Banks and the Digital Wallet Race: The Embedded Insurance Strategy

The banking industry is in a period of digital disruption as customers increasingly demand a digital experience and access to more value-added products and services. Banking also faces competition from non-traditional players where technology has fueled the creation of digital platforms, where the offer of financial services to their extensive customer base is increasingly important. As examples, we can see the rapid rise of “super apps” in Asia that offer multiple services in an integrated customer experience and the creation of digital wallets for customers to make and receive payments. These themes have led established banks and fintechs to look for ways to broaden their digital product portfolio and provide greater value to their customers.

One way to enhance a digital product portfolio is by making insurance available to customers through contextual offers that are integrated into the banking customer’s journey e.g. when taking out a loan or making a bill payment — presenting the relevant insurance proposition at just the right time to create a seamless customer experience. By the nature of the offer, these products need to be simple, affordable, and clearly relevant to the customer’s needs. Banks are increasingly adopting this approach, but is it working? And if so, how well?

With this survey, Chubb — a world leader in insurance — wanted to gauge perceptions of banks and fintechs that have explored or implemented digital insurance offerings for their customers. What are the expectations and main drivers of motivation — increase customer trust, higher revenue, improved customer retention? Is this a long-term, sustainable solution or a more short-term view?

Chubb also wanted to better understand how consumers around the world feel about buying insurance digitally. Are certain products more conducive to buying digitally? What about generational or regional buying preferences? Answers to these and many other questions will enable financial institutions to make data-driven decisions as they consider the expansion of core offerings to include insurance protection.

Embedded insurance is a strategic growth opportunity for both established and digitally native companies. The findings from the Chubb survey provide valuable insights on the key themes of embedded insurance — consumer expectations, the drivers of value creation for banks and fintechs, insurance needs and challenges for banks and fintechs — and helps inform the banking sector. Chubb is an embedded insurance market leader and well-positioned to assist banks and fintechs as they look to capitalize on this strategic growth opportunity.

Sean Ringsted

Chief Digital Business Officer, Chubb

The survey demonstrated that fintechs and established banks around the world overwhelmingly agree that including digital insurance as part of their portfolio of products and services is becoming a must-have to compete in today’s global financial services market.

Financial organizations have answered the call of the consumer for an intuitive experience for their financial products. Digital transformations within established banking organizations, and innovation by digitally native financial firms — or fintechs — has led to many cutting-edge payment solutions from digital wallets to contextual payments embedded in social media.

Financial organizations offer insurance tied to different financial products or as a standalone offering to bolster their customer base, increase consumer trust in financial products, and create additional revenue streams.

A survey of financial executives worldwide involved in making decisions about embedded insurance products — whether they currently offer embedded insurance or not — reveals that 81% of them believe that embedded insurance will turn from a nice-to-have to a must-have.

This report, based on a survey of 2,000 consumers worldwide and 200 executives from financial organizations, including established firms and fintechs — as well as interviews with Chubb’s executives — will address:

• The state of play of embedded insurance: The revenues that financial organizations currently derive from insurance and how they expect it to grow over the next three years; the key benefits of embedded insurance for those who offer it; and which financial organizations, established banks or fintechs, are leaders in embedded insurance.
• How consumers around the world feel about buying insurance: Consumers’ needs and expectations in terms of insurance coverage, main areas of underinsurance, consumers’ attitudes toward buying insurance via digital channels, and the omnichannel approach to embedded insurance.
• The partnerships between financial organizations and insurance companies: The most important characteristics that financial firms are looking for in their insurance partners (and the ones they ignore), challenges with forming partnerships and how to overcome them.

Methodology

Findings are based on a survey of 2,000 consumers worldwide and 200 financial organizations’ executives, conducted by iResearch Services in the second quarter of 2023.

Consumers were evenly split among four regions: North America (500), Latin America (500), Asia Pacific (500) and Europe (500). They represented all age groups, levels of education, and professional status. For brevity, in the text of the report, the sample of 2,000 global consumers is referred to as “consumers.”

Financial executives represented established banking organizations (52%) and fintechs (48%). They were evenly split among four regions: North America (50), Latin America (50), Asia Pacific (50), and Europe (50). The majority of fintechs (84%) had revenues of $10 million to $500 million ($250 million in some Asian markets); most established banking organizations (89%) had AUM (assets under management) of at least $1 billion. All executives surveyed engaged in decision-making about insurance products, such as embedded insurance.

For both consumers and financial executives, the regions included the following countries:

North America: U.S. and Canada; Latin America: Brazil, Mexico, and Chile; Asia Pacific: South Korea, Singapore, Thailand, The Philippines, and Vietnam; Europe: United Kingdom, France, and Spain.

Digital wallets, contactless payments, and embedded transactions are now part of everyday life. The era of cash, checks, or visits to an ATM has been supplanted by virtual payments. With many financial digital services already fully embraced by customers, financial institutions — be they well-established banks or digitally native fintechs — are looking for new types of offerings.

Many turn to insurance, and specifically embedded insurance — an innovative way to integrate relevant risk protection into customers’ purchase journeys without adding any friction to their experience.

Embedded insurance is relevant to a product and environment, like when a customer buys travel insurance while buying an airline ticket, anti-theft insurance when purchasing a diamond ring, or cyber insurance when signing up for a video gaming subscription.

Financial organizations project significant growth in the revenues they derive from insurance. In three years, more than half of financial organizations surveyed expect to derive 10% or more revenues from insurance, versus a fifth who derive that much revenue from insurance today.

Insurance offers to bank customers come in different forms: standalone cross-sells of insurance products (offered through digital and other distribution channels) that complement a bank’s core product offering; relevant insurance embedded at no additional charge such as travel insurance or purchase protection coverage on a credit card. Insurance offers to bank customers serve to enhance bank customer acquisition through new product benefits, deepen customer relationships to drive loyalty and stickiness, and support usage of bank products by creating recurring payment streams.

Most survey respondents, globally 66%, offer integrated insurance as part of added service value. That is one reason why financial executives globally ranked customer trust and satisfaction above direct revenue generation as the top benefits of embedded insurance. One of the reasons behind offering embedded insurance, especially for fintechs, is their desire to aggressively grow their customer base.

Across all regions, offering insurance as an added value is the top choice for financial firms, led by North America and followed by Europe. For example, French travelers who carry Boursorama Banque’s premium card, Ultim, can plan their trips with greater peace of mind because the card offers comprehensive travel insurance, provided at no additional cost to consumers.

Digitally native fintechs lead the curve in terms of insurance. Isabella Carvalho, Head of Digital, Asia Pacific, Chubb, is not surprised.

Unlike fintechs established banking organizations have to deal with widespread legacy technologies in all of their lines of business, as they are moving to an omnichannel, “phygital” customer experience. However, established financial organizations still have advantages, points out Israel Rayan, Senior Vice President, Consumer Distribution EMEA. "Firstly, established banks do not need to focus so much on growing their customer base because they have built it over the years. Secondly, their processes make them more operationally stable. Thirdly, they typically have more financial resources and do not depend on external sources for funding as much as startup companies."

It is not the origins of a company that needs to define its future.

Fintechs start out of the gate with an advantage over traditional banking organizations when it comes to embedded insurance, believes Rodrigo Valiente, Chubb’s Vice President of Digital, Latin America.

But that does not mean that any fintech offering financial services is ready to add on insurance. What’s the right time? While he admits there is no formula, Valiente points to several milestones that should be met before considering embedded insurance:

• A customer base of active users that are engaging with the platform regularly, at least once a month. “Insurance may not be something you think about every morning when you wake up. But digital platforms offer endless opportunities to create contextual insurance experiences to remind customers about the importance of insurance and deliver personalized solutions,” says Valiente.
• Financial products that lend themselves to embedding insurance, such as car loans, money transfers, or mortgage loans.
  
• A payment mechanism in place with the capability of collecting recurring premiums.

The adoption of embedded insurance follows the global arc of the adoption of mobile phones. Emerging markets, lacking adequate traditional communications infrastructures, and facing a scarcity of landlines, were quicker to adopt mobile phones than the developed economies.

For many people in the emerging markets, mobile phones were the only way to get a phone, so they were eager to embrace them. They leapfrogged from not having a phone at all directly to having a mobile phone, skipping the landline stage. The unbanked and underinsured in emerging markets are often leapfrogging the traditional banking stage to embrace digital banking and insurance. In those parts of the world where the traditional financial and insurance infrastructure is less mature, such as Latin America or Southeast Asia, financial executives and consumers are more excited about embedded insurance than their counterparts in more developed markets such as Europe and North America.

There is a fundamental difference in what digitization of financial services, including insurance, means in different regions. Before digitization, much of Latin America and Southeast Asia were cash-driven societies. Being underbanked translated into being underinsured. In Latin America, for example, the insurance penetration index (the ratio of underwritten premiums to GDP) of around 2% is less than half of that in developed countries. In some Southeast Asian countries, such as the Philippines, the index also hovers around 2%.

For example, GCash, a leading super app in the Philippines recognized that many customers would benefit from a backstop in the event they were temporarily unable to pay their bills.

In Brazil, Nubank, one of the largest digital platforms in the world, sought to add insurance services to its growing customer base, many of whom were unbanked or underserved customers buying insurance for the first time.

In developed markets, the digitization has been accelerated by the pandemic, and the focus is on transforming the traditional bank branch experience and the portfolio of products to better fit the digitally driven modern age. It’s not about first-time customers but about adjusting to the new habits of existing customers and the new ways of the younger generations.

While the current needs and maturity of financial and insurance markets vary by region, global markets are being influenced by technology-driven lifestyles and social trends that are worldwide. For instance, the fragmentation of experiences requires insurance in small chunks, like for a specific purpose, e.g., taking a rideshare trip. Changing work life, with a freelance workforce depending on short-term assignments, erodes long-term financial security and creates a need for paycheck protection. And the speed of life lends itself to a yes-or-no, split-second decision about insuring a single transaction. Thus, insurance purchased as part of another transaction is gaining traction, with more than half of Latin American consumers (55%) purchasing insurance in this way, which is more than in any other region.

And while the insurance protection gap is not equal worldwide, more than half of consumers globally, irrespective of whether they are in emerging or developed markets, believe that they need more insurance. They feel especially underinsured in the risks common to modern-day life — such as financial security, travel delay, or fraud. All of these modern risks can be insured using digital embedded insurance.

Consumers’ needs will continue to drive the swelling wave of embedded insurance, making the industry increasingly flexible and responsive, making more transactions nearly frictionless, and providing customers with the protection they seek.

The survey finds that consumers tend to have traditional insurance coverage such as car, health, and life insurance. There is a high degree of underinsurance in areas such as paycheck protection, pet insurance, and shipping or travel delay insurance, with each of these categories seeing adoption at less than 10% at this point. These underinsurance patterns are similar across the globe.

The types of insurance that consumers globally lack often relate to modern-day risks, which come with the increase in all kinds of travel, shifting work models from full-time to freelance or nomadic, introduction of new platform-based business models for workers to look for jobs, and customers to shop, to name just a few advances in how we live and work.

Several financial organizations have taken note of the needs of a modern consumer, including SoFi, an American digital personal finance company. The company’s insurance agency has teamed up with Blink by Chubb to provide simple, easy-to-understand and affordable personal cyber insurance. Chilean fintech Tenpo provides coverage for theft of personal belongings from a vehicle.

Most consumers still prefer to buy certain insurance products through traditional channels. Many consumers surveyed (65%) say there are forms of insurance they would buy only from insurance brokers. That number varies only slightly by region, with 70% of consumers in Asia saying that they would buy certain types of insurance while interacting with an insurance broker and not digitally, compared to 65% in Latin America, 64% in North America and 60% in Europe. However, the younger the consumers, the more likely they are to feel comfortable purchasing any type of insurance digitally.

Though there are differences by age, Amy McNeece rejects such cut-and-dried, age-based linear thinking. She stresses that while data may skew toward younger consumers as being more digitally savvy, the delineation does not neatly line up in all cases. “I think in terms of digital orientation rather than age,” she says.

To succeed at embedded insurance, financial organizations need to carefully design customer journeys by selecting the right channels for the right products and customer segments. 

The barriers to entry into the insurance business are high as the industry requires licensing and regulatory compliance, underwriting expertise, actuarial data, and claims operations. Since standing up an insurance business from scratch is inefficient for financial organizations, partnering with an insurance company is the way to go. 

Once financial organizations decide on partnering, they face a fork in the road: Financial firms can partner with established insurers or newer, digitally native insurtechs. Chubb’s research reveals that how these partnerships are typically formed exemplifies the adage that birds of a feather flock together: fintechs tend to partner with insurtechs, and established banks favor established insurers.

Such combinations are not always the most beneficial, especially in the case of fintechs. A partnership with an experienced insurer can be especially beneficial to a fintech because, being smaller organizations, fintechs typically do not have an insurance expert when they are first introducing insurance offerings. “They may add one or two people only after their insurance products are out,” says Valiente. An established banking organization, meanwhile, may have hundreds of insurance experts within its ranks.

Another benefit from a partnership between an established insurance organization and a fintech stems from the reality that consumers trust established brands more than they trust fintechs when buying insurance: About a third of consumers trust a digital-only bank to buy insurance, while almost twice as many trust an established bank or insurer.

That’s one more reason for a fintech to burnish its brand by partnering with an established insurer. However, financial organizations seem to have a blind spot when selecting their insurance partner: While their consumers have much higher trust in established brands versus digital-only ones, just 10% of financial organizations value a trustworthy brand in their insurance partner.

While their consumers have much higher trust in established brands versus digital-only ones, just 10% of financial organizations value a trustworthy brand in their insurance partner.

A data-driven approach is overwhelmingly the most important characteristic to have in an insurance partner, agree financial executives across all regions.

Banks and fintechs want to know the specifics about how insurance products affect their NPS, customer retention, or new customer acquisition.

They also want to test for these outcomes based on different placement of insurance prompts, types of products, product pricing, and other variables. "Availability of such testing tools and analytics reports is an integral part of a partnership with a sophisticated insurance partner,” says McNeece. Constant testing is then followed by tweaking and adjusting variables as new data comes in — to continually synchronize insurance offerings with the consumer journey.

The top challenges to succeeding with embedded insurance — whether external challenges with partnerships or internal organizational hurdles — center around technology and people.

“With technology being among the top three challenges in each region, there are a couple of ways to solve for it,” says McNeece. “First, it’s crucial to have a collaborative team guided by the same goal. Second, it is to make the technology itself simpler, by making it work from the insurer’s side with minimum effort on the part of the financial partner.”

After a successful spate of innovation of their core financial products, financial organizations are now ripe for moving to the next level and extending the digital transformation to insurance offerings. Consumers are ready for the digital delivery of insurance, with almost half saying that digital is the obvious way to purchase insurance, and who are also in need of more insurance that addresses emerging modern-day risks. More than half feel the need to have more insurance.

Embedded insurance is a digitally savvy way to offer many different types of insurance. With insurance being a complex offering, there are ways that financial organizations can help make embedded insurance a success: