Embedded insurance – a multi-billion dollar opportunity for Australian insurers

Embedded insurance refers to insurance-like products that are tied to a core non-insurance product, making it easier for customers to obtain context-relevant coverage against loss. Think of damage cover for your mobile phone provided as part of a post-paid mobile phone plan (“gadget protection”), or income protection offered as part of your superannuation plan. 

The concept is not new; many non-insurance brands – banks, retailers, manufacturers, telecommunication companies, and airlines – have distributed insurance products for decades. For instance, airlines have long offered travel insurance for purchase at the point of sale and credit card companies integrate travel insurance as an added service value. These mature forms of embedded insurance, whilst effective at point of sale, are often clumsy and frustrating for consumers when claims need to be made. As a result, only the largest non-insurance brands and insurers have tended to offer embedded insurance.

Digital capabilities, and ecosystem partnerships, provide opportunities for step-changes for insurers to move from traditional retail or affinity-type distribution channels towards integrated solutions, and coverages embedded in purchase of products and services. As the level of integration increases, the insurance product becomes more targeted and complementary to the core product. 

At its most advanced, embedded insurance is included by partners as a value-add to their own products or services

Non-insurers are increasingly understanding the value that embedded insurance can add to their business. For example, with access to real-time driving data from in-built sensors on customer cars, Tesla can evaluate individual drivers’ safety and underwrite a personalised premium based on their SafetyScore^TM. Tesla has claimed that their data advantage enables them to offer premiums 20% lower on their vehicles than what the rest of the insurance market can offer, and offers anytime cover changes or cancellation.² This places pressure on established carriers from as motor fleets transition from internal combustion engines to EVs.

Similarly, Cover Genius has struck partnerships with the world’s largest digital companies Booking Holdings, owner of Priceline, Kayak and Booking.com, Skyscanner, Ryanair, Zip and SeatGeek, providing tailored insurance for partners in multiple industries including airlines, retail, financial services, real estate, and logistics. These partnerships with Cover Genius allow non-insurers to offer customers tailored insurance solutions.³

By 2033, embedded insurance is expected to account for A$35B or 18% of the total Australian Insurance market worth $201B in GWP, according to our analysis. Embedded insurance is expected to drive growth in the Australian Insurance market with an estimated 34% CAGR between 2024-33, whilst traditional channels are only expected to grow by 4% CAGR during the same period.

The market expansion potential of embedded insurance is based on its ability to:

1. Provide additional distribution pathways to reach new, and wider, customer segments (“New Customer Segments” in the graph below); 

2. Enable the development of new products with partners (“New Products” in the graph below); and  

3. Take an increasing of distribution revenue from existing distribution channels (“Redistribution” in the graph below) 

Of these three drivers, redistribution accounts for the largest proportion of revenue in our model. New customer segments, and new products, account for smaller percentages of additional revenue. 

Additionally, it is estimated the greatest adoption of embedded insurance between 2024-33 is within the General Insurance segment, increasing its share of the market from 1% to 12% in 2033. This is followed by the embedded insurance Health then Life Insurance segments from 0% to 3% and 0% to 2%, respectively.

The opportunity is also built on an expectation that an aging, but wealthy, Australian population is likely more attracted to insurance as an essential service to protect their assets through general insurance, and to seek increased levels of health and life cover to ensure higher quality care as they age and support the transfer of wealth to younger family members.  

1. Regulatory compliance 

Insurance design and distribution obligations apply squarely to embedded insurance arrangements. Partners are required to take reasonable steps to ensure that the products are distributed to customers within the target market. Insurers are responsible for defining an appropriate target market and ensuring it remains appropriate over time. Insurers are also responsible for monitoring the distribution practices of their embedded insurance partners Partner brands need to be careful in selecting an insurer to team with as poor compliance practices by the insurer could well cause the partner brand damage as well. 

2. Cyber security and data privacy

One of the key components to enabling embedded insurance is ensuring partner brands and carrier technology platforms can exchange data. This comes with cyber security and data privacy risks that need to be effectively managed and continuously monitored particularly with increasingly sophisticated cybercriminals.

3. Community expectations

Insurers operating in the embedded insurance market need to be constantly cognisant of shifting community expectations. ASIC has recently responded to community concerns around suitability of embedded insurance (or add-on insurance) to individual customers, customer choice and awareness, and value-for-money provided to customers (e.g., low loss ratio). This has led to significant refunds⁴ by insurers operating in the car dealership, appliance retailing and credit card industries to hundreds of thousands of affected customers.  

When thinking about the embedded opportunity, we have identified five key embedded insurance capabilities required for success - brand and trust, core business proximity, customer insights, market reach and strong partnering capability. After consideration of these capabilities, there are range of key steps for insurers to seize the opportunity: 

1. Identify enterprise customer / partner segments for embedded insurance propositions

Determine attractive non-insurance partner brands for EI propositions, with consideration of complementary core non-insurance products that serves desired or adjacent customer segments (e.g., a motor insurer expanding from car owners to scooter hirers).

2. Determine where to play in the new embedded insurance value chain

Identify how the incumbents would like to play in the market (i.e., the degree to which the embedded insurance model is integrated with partner brands). The greater the integration, the more focused the targeted customer segment will be.

3. Update / uplift organisational capabilities to operationalise ambitions

Decisions made in the first two points will inform which capabilities require updating / uplifting. However, regardless of path chosen, data analytics, digital sales and marketing and digital platform connection capabilities will be required. Collaborations with technology and managed service providers may help to bridge the gap.

4. Consider standing up an in-house venture 

To attract the digital talent and capabilities required that may not typically be drawn to work in traditional insurers, incumbents should look to establish a new business unit that operates at arm’s length from the core business. IAG, a large Australian insurer, stood up Rollin’ insurance as stand-alone venture insurer within IAG to provide simplified insurance for the youth market.  

5. Consider incremental movements, such as a subscription model / reverse embedment

Insurance is traditional sold via a lump sum upfront premium which limits the interaction with customers to those who claim. By shifting to a subscription approach, insurers can embed their insurance offering to another loyalty or membership program (i.e., no longer a pure insurance play, customers receive additional benefits such as discounts, magazines, health and fitness benefits, driver telematics services, roadside assist etc.). One example of this is AIA’s Vitality program, which operates in the United Kingdom. A subscription model may also enhance customer loyalty to the brand, and insurers can utilise customer-lifetime optimisation strategies to further strengthen their market position.

Embedded insurance offers insurers, and non-carrier partners, a step-change opportunity to reach, distribute and serve new and existing customers. Acting now is imperative for insurers to capture the opportunity.  

With thanks to Chao Qiao, Ed Lowe, Emily Lew and Ivy Tran, and the PwC Insurance Insights team, who all contributed to this report. 

References:

^{1   Swiss Re Institute (2023) Restoring Resilience: The Need to Reload Shock-absorbing Capacity, Swiss Re Institute website, accessed 20 January 2024}

^{2   Telsa (2019) Introducing Tesla Insurance, Tesla website, accessed 20 January 2024}

^{3   Cover Genuis (2022) Cover Genius Raises $70M in Series D Funding to Further Expand Embedded Business Model, Cover Genius website, accessed 20 January 2024}

^{4   Australian Securities & Investments Commission (2019) ASIC Announces Further Add-on Insurance Refunds, Bringing Total to Over $130 Million, ASIC website, accessed 2 February 2024}