EY expert talks embedded insurance pros & cons for carriers

By David Connolly
David Connolly is EY's Global Insurance Technology Leader. He discusses the benefits and consequences of embedded insurance for carriers

The wave of embedded insurance is steadily gaining strength.  Somewhere between 2027 and 2030 we expect that around 30% of insurance transactions will be embedded; hosted by companies outside of the insurance industry.  The end consumer will be the ultimate winner.  With embedded insurance comes a new era of insurance products that are designed and priced with the customer in mind, versus what insurance companies want to sell them.  Accordingly, many of the protection gaps that exist today should be addressed and herald a new age of insurance solutions. 

As the appetite for innovation increases, we are seeing the demand for embedded insurance span multiple industries. EY teams are presently tracking and driving, via the EY Nexus platform, seven sectors including automotive, real estate, health care and more that have launched embedded insurance products or will do so soon.  Additional industries will join this wave. Some companies will go their own way and will launch insurance products without a carrier.  Others will launch their own Managing General Agents (MGAs) and have insurance companies underwrite the risk.  Some may choose to loosely partner with existing carriers on a white-label basis.  But in all cases, myriad new data sources will need to be considered and ingested to price insurance in ways that were previously not considered.

Data driving growth with auto manufacturers 

Auto manufacturers launching their own vehicle insurance have gained the most momentum thus far.  The newer connected vehicles generate hundreds of data points and there is a myriad other environmental data available to inform the protection pricing: We know who is driving, how they drive, where they drive, when they drive and why. We can see in-vehicle distractions and assess and price the risk in real time.  We can predict the risks associated with driving on certain roads versus others, which will vary based upon time, weather, traffic, the probability of people and animals in the road and more. And we can suggest alternate routes to reduce those risks.  

The option to buy these new, better-risk-adjusted insurance policies offered by the vehicle manufacturers (for both personal lines and commercial fleet) will eventually come bundled with the sale of the vehicle.  We predict that at some point in the future, traditional insurance methods will be obsolete. The price of the vehicle will include the cost of coverage, and that pricing for protection could be recalculated every six seconds, with the premium price being trued up at the month’s end.  Full transparency with regard to why you paid what you did for insurance is made available, along with tips for improvement.  


The “policy of one” is closer than we think

How does this new model address the protection gap?  According to EY teams latest Global Insurance Outlook, embedded insurance won’t solve the protection gap on its own, but it can spark wider business model transformation. 

You cannot today buy a car and drive off the lot without proof of insurance.  The gap lies in what you pay for insurance. The customer may not be paying the right or fair amount.  It is fairly well known (and oddly accepted) that good drivers usually get stuck paying more for the bad drivers.  Broad information is input into underwriting models about where you live, information is pulled from the department of motor vehicles, etc.  Then the guesswork begins to estimate the insurance premiums for you for an assigned vehicle — which may not be a car you will ever drive.  The new data available from within and outside of the vehicle is far more than most insurance companies are ready to handle today from an underwriting perspective.  

 The MGAs and insurance companies that are being launched by the auto manufacturers are utilizing a new breed of actuary, adding in data scientists trained in artificial intelligence to develop underwriting models that effectively create “the insurance policy of one”: the exact pricing for every driver.  And the most important protection gap that is filled by this new wave of insurance is the saving of more human lives. A better assessment of risk means better advice provided to the insured in real time to avoid it. 

Real estate owners and managers, pharmaceutical companies, health care organizations, banks, credit card companies, pharmacies, cruise lines, farm and heavy equipment manufacturers, restaurant chains and more are all taking similar paths to the auto manufacturers.

There is a gap in every industry between what they should be paying for their insurance versus their actual cost for protection.  The emergence of data sensors and other technologies is proving a treasure trove of information that is being applied in effectively the same way as for the driver of a vehicle.

The pharmaceutical company that manufacturers the chip that gets embedded into an animal for tracking also captures data that can be used for insurance underwriting.  This is being considered for domestic pet insurance and could be used for high-value equestrian cover and other livestock.  Similarly, the protection gaps filled can include keeping these animals alive longer.

There is a commercial real estate company that may soon offer insurance for its business tenants as part of the rental contract.  There are over 20 new data elements being captured from within and around the building that, today, insurance companies do not have access to, and probably would not know how to utilise for underwriting purposes.

The required response by carriers is clear: Launch an embedded platform and a set of protection products that are equal to or better than what is emerging outside of insurance.  And do so at speed.  Your existing systems and in-house expertise may not be enough to achieve this objective; there are commercial options available.  Not only could this move help you stop the loss of customers, but the fastest movers may realize quite profitable growth.  Conversely, if embedded isn’t part of your strategy, be prepared to see as much as 30% of your business be stolen. 


About the author: 

"David Connolly leads the Global Insurance Digital Practice. In this capacity, he and his team define a multitude of business-driven, technology-enabled offerings that both property and casualty and life and annuity carriers need to consider in order to remain competitive in the digital marketplace.

Prior to this, David has also led the EY Guidewire practice globally since 2008. He began his tenure at Guidewire in 2004 and along with his team has been involved with more than 30 programs and successfully supported over 160 implementations around the world.

David has earned a BA in Economics from the Johns Hopkins University."

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