The emergence of “embedded insurance” is disrupting the insurance distribution chain’s reliance on traditional insurance carriers and producers. Instead, new technology platforms enable companies to embed the purchase of insurance coverage along with their brands’ core product offerings. Embedded insurance allows companies – across a range of industries – to offer their consumers tailor-made insurance coverage at the point of sale, providing consumers a more frictionless purchasing experience as well as supplying insurance underwriters with more data for better pricing.
This article highlights six key issues of which companies seeking to enter into the highly regulated insurance space should be familiar.
The first question that a company seeking to embed insurance offerings on its platform must address is what insurance-related licenses are necessary. In general, any person or entity selling, soliciting or negotiating insurance must be licensed as an insurance producer or qualify for an exemption from such licensing requirements. A license is required in each state in which the insurance products are offered and for each type (or “line”) of insurance offered. Where activities are transacted online, this typically means that a license is required in all U.S. jurisdictions.
Instead of becoming a licensed producer itself, a company may decide to partner with a third-party licensed producer to host on its platform. As discussed further below, if a company decides to become a licensed insurance producer itself, this broadens its ability to market the insurance offerings as well as provides flexibility as to how it may be compensated. Either way, a licensed insurance producer will need to partner with an adequately licensed insurance carrier to underwrite the policies; in most cases companies looking to offer insurance will most likely pursue the insurance producer route as most companies will not be ready to meet the capital, regulatory and logistical requirements it takes to be a full-stack licensed insurance carrier.
To ensure a smooth insurance producer licensing process in all states, it is essential that the formation of the insurance producer entity satisfy certain state-specific requirements. Once the company has obtained its business entity insurance producer licenses, the company will need to be mindful of certain ongoing compliance issues, including insurance carrier appointments, insurance agent affiliations, records maintenance, license renewals, maintenance of premium monies, trade practices and cybersecurity.
The answer to the question of what insurance licenses a company obtains will dictate its flexibility with respect to how it may be compensated. Generally speaking, a person or entity must be licensed as an insurance producer in order to receive any success-based compensation in connection with the sale of an insurance product. By contrast, non-licensees that direct business to unaffiliated third-party insurance producers may receive compensation calculated by other metrics, including flat fees, fees-by-click, marketing or advertising fees or fees based on referrals, subject to certain additional qualifications. The amount of compensation a company receives – whether as a licensed producer or as a non-licensee that directs business to unaffiliated third- party insurance producer – is ultimately a business negotiation with the carrier and any other involved third-parties.
Such negotiation may take a range of factors into account, including, among others, a company’s brand and established customer base, a company’s access and ability to share consumer data and whether or not a company holds its own insurance producer licenses or is reliant upon an unaffiliated third-party insurance producer.
Similar to the issue of compensation, what and how a company can communicate to its consumers about insurance offerings depends on whether or not such company is a licensed insurance producer or a non-licensee. Whereas a licensed company can freely discuss the terms of the insurance offerings, a non-licensee’s website is generally – subject to certain qualifications – limited to include internet advertisements for products or services of unaffiliated third-party insurance companies and producers in the form of banners, tiles, hypertext links, frames or embedded links, which link to the licensed insurance entity’s website where the insurance solicitation and sale takes place.
In terms of messaging, advertisements cannot be untrue, deceptive or misleading. Insurance laws and regulations may impose certain additional requirements depending on the applicable state and the line of business involved. In addition to state insurance laws, insurance advertising may be subject to certain additional Federal Trade Commission (FTC) rules and regulations.
Companies offering insurance products on their platforms also need to be cognizant of not tripping anti-rebating laws. Although the rules differ on a state-by-state basis, insurers and producers are generally prohibited from directly or indirectly offering inducements or valuable consideration (above certain de minimus thresholds) in connection with the sale of insurance when such inducements or valuable consideration are not specified in the insurance policy. The underlying purpose of these anti-rebating provisions is to require an insurer or producer to provide insurance in a nondiscriminatory manner to like insureds or potential insureds, and to prohibit an insurer or producer from providing an insured or potential insured with any special benefit not afforded to other insureds or potential insureds.
Similarly, many states also prohibit tie-in sales, whereby the purchase of a good or service is a condition of purchasing insurance. In New York, for example, regulators have interpreted statutory prohibitions against tie-in sales to permit bundling insurance with the purchase of a good or service only where the insurance is provided on an optional basis and for a separate charge. Companies seeking to embed insurance solutions when selling non-insurance products or services need to be sensitive to these state-by-state restrictions and take care in structuring their programs so as to be compliant with these rules.
Companies seeking to embed insurance offerings on their platforms have a competitive advantage in their access to consumer data. While consumer data can be useful in underwriting and pricing risk, state insurance laws impose certain limitations. Although an insurer (or a producer acting on its behalf) has wide discretion in selecting risks and assessing those factors that it deems material to such risks, states prohibit insurers or producers from engaging in unfair discrimination in the pricing, design and sale of insurance products. Insurers or producers must have a reasonable and actuarially-grounded basis to justify differentiating among policyholders.
With respect to certain underwriting factors, insurance laws may restrict such the use in the underwriting process unless there are sound underwriting practices and actuarial principles reasonably related to actual or anticipated loss experience. With respect to other specific categories, however, insurance laws restrict such use absolutely. For example, the insurance laws of every state prohibit underwriters from discriminating on the basis of race, ethnicity or national origin in making underwriting decisions, including in determining rates, regardless of whether or not they correlate with or contribute to greater risk.
Accordingly, although companies may leverage their consumer data to offer more competitive pricing than traditional companies in the insurance market, the ability to use such data is not unlimited and companies must adhere to specific state insurance laws and regulations.
6. Intellectual Property
For nearly all companies that seek to add insurance to their platform, protecting intellectual property is paramount. In negotiating agreements with a carrier and/or unaffiliated third-party insurance producer partners, a company must pay close attention to the intellectual property provisions so as to ensure its technologies are safeguarded. Similarly, insurance carriers and producers that partner with non-insurance focused companies must make sure that their own intellectual property rights are secure.
Further, there are unique ownership issues that arise in the insurance context in addition to the typical intellectual property rights associated with the sharing of technology platforms. For example, an issue that typically arises in negotiations is which party owns the insurance policy expirations and renewals. Accordingly, when negotiating these partnership agreements it is critical to account for both traditional intellectual property and other insurance-specific ownership rights.
The ability of non-insurance-focused companies to package customized insurance solutions along with their normal product offerings promises opportunities for industry and consumers alike. But such opportunities raise a myriad of legal and regulatory issues. Although this article highlights six key issues, these are by no means the only ones implicated by embedded insurance. The ability to successfully navigate these issues is central to whether the promise of embedded insurance opportunities can be fully and effectively realized.
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Editor's note: Authored by Alexander Traum, this article was originally published in Legaltech News.