Why Should Insurers Care About Embedded Finance?

This article is by George Toumbev, Chief Commercial Officer, NatWest Boxed

Price is no longer a differentiator for insurers – most large providers can price premiums at or near market rates, while switching costs for customers are pretty much non-existent.

Instead, customer experience has become the focal point. Individuals are focusing more on preventative care and income protection; cover for emerging risks for EVs and extreme weather; better ways of managing costs; and convenient digital experiences. But how can insurers better serve these needs?

Enter embedded finance.

Embedded insurance, a form of embedded finance, is already driving third party integrations, and it’s time to build on this through a wider range of financial services. From price incentives, savings accounts for retirement planners, and credit options for unexpected eventualities, insurers must focus on developing a more holistic view of customer needs.

The challenge

Insurers, whether offering life, travel, car or health insurance, typically face limited customer touch points, likely a yearly check in when an annual policy is up for renewal. The nature of these relationships can be transactional, with consumers choosing price and convenience over brand loyalty.

But customer retention in the insurance industry is more than just a statistic—it is a key driver of profitability and long-term growth. The insurance industry has the highest customer acquisition costs of any industry. It costs an average of seven to nine times more for an insurance provider to acquire a new customer than to retain one (IAD). Embedded finance offers insurers a way to increase the lifetime of these customer relationships while providing a better service.

The opportunity

If we break down the insurance market by types of insurance, we can observe several key trends and opportunities.

Motor vehicle insurance premiums are expensive, and consumers will shop around to find the best price, typically using a comparison website. Embedded finance enables insurers to offer instalment plans to incentivize consumers to buy annual car insurance, which helps break down the cost into affordable repayments. Alternatively, insurers can also offer their customers a savings proposition to help them save and mitigate unexpected costs, such as paying for an MOT or emergency repairs. In today’s climate, empowering customers to build savings for a rainy day becomes a natural, coherent proposition. And in doing so, the insurer can not only expand the customer’s payment ecosystem but also avoid them seeking alternative providers.

For travel insurance providers, the trajectory is similar. 51% of Brits bought single-trip insurance in 2023 despite having multiple trips due to lack of awareness on multi-trip coverage, and only 23% take out annual insurance, demonstrating that even frequent travelers are unaware of annual policies or are unengaged with their insurance options (Co-op Insurance). Offering financing to spread the cost of annual insurance products opens the door to more direct customer engagement, reducing the need to rely on booking sites for sporadic insurance packages. As with car insurance, the ability to save towards a holiday in a dedicated account or wallet also increases customer touch points, whilst incentivising them to remain loyal to one provider.

When it comes to home insurance, the picture looks a little different. As of 2024, there were 35 million home insurance policies in the UK, but demand for home insurance is expected to slow down, with 28.8% of residential property transactions terminated in 2024. Climate change and a green energy trend is also driving the need for new insurance lines, such as home insurance that covers EV charging points and houses with solar panels. The Government’s policy demand for energy efficient homes by 2025 has also put pressure on landlords to upgrade their homes to meet a threshold of energy efficiency.

Property insurance must expand into new lines of smart home insurance, but insurers face an even greater challenge in making their packages accessible and flexible for customers. Working with an embedded finance provider could enable home insurance providers to offer savings products or financing for consumers to upgrade their homes, as well discounts on insurance product add-ons to accommodate their shifting needs. They could also incentivize homeowners to make their houses energy efficient by offering credit options to split their alteration cost payments.

Why should insurers care about embedded finance?

Embedded finance will be a $320B market by 2030 (BCG), and insurers that can use it in the right context will be able to pull away from the pack.

Insurers are uniquely placed to benefit from embedded finance, with existing rich data on their customers which means they’re able to predict moments of truth – from buying a car, to buying a house, to starting a family. If they can broaden their product set to deliver value-adding services on the back of these milestones, designed to make it easier for customers to streamline their financial lives, they can build loyalty from the very first interaction.

We’ve already witnessed a rise in the adoption of embedded insurance that is facilitating indirect engagement through third-party integrations. By embracing embedded finance, insurers can own the consumer journey instead of customers looking elsewhere, bundling insurance products with financial services to enable them to save towards a new car or a holiday whilst receiving a discount on a related insurance product.

Broadly, insurers want to increase engagement, improve and innovate the customer experience. And if they can generate additional revenue, even better. Embedded finance is perfectly positioned to empower insurers to expand the services they deliver and the way they deliver them.

Ultimately, insurance companies are struggling to build loyalty in a competitive environment. Embedded finance has the potential to transform transactional customer interactions into deeper, life-long relationships.