Is investor bullishness on embedded insurtech warranted?

Embedded insurance — selling coverage at the same time as another product or service — is on the rise. According to data platform Dealroom, it accounts for a growing share of all policies sold, and startups in this space raised nearly $800 million in 2021 alone.

Having recently polled investors on all things insurtech, we were curious to know if the market remained as bullish on embedded insurance as last year — and whether it was warranted.

“Personally, I remain bullish on embedded insurance,” Brewer Lane Ventures general partner Martha Notaras told TechCrunch. “Many insurance purchases are difficult, so rolling insurance into another transaction makes a lot of sense.”

While seeing clear value in the ability to bundle insurance with another purchase, Notaras and other investors we talked to also had reservations.

“We believe in the concept of embedded insurance, but a more measured approach would suit investors well when analyzing these businesses,” Distributed Ventures partner Adam Blumencranz said.

Some concerns we heard from investors have to do with less promising concepts masquerading as embedded insurance, while others are challenges of the model itself. But all in all, they paint a picture of a vertical whose potential goes well beyond easier distribution.

A new sales channel?

A recent joint report from Dealroom and VC firm Mundi Ventures described embedded insurance as having the ability to “benefit all the actors involved, from third-party distributors and insurers to end users.”

If that seems a little abstract, let’s take the report’s example of car insurance bundled with the online purchase of a used car. For the car marketplace, the transaction could mean additional revenue and better service for clients. And for the insurance provider — which can be an incumbent helped by an insurtech or an insurtech itself — the model could unlock a new and powerful distribution channel.

From this perspective, there are similarities between embedded insurance players and buy now, pay later (BNPL) providers. But this parallel also hints at potential pitfalls for insurtechs that don’t think enough about their relationship to platforms.

A major risk is the stability of a relationship that Insurtech Gateway’s director and co-founder, Rob Lumley, describes as one-sided. “Embedded products are more likely to chop and change their insurance provider,” he warned.

Notaras thinks VCs are less likely to gloss over this. “I do think that investors will be more thoughtful about the strength and durability of the embedded channel,” she predicted. Her takeaway? That “the winners in this space will need to forge unique and valuable relationships with the owner of those other transactions.”

There are many contexts in which insurance can be sold as part of a bundle, meaning that partners can be quite varied. For instance, VC-funded insurtech for embedded insurance Cover Genius says it “protects the global customers of the world’s largest digital companies — including Booking Holdings, Intuit, Hopper, Skyscanner, Ryanair, Descartes ShipRush, Zip and SeatGeek. It’s also available at Amazon, eBay, Flipkart, Shopee, Wayfair and — via XCover Go — many smaller stores.”

Again, if this reminds you of BNPL, you are not alone — which calls for advice, given that sector’s ups and downs in recent quarters. “Embedded insurtechs,” Notaras said, “need to be thinking about what lasting value they can deliver to their sales channels so the channel does not see insurtech as one of many providers, which is what I observe happening in the BNPL fintech space.”

Finding true value in embedded insurance

According to OMERS Ventures principal David Wechsler, there’s often a misunderstanding on what embedded insurance is and where its value truly lies.

“Many believe embedded is a distribution-only play. In other words, sell insurance as a bolt-on while selling something else,” he said. “Improving the efficiency of distribution is highly desirable, but the embedded model has a lot more promise with improved underwriting.”

For founding partner Florian Graillot, embedded insurance is now a buzzy term that some use in misleading ways. “A number of B2C startups with an online sales journey are rebranding themselves as ‘embedded insurance,’ but they move users outside of their partners’ customer journeys.” This means that they are not true embedded insurance players.

When done right, embedded insurance is a lot more than lead generation, Graillot said. “There is a real opportunity for insurtech startups that manage to combine both the tech/product expertise — to add insurance into partners’ journeys — and the insurance knowledge to quickly design relevant policies.”

New York-based Sure is an example of a company that sees embedded insurance as more than an add-on. Its APIs allow its clients to build custom insurance products that are tailored for their users and fit into their brand experience. (German insurtech Hepster does something similar in Europe, as does YC-backed Curacel in Africa.)

There’s a lot of value in the first-party relationship that platforms have with their users — and that should be leveraged, Wechsler said. “The embedded vendor should not only have greater access to the customer, they should also have a level of detail about the customer that helps quantify the risk.”

For Wechsler, auto manufacturers illustrate how embedded insurance can go beyond distribution: They “not only have access to the customer, they also know how customers drive. Underwriting can take the real risk into consideration and price the coverage appropriately.”

Cars and insurance are a common blend, but there are lots of other contexts in which bundles can be sold — and already are. “A number of players have emerged in the field, most targeting the ballooning gig economy, but embedded insurance can be applied to so many more verticals like recruitment or mass retail,” said Clarisse Lam, associate at New Alpha Asset Management.

Wheat from chaff

The potential breadth of embedded insurance explains why investors have been enthusiastic about it. But is this level of interest holding up despite the public market selloff and worsened macroeconomic conditions? For Lam, the answer is yes.

“I think embedded insurance is still a hot market for investors right now,” Lam said. She expects this trend to continue: “The sector has already attracted millions in investor money, and it will continue to do so as the value of embedded insurance is unlocked across all markets.” However, insurtechs won’t be given a free pass: They “still have to meet investors’ expectations for revenue generation,” she added.

Portage Ventures partner Hélène Falchier concurred in calling embedded insurance “a long-term trend.” But we would argue that this is perhaps precisely why it would benefit from less buzz and volatility.

As mentioned earlier, Distributed’s Blumencranz is one of the people who’d like to see less hype. “Although we’re generally bullish on the idea, we think investors, entrepreneurs and industry analysts get a little too carried away at times.”

Blumencranz is not bearish at all on embedded insurance — his firm recently made an investment in this space — but he and his colleagues have a thesis: “[That] more attention must be paid to the ‘why’ (i.e., is it an organic extension of the embedded partner’s offering?), the ‘what’ (i.e., is it the right insurance product at the right price?) and the ‘when’ (i.e., is now the time the consumer wants to shop?).”

How many embedded insurance companies will take the concept the whole way remains to be seen, but they are undoubtedly changing insurance as we know it. There could be more to come, this time on the M&A front: According to Wechsler, “the growing interest and value of embedded insurance may bring nontraditional companies into the acquisition arena as well.” Who will be the first non-insurance company to buy an embedded insurance player? We are dying to know.