In the wake of the Covid pandemic, an increasing number of consumers have transitioned to buying products and services online, and insurance is no different. Insurance companies have been quick to focus on leveraging digital infrastructure and disrupting traditional models of buying and servicing insurance policies. To put it simply, embedded insurance refers to bundling of insurance coverage within a product or service itself, offered at the point of sale or service. For example, while booking a flight ticket you are given an option to buy travel insurance, or while buying an electronic device you are given an option to purchase accidental damage and theft insurance to protect the device. These embedded insurance products are already being offered online by leading e-commerce companies, and operators of popular mobile apps for ride hailing, delivery, travel booking, payment or other services, amongst others. Embedded insurance could either be offered on a paid basis (such that the customer pays an additional amount towards insurance premium while purchasing the core service/ product), or on a complimentary basis where the insurance cover is attached to each sale of the product or service.
The insurance cover would typically pop up as an add-on to another purchase, when the customer is already contemplating a financial decision and his/ her data is, by now, pre-filled for insurance purchase. For insurance companies, this model creates a new revenue stream and provides a medium of low cost distribution of its policies. It also provides access to a wider base of customers and their valuable data, enabling insurers to enhance overall product innovation, perform risk assessments and calculate more accurate pricing. It provides a lot of convenience for people as insurance is available at the same time that they buy a valuable product or merchandise. When such convenience comes powered by data and technology to make sure that the customer gets the right choice of insurance product to fit what he’s buying, based on the customer’s digital footprint, it’s an attractive proposition for all concerned.
Since distribution of insurance remains highly regulated and limited to insurers and intermediaries (including brokers, corporate agents and individual agent) licensed by the Insurance Regulatory and Development Authority of India (IRDAI), a majority of ‘embedded insurance’ covers are based on group insurance arrangements. The IRDAI has formulated extensive norms on solicitation, distribution and administration of group insurance policies and has also laid down certain key conditions for forming a valid “group” for group insurance, which include that the group should consist of persons assembling together with a commonality of purpose and that the group should not be formed with the main purpose of availing insurance. Since insurance products can only be issued and sold by licensed and regulated entities, it is imperative that embedded insurance arrangements are reviewed carefully from a regulatory perspective.
While there are great benefits in pushing the embedded insurance model, the Indian insurance market remains highly regulated. Compulsory bundling of insurance products is not permitted by the regulator. Further, compensation payable to the respective stakeholders in an embedded insurance model continue to be challenging where the Insurance Act, 1938 prohibits inducements or offering of rebates to any person purchasing insurance and only licensed intermediaries are permitted to receive commissions for sale of insurance products.
There is also a detailed framework put in place by the IRDAI on advertising of insurance products, and the roles which can be performed by unlicensed third parties. While one of the consequences of ‘embedded insurance’ is that the insurance component is rendered ‘invisible’ to customers – this is a double-edged sword as customer awareness is critical for a financial product like insurance. For embedded insurance to be successful on a larger scale, the right balance will have to be achieved between operational efficiency / seamlessness of customer journey on the one hand, and the quality of customer awareness on the other hand. In short, there are valid concerns that customer interests should not get lost in the fine print, and customers should have easy access to granular details of their insurance covers. The designing of customer interfaces and wording of disclaimers will be important to delineate roles of stakeholders, avoiding customer dissatisfaction, mis-selling concerns and managing exposure to consumer litigation. Perhaps, one of the consequences of the growth of embedded insurance will be gradual simplification of the terms of insurance documentation, as well as simpler and faster insurance claims processes.
In the same vein, the next phase of growth of embedded insurance can be fueled by insurtech players not only augmenting distribution, but also the policy servicing/ claim settlement aspects. Depending on the levels of up-take by customers, this model will likely impact product innovation and underwriting functions. Given that sophisticated underwriting and accurate pricing is at the heart of successful insurance operations, industry players will mull over how embedded insurance products will meet these challenges (alongside improving distribution). Such models will also strongly influence insurers to develop products, based on customer access points available through their embedded insurance partners.
The Road Ahead
‘Embedded insurance’ can be an incredible tool for insurers and intermediaries to increase insurance penetration, particularly in rural or other underserviced regions of the country. Likewise there are also significant benefits to customer’s ease of use and convenience. It will be critical for businesses to strike the right balance between speed/ efficiency of business operations, protection of customer interests and compliance with data protection and regulatory norms for the success of this model.
This article was originally published in The Times of India on 11 November 2021 Written by: Shailaja Lall, Partner. Click here for original article
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
The Bar Council of India does not permit solicitation of work and advertising by legal practitioners and advocates. By accessing the Shardul Amarchand Mangaldas & Co. website (our website), the user acknowledges that: