Embedded insurance through regulation and digital innovation

The current regulatory framework

 

The Insurance Distribution Directive (IDD)

"Embedded insurance" refers to offering insurance services bundled with noninsurance products or services. This usually results in insurance products being distributed through noninsurance channels by noninsurance players in their products and services. In this way, companies can maximize their market penetration and complement their offerings with an insurance component.

Until the Directive (EU) 2016/97 (IDD) entered into force and was transposed into national law, there was no specific regulation for these practices, although they were already widespread in the market and monitored by the Italian Institute for the Supervision of Insurance (IVASS).

Embedded insurance was implemented through partnerships consisting of different types of contractual models between non-insurance companies and insurance companies, with some limitations.

First, it was only large companies that had the capacity to implement such models. In most cases, insurance products weren't really embedded in a complex offering and in a single customer journey: the agreements between the parties included the mere obligation for the noninsurance operator to give its customers the opportunity to take out a standardized insurance policy, at its own choice and discretion, after the main purchase of a product or service. So there were separate contractual relationships with distinct obligations and performance between the customer on the one hand, and the insurance company and the service or product provider on the other. This also made the insurance company easily replaceable in the model, unless the partnership agreement bound the noninsurance company with exclusivity clauses or otherwise long-term commitments. It also resulted in absent or ineffective data sharing and exploitation.

The IDD regulates "insurance distribution" activities, which can only be carried out by authorized entities subject to supervision by the Supervisory Authorities.

Understanding which activities fall under the IDD's scope of application and which are excluded from it – and can, therefore, be carried out freely by any market player – is crucial in the context of embedded insurance, where companies and intermediaries work closely with business partners that are often outside the insurance world.

Consider, for example, travel policies bundled with airline tickets, accidental damages polices bundled with electronic devices, or credit protection insurance bundled with credit cards. Although these "packages" may appear simple, they conceal often complex distribution models. In fact, their implementation involves interaction between multiple parties, such as service providers or digital platforms, who likely don't hold an insurance license.

In this context, it's essential to understand what's meant by "insurance distribution."

The IDD's definition of insurance distribution is quite broad. It includes any activity of advice or proposal or other preparatory activity for concluding insurance contracts, assisting in the management of such contracts or supporting in case of claims. Conversely, merely providing information about potential policyholders or insurance products doesn't constitute insurance brokering, if no further action is taken to facilitate the taking out of the policy.

The connected contracts exemption

Also worthy of attention is the "Connected Contracts Exemption."¹ Ancillary insurance intermediaries can take advantage of this exemption, avoiding the application of the IDD. So, in essence, they can distribute insurance products without being registered with the RUI (the Italian Register of Insurance Intermediaries), if:

• they offer insurance complementary to the different good or service offered; and
• the premium doesn't exceed EUR600 per year or EUR200 for insurance policies combined with services of less than three months' duration.

If the intermediaries don't meet these conditions, they have to get an insurance license, unless the distributor limits their activity to a mere "introduction" of the insurance product, which, in that case, would probably be purchased at a later date, as was the case in the "old" embedded insurance model.

Obligations regarding cross-selling

Regardless of which distribution model is adopted, in all cases where the insurance product is ancillary to another product (or vice versa), certain provisions must be observed.

Article 24 of the IDD (and Article 120-quinquies of the Italian Insurance Code) provides specific transparency obligations in the case of cross-selling, with the aim of ensuring clarity and freedom of choice for consumers. In particular, distributors have to inform customers about the possibility of purchasing different components of a package separately or provide a detailed description of the individual components and their costs.

New models of embedded insurance

The combination of specific legislation on cross-selling and the evolution of digital technologies, including cloud, algorithms and a greater general ability to leverage data, are leading to the development of new models of embedded insurance. They unify all customer interactions into one articulated flow, and unlike the old model, which offered opportunities primarily to large companies, they're now an opportunity for operators of all sizes.

New models need to be reflected in the contracts between the stakeholders involved. This is especially important in terms of IT integration of their respective systems, data access and control, obligations of the parties according to their role in data protection, project governance and accountability. It's also key to customer relationship management, regulatory compliance, liability, KPIs to monitor the success of the project, but also termination of the partnership and its consequences. Finally, through data processing and algorithms, companies can offer highly customized insurance solutions in line with each client's unique needs.

But the regulatory and market framework isn't yet complete. So companies can't maximize the benefits of new embedded insurance models. Data sharing remains based on the initiatives of insurance ecosystem players and the contracts between them: insurance companies, brokers, technology providers and enablers. There's still no mandatory regime for data sharing in the insurance industry. And this is precisely the goal of the new European FIDA (Financial Information Data Access) regulation proposed by the European Commission, which is expected to become applicable from 2027.

 

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¹ See Articles 1 (3) and 2 (1) (4) IDD.