Insurance is, in theory, one of the most virtuous concepts on earth. It is a natural extension of – or even an improvement on – social security.

Everyone pays a small contribution so that when an unlucky event happens to one person, we all contribute to helping them.In that sense, insurance is all about caring and protecting people so that we can live our lives to the fullest. 

And yet, insurance as we know it today is broken. People tend to distrust insurance – no one likes thinking about it. But why is this? Where did the insurance industry go wrong?

Insurance companies need a different objective

‍Insurance companies measure their performance through their ‘combined ratio’.

Simply put, this is the sum of all costs related to claims, administration, acquisition and other things like reinsured costs, divided by the total earned premiums. If the combined ratio is below one, then the insurer made a profit.

The combined ratio is usually split between the ‘loss ratio’ – which represents the cost of claims payouts – and the rest, which we call the ‘expense ratio’. The expense ratio is directly linked to the efficiency of managing insurance and the effectiveness of distributing it.

In this context, a traditional insurance business has the following objective: a combined ratio below 100%, thus minimising both the loss ratio and the expense ratio. But does this stay true to the core mission of insurance: to care and protect people?

Not exactly. The loss ratio is actually the best way to determine whether an insurance program is generating value for the end user or not. The higher the loss ratio, the more value insurance has and the greater the impact on people’s lives.

Therefore, the only objective insurers should have is: a combined ratio below 100% while maximising the loss ratio (while of course remaining profitable). This is the only way to ensure that insurance companies reconnect to the true purpose of insurance and repair this broken industry.

How embedded insurance helps build a better society

People have different interpretations of embedded insurance. Some believe it only concerns small insurance products such as warranty cover, while others believe it relates to upselling insurance at the point of purchase.

While that’s not entirely wrong, the concept of embedded insurance is much broader than that. Industry expert Simon Torrance defines embedded insurance as 'abstracting insurance functionality into technology to enable any third-party product, service provider or developer in any sector to seamlessly integrate innovative insurance solutions into their customer propositions and experiences, either as complementary add-ons to their core offerings or as new native components.'

In that sense, embedded insurance benefits the final user (the insurance beneficiary) and creates value for the business adding insurance to its offering.

Advantages of embedded insurance for end customers

Insurance is inherently complex and will remain so. 

Embedded insurance makes it easier for the end user to understand their cover. One example is the cover delivery platforms offer their couriers. Because insurance is embedded in their app, couriers are protected the moment they log on for work without having to research their options and decide which cover they need.

It can also close potential protection gaps. For instance, once a customer buys a bike online, they wait for it to be delivered. In the meantime, they won’t be able to buy insurance for their bike because they don’t know the exact start date for the insurance contract. 

But, if the bike retailer embeds insurance into their online shop, this could be a one-click add-on for the customer where the cover automatically starts as soon as the bike is delivered.

Embedded insurance can also significantly reduce distribution costs – hence reducing the end price and bringing us back to the idea of sharing the risk instead of over-individualised pricing, which goes against the fundamental goal of insurance: increasing cover for all.

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Advantages of embedded insurance for non-insurance companies

‍With embedded insurance, customers are offered insurance at the right place and time, typically when the risk is top of mind. Therefore, it is a very effective channel for companies to generate additional revenue by cross-selling complementary insurance products.

But embedded insurance is much more than a revenue tool. Ultimately, it can help businesses build a unique value proposition to truly differentiate themselves on the market. Through embedded insurance, companies can boost financial resilience for their customers and show that they care.

All this while also enabling them to achieve their strategic goals, such as lowering customer acquisition costs, increasing retention, driving behaviour and building closer customer relationships.

What does the future of embedded insurance look like? 

We can only dream of a world in which people don’t need to buy or even think about insurance anymore. But with embedded insurance, this world could be made possible: a world where insurance is embedded everywhere and people are fully protected no matter what happens, creating a global safety net anyone can fall back on when needed.

Embedded insurance has the potential to improve financial inclusion by resolving some of life’s inequalities. In its purest form, it’s truly a unique way to protect and care for everyone. 

By removing all friction in the insurance world – from distribution to insurance being automatically included to whatever else – we would only need a small part of the GDP to build this global safety net.

If we as an industry prioritise embedded insurance, help close the protection gap, maximise the loss ratio and ensure fair commissions, we could ultimately restore the purpose of insurance and ensure that the value goes back to protecting end customers against life’s worst outcomes.