If embedded insurance is to play such a dominant role in the future of insurance as many industry people say, then it’s worth exploring the implications that arise from the different forms that are emerging. This is needed primarily so that insurers can understand the ethical implications that arise from different forms of embedded insurance. This will then allow them to position their initiative within the appropriate accountability framework.
Some in the market will argue that the sector is too busy innovating to deal with such complications. We need to be pushing hard to bring the benefits to consumers, goes the narrative. There’s some truth in that, but not a lot. Insurers need to be pushing hard on not just the benefits but also on the risks that are clearly associated with embedded insurance.
Let’s spend a minute though going over the three forms of embedded insurance. The first is soft embedded, in which the consumer opts in to buy the insurance on offer. Then there’s hard embedded, in which the consumer has to opt out of buying the insurance on offer. And finally there’s invisible embedded, in which the consumer buys a product that has insurance seamlessly embedded into it, to the point that they won’t know it’s there until a fortuitous event occurs.
Invisible Insurance
I’ve raised a number of questions in the past about embedded insurance per se, so what I want to do here is concentrate on that third type of embedded insurance: the invisible one. I can’t recall ever having encountered invisible embedded insurance, but then, it wouldn’t be what it is if I had!
The nearest I can think of is motor insurance for a hire car, but even then, I would still want to know about the scope of the embedded cover. For example, if business use was covered, what excesses applied and if hiring in the US, what level of liability cover was being provided.
And while I can see that as an employee, or as a rail passenger, I benefit from insurance working in the background for the provision of that employment and travel, it is insurance that indemnifies the provider and not the user.
Experience before Choice
One example of invisible embedded insurance I’ve heard talk of is for extended warranty on a household appliance. Yet there’s something not quite right about that. Can a regulated product be sold invisibly embedded into a non-regulated product? And if appliances are so much more reliable now than they were in the past, what if I don’t want to buy cover for a risk that is so extremely low, especially on a mid to low value item?
What this amounts to then is the customer experience taking precedence over customer choice. That seems to be the wrong way round. Why would I be interested in an experience for something I wouldn’t choose to buy, or would at least be allowed the option of not buying?
Let’s run with that household appliance example a little longer. There may be some risk associated with the item’s performance over say the next 5 to 10 years, but is that a risk to be borne by the consumer or by the appliance manufacturer? Invisible embedded insurance feels like a reliability risk being transferred out of an appliance manufacturer and turned into a customer revenue stream instead. What does this then do to the interest of the appliance manufacturer in designing reliability into their product?
A Claim without Claiming
People promoting invisible embedded insurance talk about how important it is for the customer experience at point of claim to be right. Parametric settlements are mentioned, but not much else. It comes across as just all talk at the moment, the hope being that something will be fixed up in time. I’m not sure I share their confidence.
Instead, my thoughts turn more towards the obvious question of accountability. If the customer doesn’t know they’ve bought insurance, then how will they know if the damage is covered, or how settlement is determined, or what excess applies? How will reasonable care be judged, or material facts be decided?
Remember that counter fraud controls can’t be applied to claims on invisible embedded insurance. That’s because you can’t comply with or break a policy condition you know nothing about. Insurers would need to waiver so much of what is at the heart of how they manage their business. Have they factored this in?
A Final Thought
A further concern I have about the role of embedded insurance, be it invisible or otherwise, is that it positions so much insurance activity around points of purchase. The insurance is being embedded into something at the point that it is being sold. Yet risks exist outwith of those times when we pull out our wallets. What do we do then when we’re not actually buying something, yet need cover?
There are real challenges associated with embedded insurance, and the hardest ones will be with invisible embedded. In their efforts to distribute insurance as seamlessly as possible, insurers are exposing themselves to all sorts of risks. What the market looks upon currently as innovation is in danger of eventually being judged in the same way as payment protection insurance. And that would be a very great shame.
