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How is embedded insurance impacting car insurance?

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Embedded insurance is any cover that's sold alongside the asset that's being insured. For instance, in the travel insurance industry, consumers might buy travel cover at the same time as they buy flights. Or, in the events industry, they may buy cancellation cover with their tickets.

In the auto industry, embedded insurance refers to policies included with the purchase or lease of a vehicle, offered directly by manufacturers, dealers, or leasing companies. Ford, General Motors, Tesla, and many more brands all currently offer embedded insurance. And while it's not a new way to sell insurance, there's evidence that it's growing in popularity.

In some states in the US, 17% of Tesla customers use the brand's own insurance. Meanwhile, according to GlobalData, insurance professionals expect car insurance to be the segment that's the most disrupted by embedded cover.

What will be the likely impacts of this disruption? And how can insurers respond? I explore the answers.

Embedded insurance is about embedding insurance purchases alongside buying an asset that needs insuring. This differs from conventional buying in the motor industry, where insurance is usually bought through a separate channel.

By changing the way people buy insurance, embedded motor insurance differs in 2 ways from conventional cover.

1. Embedded insurance can provide greater convenience for consumers - no matter how they pay for their vehicle

Conventionally, when consumers buy a vehicle, they search for cover separately.

Getting quotes and comparing policies is a step that everyone is used to. Embedded insurance removes the need for this additional step.

With embedded insurance, consumers can simply choose their vehicle, and add on their insurance cover at the point of sale for an improved customer experience. If they're financing their vehicle (as 92% of new drivers do, according to The Car Expert), this allows them to pay 1 monthly bill for their car and their insurance.

Embedded cover makes other types of vehicle financing easier too. For instance, people aren't only buying cars to own them. They're subscribing to them, using car-as-a-service (CaaS) models, or leasing them.

In CaaS or subscription models, customers don't just pay for the vehicle. All necessary payments - including for insurance, maintenance, and car tax - are included in the subscription fee.

It's embedded insurance that makes this all-in-1 solution possible. The alternative would be for customers to pay for a subscription and then go elsewhere for a flexible policy to match their vehicle usage - something that's less convenient.

2. Embedded insurance could let vehicle manufacturers make better use of connected car data - if customers are on board

Modern vehicles are increasingly connected, real-time data collecting machines. They're collecting lots of data every single day including on braking patterns and vehicle usage and, in some cases, even driver biometrics and heart rates.

Previously, for insurers to access deep data on driving habits, they would need to use vehicle telematics, such as "black box" policies, that would collect that data.

Now, connected cars collect data without the need for an additional installation. And it's the Original Equipment Manufacturers (OEMs) - not insurers - that have access to this data. This could offer them more detailed insights into drivers than insurers may be able to access.

As a result, manufacturers could have the opportunity to offer more tailored cover to their customers, by selling policies alongside the vehicle. In some cases, this could make embedded insurance more attractive to consumers than conventional policies.

However, for data-led embedded insurance solutions to become mainstream, customers need to consent to sharing their data. As it stands, they may still be reluctant to do this.

For example, in a recent survey of US customers, 82% of respondents said they didn't know how much data their vehicle collects on them. According to Parkers, 86% of people don't want their vehicle data shared with third parties.

Before they use customer data in embedded policies, then, manufacturers need to ask what's in it for the customer? Just as vehicle telematics has reduced insurance premiums for drivers, manufacturers would need to offer a benefit for customers that share data through embedded insurance.

In the case of Jaguar Land Rover customers, this benefit may be that customers can get covered. In December 2023, Jaguar Land Rover launched their own insurance in response to difficulties customers faced getting insured through conventional channels. Many customers struggled with high premiums, due to the vehicles' apparent high theft rates.

However, in most cases, the benefit that customers expect in exchange for their data is lower premiums.

There's no guarantee that embedded insurance will ever become mainstream. However, we're seeing a trend towards CaaS products, alongside car leases with optional insurance included.

For instance, Deloitte predicts that vehicle subscriptions account for 10% of the market by as soon as 2025. And according to a US study by Polly, 70% of drivers agree that buying a vehicle with insurance would make things more convenient.

If embedded insurance continues to grow, we could see the insurance market impacted in 3 ways.

1. Embedded insurance means that motor insurers work increasingly with manufacturers

According to US forecasts by Deloitte, if 20% of customers choose embedded insurance, there's $50 billion less being spent on insurance through conventional channels. By taking customers out of the market before they shop around, there are fewer customers for direct-to-consumer sales.

It's rare for manufacturers offering embedded insurance to create policies, assess risk, and underwrite the cover themselves. Instead, it's much more common for them to partner with insurers to create branded policies embedded within their customer journeys. As an example, Ford Insure is currently administered by EUI, a subsidiary of Admiral.

The general move towards embedded insurance could encourage insurers to find different ways to sell their products. For instance, insurance companies may consider working increasingly closely with manufacturers.

This new approach is easier for larger insurers, as they have the resources to win larger contracts. Yet there are opportunities for smaller brands too.

That's because it's not just manufacturers that can offer embedded insurance products. Instead, car dealers, CaaS companies, and vehicle lenders can do so too. As such, while big insurers have an advantage, there's still room for new insurers to get in on the action.

Whatever size they are, though, insurers need to differentiate their offer to stand out. As embedded policies tend to be priced higher than conventional insurance, these have an additional benefit.

The simple convenience of buying insurance together with a vehicle could be beneficial enough for some consumers. However, when price is still the main factor motivating insurance purchase decisions, this may not be sufficient for everyone.

In particular, young drivers, or those with specific needs, may pay a large premium on embedded insurance vs sourcing it themselves. This is because with embedded insurance, the underwriting is designed to fit the 'average' driver.

2. Embedded insurance may require conventional insurers to offer simpler, more flexible products

Convenience is one of the commonly cited benefits of embedded insurers for consumers. It's unlikely that conventional insurers can match the convenience of embedded insurance by selling through conventional channels.

At the same time, cost is likely to remain the most important factor for customers when they buy insurance. So, unless embedded insurance can match the prices offered on a comparison website, it may not take off at all.

While conventional insurers can't match the convenience of embedded insurance, they can make their policies more flexible. Flexibility is an important component of embedded policies that come with car subscriptions. That's because consumers can cancel these policies without a fee. Insurers could foreground such flexibility in their direct offers to consumers.

At Confused.com, we're seeing more customers interested in flexible insurance policies, in motor insurance and elsewhere. For instance, in the automotive industry, pay-per-mile drivers only need to pay for the distance they actually drive. According to a study by Guidewire, over half of consumers can see the value in a usage-based policy.

In these types of flexible policies, drivers could have the peace of mind that they're not locked in for a year. If they leave, they won't have to pay a cancellation fee. Plus, their flexible policy could cover them to drive any vehicle, for as long or as little as they like.

For this to function, insurers may need to structurally change the way that policies work. For instance, the no-claims bonus may be obsolete in a policy that doesn't run annually.

3. Data-powered embedded insurance raises new questions about data ownership

Only 10% of connected car drivers know that they have a data sharing agreement in place with their car manufacturers, according to Parkers. The same survey showed that the majority of consumers don't want their data shared with third parties at all.

However, unless manufacturers build insurance policies from scratch themselves, embedded insurance on new connected cars inevitably requires some data sharing. In these cases, any insurer that they do partner with needs access to that data to tailor and price deals and process claims.

This raises issues surrounding data security, ownership, and access. Insurers need to ask consumers permission to access their driving data.

But according to a survey by KPMG, almost half of consumers believe they should own their driving data - and do as they please with it. The same survey showed that only 35% of UK auto executives expect the vehicle owner or driver to own that data. Navigating these expectations requires clarity and, in an extreme case, regulatory changes.

What's certain is that, in the case of embedded insurance for connected cars, insurers and manufacturers need to offer drivers a benefit in exchange. Whether this is a financial reward or additional features, consumers probably aren't going to share their data automatically through a digital platform without a reward.

Embedded insurance offers consumers a different way to purchase insurance. From our perspective, if buying insurance alongside the vehicle is the right option for them, then it's an overall positive. At Confused.com, we believe in customer choice, and embedded insurance gives them an additional option.

But even if embedded insurance does eventually account for around 20% of the market - as some forecasts have suggested - there's always customers who shop around. Currently, nearly every driver can get a cheaper deal by finding a separate policy on Confused.com. Until this changes, it's unlikely that embedded insurance is going to take over.

The key for customers is choice. As consumer champions, that's exactly what we offer.

Embedded insurance offers a different way for consumers to buy motor cover. By doing so, it has the potential to divert customers from the channels that they usually use to buy insurance.

While it's growing as an option, embedded insurance is not yet mainstream - and there's no guarantee that it's going to be mainstream. When policies are available at a lower price through channels such as price comparison websites, the convenience of embedded policies may not be a sufficient appeal.

As more manufacturers experiment with embedded insurance, time will tell what customers prefer. In the meantime, insurers could explore deeper partnerships with manufacturers - or offer more convenient and flexible products themselves.

Learn more about what we do at Confused.com and stay in the loop with how the industry is adapting.

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