, when you buy some other product, the seller tries to get you (or even forces you!) to buy insurance too.
This may remind many of you of the extended warranty pitch when you buy a car or TV or when the rental car agent tries to badger you into buying insurance.
In other words, these are things most people don’t want, but some pushy salesperson tries to convince you that you need so they can make a commission.
Today, you may think of it as Tesla selling insurance to their customers. But, in many ways, that is an outlier. The embedded insurance movement is more about insurers trying to get other companies to sell insurance for them, rather than a retailer starting their own insurance arm.
The idea is customers don’t realize they need insurance or, perhaps they realize it, but want the convenience of buying it automatically rather than having to shop separately.
There are some applications where this could make sense. Let’s say you’re climbing Mt. Everest, it might be nice if the sherpa included some life insurance in the travel package!
But more often that not, embedded insurance is like when toy makers used to sell electronics with batteries included. A lot of the times the batteries didn’t work as well as the ones you could buy yourself, yet they cost more because you were forced to buy them.
Recycling Old Ideas
Some of you may read this and say, isn’t embedded like when the auto dealer tried to sell you insurance on the lot? Yep, that’s exactly what it is.
Or isn’t it like when Sears used to sell Allstate policies in its stores? Right, that too.
Or when the Circuit City salesperson would talk you into a new stereo only to tell you at checkout “you know, this is a piece of crap and will break in a year, so you really should get the extended warranty”? Yeah, that was embedded too.
So you can think of embedded like all those 70s TV shows they’ve brought back with new actors that nobody was asking to be rebooted. Nobody is quite sure why the network agreed to make them. That’s embedded insurance!
The Lazy Consumer
The core premise of embedded is that the buyer is too lazy to buy their own batteries or, perhaps, that they don’t know the difference between AA and AAA, so they need to have the decision made for them.
Almost every type of insurance being offered as “embedded” could easily be bought separately. We are not talking about creating new types of insurance for novel risks. It is mostly auto, pet, comp, and warranty.
The main reason they are being repackaged as “embedded” is because the insurers realized they are bad at selling them on their own. The hope is by using a middleman they can catch you in a weak moment where you might buy pet insurance from the pet store that just sold you the puppy.
It’s emotional manipulation rather than truly addressing a need.
Nudge vs. Manipulate
What this really comes down to is what you think about the sophistication of your customer. If you think they want to do the right thing, but need it made easy for them, then behavioral finance would suggest you can “nudge” them to the optimal outcome.
However, often companies think their customers are dumb and can be taken advantage of. Think about how they put the candy bars at the checkout to try to get you to make an impulse buy that you didn’t really want.
So is embedded insurance the checkout candy bar or a helpful nudge?
Let’s start by examining the business case for embedded insurance. Every paper I have read advocating for embedded highlights how it’s good for the insurance company (they sell more policies), good for the distributor (they get fee income for the referrals), and good for investors (embedded insurance can be overpriced due to the inability to comparison shop).
Rarely, does it address whether it is good for the buyer. So we certainly seem to be in manipulation territory.
We also know impulse purchases tend to be overpriced because they take advantage of your emotional state. Even if done logically, we know captive products tend to sell at higher price points, so it is unlikely to be a good deal for the buyer.
There is usually some discussion about addressing the “insurance gap“. This would fit the nudge narrative. As someone who is building a business around fixing the home insurance coverage gap, I am very receptive to this concept!
Mind the Gap
However, the way to address the gap is to convince customers of the value of your product. It isn’t to trick them by positioning it as an impulse purchase, including it in the product without clearly disclosing it, or putting on pressure sales tactics to twist someone’s arm into buying something they wouldn’t have otherwise.
I’m not saying all embedded insurance uses one of these tactics. There are fine examples of addressing the coverage gap, but more often than not, the motivation is what is good for the corporate interests rather than the consumer.
Most people have learned not to buy the rental insurance or the extended warranty. So why are we trying new versions of this tactic when the old ones were clearly anti-consumer?
What embedded insurers are really doing is trying to make the insurance buying process less efficient by using the cover of “making it easy” to make it harder to understand what you actually bought and whether it’s appropriate all while charging you a higher price.
That doesn’t sound like innovation. That sounds like a new way of doing what insurance companies have done for hundreds of years…ignoring what the customer wants.
The Value Test
If an embedded insurer is truly bringing value to the customer, it will need to accomplish three things:
- Better coverage than available in traditional channels
- Lower price than in alternative channels
- Easier buying process with clear explanation of why it’s a good price and offers better coverage
If a company has found a way to do all three of those, then it has created a good experience by embedding. If all it’s doing is selling overpriced products or insurance to people who don’t need it, then it shouldn’t exist.
The Great Irony
But there’s one other consideration. Is selling a product to an unaware buyer actually good for the insurer? Or are they losing too? I’ll answer that question next time in Part II.
3 thoughts on “Is Embedded Insurance Bad For Consumers?”
I have enjoyed the article it has a different perspective
Just this week I described an embedded insurance product I worked on as a tax on the consumer, not a risk transfer mechanism. In that embedded scenario, insurance was required for a rental. A standard renters or homeowners policy would provide coverage but few knew to bring their policy docs with them so most agreed to pay $10 / month for an embedded policy so they could complete the rental agreement. That embedded program produced single-digit loss ratios. Bad for consumers.
But I also worked on another embedded program that offered DP3 products from many competitive DP3 carriers and found consumers better coverage at lower rates. Great for consumers. Embedded is a mixed bag.
Be interesting to see if regulation, like Consumer Duty in the UK, falls on the non-Insurer (or more likely introducer) attempting to sell embedded insurance.