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How Does Embedded Insurance Lower Customer Acquisition Costs for Carriers?

Customer acquisition is essential to property and casualty insurer growth. Yet the costs of acquiring new customers can be daunting — and customers are more willing than ever to switch insurers to suit themselves.

Embedded insurance offers a way to reduce customer acquisition costs and increase loyalty. By making customer acquisition and retention easier, embedded insurance allows for deeper connections and better long-term relationships between P&C insurers and the customers they serve.

The High Costs of Customer Acquisition

Property and casualty insurers spent billions on advertising in 2020, with Progressive alone spending nearly $2 billion, write S&P Global Market Intelligence’s Sarah Barry James and Kris Elaine Figuracion. And advertising is only one part of the total cost of acquiring new customers.

Insurance has one of the highest estimated costs of customer acquisition of any industry. Across all industries, the estimated cost of acquiring a new customer is five times the cost of retaining an existing one. In insurance, however, acquisition is seven to nine times more expensive than retention — between $487 and $900 per customer, writes Sean Harper, cofounder and CEO at Kin Insurance. Convincing new customers to buy coverage is expensive.

Customer acquisition costs (CAC) have a direct impact on a carrier’s bottom line. The more it costs to bring in a new customer, the more the customer will need to spend and the longer the relationship will need to be maintained in order for the acquisition to become a net benefit for the insurer. In an era of insurance customer choice and mobility, addressing the costs of customer acquisition can be more daunting than ever.

Because customer acquisition costs are so closely tied to the bottom line, addressing them has a profound impact on an insurance company’s business goals. “Reducing CAC means that the business is spending money more efficiently and should see higher returns in its total profit,” writes Sophia Bernazzani, product marketing manager at collaboration technology provider Owl Labs.

And high acquisition costs are passed on to customers. Even among P&C insurers that are digital innovators, reliance on inefficient methods of conducting business still abound, according to an April 2021 study by researchers Craig Paul Pillay and James Kariuki Njenga. Inefficiencies from carriers can be reflected in higher rates paid by customers. When this imbalance widens, customers begin to question the value their coverage provides. They may seek coverage from a different carrier, exacerbating the problem by forcing the carrier to turn again to customer acquisition.

Not only is customer acquisition expensive, but it is often inefficient in its failure to provide the coverage customers actually need. The IBM Institute for Business Value estimates there is a $1.2 trillion gap between the coverage insurance customers need and the coverage currently active worldwide. “Filling [this gap] will require insurance that’s more responsive, transparent, and affordable—not to mention easier to use and purchase,” write bolttech's Rob Bauer, and IBM’s Yoann Michaux & Mark McLaughlin. Embedded insurance meets this description, making it a promising option to improve coverage as well as lower costs.

Embedded insurance can help fill the coverage gap while making customer acquisition resources more efficient. Embedded coverage offers a way for insurers to directly address their bottom line while also providing the streamlined, personalized insurance experience customers expect.

Meeting Customers Where They Are

Digital transformation is a current, daily reality for insurers. There still remains plenty of room to improve the customer experience through digital channels, including the use of embedded insurance.

Most insurers have a basic online presence. Yet “very few are delivering a markedly improved, highly personalized overall experience via digital,” notes Michael Ellison, president of research and consulting firm Corporate Insight. Embedded insurance is one way to offer a personalized experience to customers at precisely the point in the customer journey that it is most needed.

Embedded insurance bundles insurance coverage with the purchase of the product or service for which coverage is required. For example, auto insurance may be included in the purchase price of a vehicle, or travel insurance may be part of purchasing an airline ticket.

For customers, the value of embedded insurance lies in its ease of access. Many customers won’t go out of their way to find separate insurance for a new purchase unless they are required to do so. “By contrast, insurance products that are natively embedded allow customers to protect themselves and their possessions against uninsured losses with unprecedented low (or even no) involvement,” writes Sibylle Fischer, director of strategic venturing and startup scouting at Baloise Group. The result is better peace of mind for customers and an improved regard for insurance.

For insurers, embedded insurance addresses another hidden cost of customer acquisition: the cost of onboarding a newly-acquired customer. Onboarding is essential to offering the personalized service customers want, but it’s often overlooked by sales teams, writes Peter Ord, founder and CEO at client onboarding and implementation platform GuideCX.

Embedded insurance kickstarts the onboarding process by gathering basic information and launching insurance coverage for the customer. With this initial information in hand, carriers and agents can dive into the work of educating the customer about the value of the policy and the additional insurance options available.

Putting Embedded Insurance To Work for Customers and Carriers

The costs of customer acquisition aren’t borne by carriers alone. Insurance agents also struggle with the high costs of turning leads into customers.

For agents, it can be particularly difficult to see how onboarding a new customer pays off, as the costs are often immediate but the relationship’s value only unfolds over time. Agents who miss the value of relationship-building are at risk of spending ever-increasing amounts of money and time on customer acquisition to no benefit, writes Carl Maerz, cofounder of Rocket Referrals.

Embedded insurance helps these agents by lowering the time and money costs of connecting to new customers. With acquisition out of the way, agents can move directly into building a relationship with their new customers.

Embedded insurance can also help address one of the largest sticking points for customers: A longstanding lack of trust in the insurance industry.

Customers recognize the value of insurance coverage. In a 2019 study, 62 percent of responding insurance customers said they found insurance provided peace of mind in the face of risk, writes Kai-Uwe Schanz, deputy managing director and head of research and foresight at The Geneva Association. Sixty-one percent of respondents thought insurance companies offered “an important service,” and 57 percent thought it was “smart and responsible to purchase insurance products.”

Despite customers’ recognition that insurance provides value, they don’t generally find insurers trustworthy. Only three percent of respondents in the 2019 Eptica Insurance Digital Trust Study, for example, considered U.K. insurers trustworthy.

Yet even here, embedded insurance provides hope. The Eptica study saw 63 percent of respondents state that “easy and seamless service” made them more likely to trust a brand. Combining the simplicity of embedded insurance with customers’ sense that they’re doing the responsible thing by buying coverage can help boost customer confidence while also lowering acquisition costs.

Insurers seeking to embrace embedded insurance will need to start by looking at their own technological capabilities. Insurers will need platforms and tools that work seamlessly in a digital environment, as well as up-to-date ways to capture, store, protect, and analyze data, write Robin Merttens and fellow researchers at InsTech London.

Traditionally, customer acquisition was one of the most daunting parts of the P&C customer journey. Embedded insurance makes it easier than ever to initiate an insurer-customer relationship. By embracing embedded insurance, P&C carriers can shift their focus from customer acquisition to addressing risk, providing tailored coverage, and building long-term customer relationships.

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