Increasing frequency and severity of CAT events
In my past life, I used to work at a major property and casualty insurance firm in claims strategy and planning. The team had an envious view of the city, perched high on the thirteenth floor in the Back Bay area of Boston. I remember one day, the monotony was suddenly disrupted by a relentless thwack, thwack, thwack against the windows – a hailstorm fell upon the city.
Everyone crowded around the windows in awe. “It’s so loud, it’s amazing,” someone remarked. Like a specter, the normally cheery head of the property claims division appeared behind the group. “Team, that is the sound of claims, claims and more claims.”
They were right. We were about to be inundated – car damage, roof damage, medical injuries due to accidents. That one fall day in Boston serenaded one of the company’s worst years for weather-related damage.
Extreme weather events – deep freezes, floods, severe storms, heatwaves – are becoming more frequent and severe with the changing of our climate1. With that, the cost of property and casualty insurance claims is rising2. While insurers may adjust for this changing risk by taking a more detailed approach to underwriting and, in general, repricing policies upwards, a material price increase is an easy way to spark an unwanted question in their policyholders’ minds: “Should I switch insurers?”
Embedded lending as an answer
Embedded lending is a type of embedded finance, which is the act of taking a banking product or process and embedding it into a non-bank environment. By doing so, it addresses customer demands to create less work while building more security and fluid experiences into the processes and tools they already use.
Embedded lending may give insurers a powerful new tool to not only delight policyholders, but also actively improve the resilience of properties they insure, possibly reducing the frequency and severity of insurance claims in the future.
How can embedded lending help?
Let’s consider a home that has been damaged by flooding in a storm. Embedded lending would allow an insurer the ability to offer a white-labeled loan to a claimant embedded into the claims process.3 This means having the ability to help the claimant to not just repair their home, but also potentially build back better than before.
This may also open new horizons for the claimant. They could consider measures or building materials that are more resilient to future flooding, better insulation to reduce heating costs and combat climate change or simply purchase items that will allow them to renew their space after what is likely one of the more stressful moments of their lives. The result? Insurers can go beyond the norm and help better the lives of claimants.
For the insurer, this could suddenly change the claims business into a cost mitigator and potentially a revenue center for the organization.
How? First, the claims operation could reduce the likelihood of a future claim, or its severity – decreasing future expense ratios and increasing long-term profitability. Expanding beyond this, offering embedded finance could turn claims into a revenue generator rather than an insurer’s core cost center. Finally, helping a claimant to be “in a better situation than before” has ramifications for enhanced policyholder experience and may result in higher retention rates.
Put simply, this may also help with increasing the value of the asset and its corresponding premiums. All in all, there’s a great deal of potential in improving combined ratios.
You can find out more about embedded finance in The Global Payments Report.
So… what should you consider now?
It may still be early days for embedded lending as a product for insurers. There are a lot of questions to be answered, especially whether this is right for your policyholders’ desired experiences. However, it’s important to start considering these critical questions with your team so that the investments that enable these features are made when or before your policyholders begin to expect them.
Better yet, you can partner with a company that is thinking about this for you as part of your payments experience.
1 BBC (2019) Climate change: Huge toll of extreme weather disasters in 2021 [Accessed 7 April 2022]
2 Lockton (2021) Why the cost of real estate insurance claims have been rising [Accessed 7 April 2022]
3 FinTech Magazine (2022) Embedded finance and the growth of fintech in 2022 [Accessed 8 April 2022]