Todd Seabaugh
VP, Business Initiatives at RGAX

From Embedded Finance to Embedded Life Insurance: Applying Lessons Learned

“…with more focused product offers come potentially lower distribution costs that end up in product savings for the individual and streamlined processing for the insurer.”

Earlier this year, we co-hosted an interactive client gathering with SixThirty Ventures during InsurTech Week/InsurTech Insights in London, UK. During that event, SixThirty Venture’s Samarth Shekhar, Regional Manager in EMEA, provided an overview of the current embedded finance/insurance landscape and emerging opportunities to extend this into the Life and Health sector.

While we know this is a well-trodden landscape in the P&C space, Life and Health is still mostly in the test-and-learn phase, particularly in the underinsured and uninsured segments of the life insurance market. Our team is actively exploring how embedded offers can add value and be seen as complementary to customer journeys. SixThirty has been a valuable partner to the RGAX team and has proven to be a well-informed surveyor of the embedded insurance scene. We are excited to extend the conversation we began with Samarth and delve deeper into a few topics he introduced last month at our joint event.

Q: Samarth, thank you for your time today. To effectively set the scene, can you define embedded finance for our readers and the natural gateway to embedded insurance. What are the inherent benefits?

Thanks for the opportunity to share some insights with your highly knowledgeable readers.

When I use the phrase “embedded finance,” I’m speaking about offering relevant financial products (payment, lending, and insurance) via the customer workflows of (mainly non-financial) platforms (e.g., travel websites, retailers, marketplaces, vertical SaaS solutions, telcos, and banks) and then tailoring the product and the offer based on consented or anonymized first-party data on the customer and where they are in the journey.

For insurers, this is familiar territory – affinity programs, bancassurance, and so forth that bundle insurance coverage with the purchase of other products.

However, the big difference and benefit to carriers is the availability of often real-time, enriched data about the customer from the platform, allowing for better underwriting and more tailored offers that these customers can purchase in a seamless experience. Platforms can see anywhere from a two-to five-times increase in revenue streams, increased customer stickiness, and the benefits of delivering a “whole product.”

In addition, with more focused product offers come potentially lower distribution costs that end up in product savings for the individual and streamlined processing for the insurer.

Q: How has this market opportunity evolved over time? What are some of the current challenges you’re hearing?

Embedded finance is estimated to be a $230bn market opportunity by 2025 (Source: Lightyear Capital), of which over $70bn is in insurance alone.

Insurance has traditionally been sold face to face, via a variety of intermediaries – Tied Agents, Brokers, MGAs, and Aggregators. Meanwhile, as per research by McKinsey (2021), the share of digital customer interactions across sectors has shot up from 36% in December 2019 to 58% in July 2020, mainly driven by COVID-19.

Insurance underwriters are experts at managing risk, but they lack enough rich, real-time data to create tailored, competitively priced products that today’s digital-first customer has come to expect.

Embedded insurance is a massive opportunity because it’s not just offering an existing product online or via a mobile app. It’s offering the right insurance product based on contextual data at the right moment in the customer journey on favorite platforms. However, insurers’ legacy systems are holding carriers back from embedding into the real-time workflows of modern platforms. I see this as one of the biggest challenges at the moment.

Q: We’ve seen successful alternative distribution models in adjacent industries. Can you tell us a little bit about what seems to be working and how the insurance industry could replicate this type of customer journey success?

The first successes have definitely been in distributing payments and lending – think Uber or Shopify or insurance via Amazon or Tesla. In insurance, while traditional distribution has been done in person or through brokers or agents, relatively simpler P&C products represent the greatest opportunity.

The proposition for platforms or distribution partners is clear: embedding insurance products at point of sale unlocks additional (recurring) revenues, higher margins, and customer stickiness.

Given the protection gap, insurers have a tremendous opportunity to meet customers where they are (e.g., retailers, telcos, and marketplaces) en masse with data-driven, tailored, frictionless offers.

Most platforms are open to a “partner” or “buy” model rather than “building” embedded insurance. However, there are several insurtech firms offering Insurance as a Service stacks that can allow platforms to embed insurance products. In either case, insurers need to find a way to meet consumers’ demands, sooner rather than later.

“Embedded finance is estimated to be a $230bn market opportunity by 2025, of which over $70bn is in insurance alone.”

Q: You mentioned the concept of Personal Green in your presentation – referring to a person’s wealth, health and data converging. How might this impact the market/appetite for an embedded insurance proposition? As funding increases, so does the competition for dollars – what are you seeing in the market that involves this?

Indeed, Europe, with its aging demographic, widening retirement savings gap, and (permanent) changes to the workplace post–COVID 19, is a key arena for our thesis concerning the Personal Green at the intersection of “wealth, health, and privacy.”

Data is at the heart of this convergence, and embedded finance can be a natural enabler. It uses relevant, permissioned data to serve tailored financial products at the right time and creates a feedback loop for the development of new or refined products targeted at underserved segments.

Regulators, incumbents, startups, and their investors all understand the challenges and opportunities that digitalization presents.

While the venture market has felt overheated for the last few years, insurtech venture funding is minuscule compared to the massive protection gap or even the IT spending of large insurers.

We believe the embedded finance market has considerable room to grow, with multiple models in play for connecting supply and demand as well as for creating new products for new or underserved market segments.

Q: Can you help our readers better understand the embedded insurance “lay of the land”? What types of opportunities are there for participation?

There are four main types of players in the embedded insurance space:

  • Pure B2B technology, SaaS enablers
  • B2B2C, typically with a tech stack and a Broker or MGA license
  • Insurance as a Service, offering full tech stack, insurance licenses, and capacity
  • exchanges or digital brokerages connecting demand (from distribution partners) to capacity (from traditional or new insurance providers)

Those that offer Insurance as a Service have attracted significant interest and investment given that they are building regulated insurance products from the ground up and require more upfront capital.

Still, we are also seeing interesting players scaling with an MGA-only, exchange, or marketplace model, particularly in the P&C space.

The full-stack insurer bears the higher risk and is regulated, but has full control over the insurance product. Yet we see several MGA-only players whose risk carriers offer a free hand in tailoring the product, while allowing for a short time to market and efficient product development.

Q: As investors, how do you typically evaluate startups in the embedded finance space?

Beginning with the team behind the startup, we look at its market size and growth potential, its go-to-market approach, and its ability to build better defensive moats than its competitors via data and AI. In the embedded finance space, it helps to understand the following:

  • Revenue model: SaaS/license fees, value-based pricing, or brokerage fees (% of Gross Written Premium)
  • Customers/Who do they make money from? Incumbent financial institutions, neo-banks/neo-insurers, platforms (non-financial institutions), and so forth. These target customers have different appetites for new solutions, varying sales cycles, deal sizes, and the land-and-expand potential that we consider.
  • Data-product fit: Who is bringing first-party data (bank, telco, retailer, marketplace, HR, accounting software provider, etc.) and which tailored financial products (insurance, payments, wealth management, etc.) can be offered based on that data, potentially in combination with external data?
  • Financial services value chain: Which parts of the value chain does the solution address (in the insurance space: sales agent, broker; price, bind and issue, etc.)?

Q: We’ve talked about the embedded finance landscape as well as the appetite and opportunity for embedded insurance. Knowing that Life and Health products are complex and more challenging to embed, is there any insurer or insurtech out there today who is leading the way?

There are several direct-to-consumer players in the Life space, like Ethos, Fabric, YuLife, and Bestow, and generic embedded insurance players, like Boost Insurance, BoltTech, and CoverGenius. However, we haven’t seen embedded insurance players reaching a meaningful scale in the Life and Health space yet.

Some promising players are taking on life insurance brokerage (Anorak), enabling simpler Life products like funeral insurance (e.g., our portfolio company Click2Sure) or digitizing part of the advisory process (e.g., our portfolio company vlot offers a “quick financial health check” via a B2B2C model, based on first-party data available with employers or pension funds).

Q: Is there anything else you’d like to share with our readers? Any advice for life insurers who want to dip their toes into this market?

At the risk of oversimplifying, it is about the customer, the data, and the product. To begin with, ask yourself the following questions:

  • Are there existing platforms where you can find your ideal customers with (some or most of) the data points you need to price and offer your product?
  • What products that can be offered digitally are the simplest or relatively standard, and what data would be needed to price and offer them?
  • Which of your current/existing products can be refined or adapted to be offered digitally?
  • Can you identify any new or underserved customer segments (particularly those that can be accessed digitally or via large platforms) for which you might have the capability to build or adapt products?

Thank you, Samarth, for all your insights. You’ve provided us with so much to think about. Though we are still early in our efforts to provide financial security through embedded life insurance, we see a great opportunity to use it to bring more coverage to the uninsured and underinsured market sectors and we walk away from this conversation with a few key takeaways. We strongly believe that staying true to your core competencies is essential, especially in innovation; which is why it’s crucial to partner with other businesses that possess skills, expertise and technology that are complementary to your own. Secondly, scale will be your greatest ally. Finding and developing products and brands with broad market appeal and a logical relationship with life insurance will be key.

Reach out to chat or share your ideas about embedded opportunities and what challenges your teams are currently facing.

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