Embedded insurance: opportunities and risks

January 2023 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

January 2023 Issue

According to article 757 of the Brazilian Civil Code, an insurance contract is a contract under which “the insurer undertakes predetermined risks, against payment of a premium, to guarantee a legitimate interest of the insured regarding a person or thing”.

Traditionally, the contractual process of private insurance has been bureaucratic, based on various written documents, including a risk assessment questionnaire, a proposal and issuance of the insurance policy, thus formalising the acceptance of risk.

Recent, regulatory changes in Brazil, as well as social changes such as the coronavirus (COVID-19) pandemic and an advancing digital economy, have accelerated digital transformation in all sectors. In the insurance industry, Brazil has seen the rise of InsurTechs driven by regulatory sandbox projects. Today, some insurers in Brazil offer 100 percent digital insurance contracts, without using intermediaries, in a fast and seamless process that is very different from that offered by incumbents.

So, can digital sales become a key offering in the insurance industry?

Embedded insurance: prospects and potential

Embedded insurance falls under embedded finance, which is the integration of financial products and services into non-financial institution platforms, such as digital marketplaces and physical retailers. As contradictory as it may sound, embedded insurance is not exactly a ‘type’ of insurance. It is not an insurance line like cyber, life or directors & officers (D&O) insurance, for example. Rather, it is an insurance selling model with the following characteristics: (i) real-time bundling and sale of insurance; (ii) convenience; (iii) relevance; and (iv) the ability to customise products for consumers.

To clarify the idea, let us consider ‘extended warranty insurance’, a product which provides a policyholder, optionally and upon payment of a premium, with an extended warranty period for a purchased good beyond what the original manufacturer offers (according to article 2 of Resolution CNSP No. 436/2022). As a rule, the offer is made when the product (such as a home appliance or smartphone) is purchased, both in physical retail stores and on e-commerce websites.

The concept of embedded insurance is not new. Basically, it aims to expand the method of offering extended warranty insurance to other lines of business: when a core product or service is purchased, insurance is offered to protect it, in a way that is convenient and relevant to the client, who will have the flexibility to decide whether or not they want it and, if they choose to do so, to have it customised to their own needs.

Examples of insurance, besides extended warranty, that can be offered to consumers through the embedded insurance business model include bicycle insurance when buying or renting a bicycle, travel insurance when booking a flight and home insurance when buying furniture, among others.

Moreover, some of the advantages of embedded insurance are: (i) the absence of temporary gaps in coverage, since the insurance contract is finalised ‘in real-time’; that is, at the time the product or service is purchased; (ii) reduced distribution costs; and (iii) convenience and autonomy for the consumer when contracting.

While there is plenty of room for this type of insurance to grow in Brazil, especially given the low penetration of insurance in the country, there are regulatory challenges that should not be overlooked.

Challenges facing embedded insurance sales

Embedded insurance is gaining prominence in Europe, and many studies have shown that it will become increasingly popular in the coming years. In Brazil, however, there are regulatory challenges involved. For example, tie-in sales are prohibited under the Brazilian Consumer Protection Code. In addition, if the consumer’s consent is found to be defective, the legal transaction may be annulled. Insurance providers will also need to comply with the Brazilian Data Protection Law.

Starting with the first challenge, article 39 of Brazil’s Consumer Protection Code prohibits “abusive practices”, one example being “tie-in sales” – “to condition the purchase of a product or service to that of an addition product or service”. A superficial analysis might suggest that embedded insurance constitutes a tie-in sale, and is therefore prohibited.

It could be argued, however, that embedded insurance sales are aligned with both Brazilian legal and regulatory norms, as well as court rulings, including by the Superior Court of Justice. Certain requirements would have to be met. The consumer must be given the option to decide whether to purchase the insurance, and at least two insurance provider options must be offered. In addition, the consumer must be informed about their right to decline the insurance offer and must be given proof of purchase for each of the contracts, i.e., the product invoice and the insurance policy.

Meeting these requirements will help to avoid defective consent under article 138 et seq. of the Brazilian Civil Code, which could make the embedded insurance contract invalid.

Finally, considering that data processing plays a key role in the embedded insurance underwriting process, development of this promising new business model within the insurance industry is likely to strongly depend on full compliance with the Brazilian Data Protection Law (Law No. 13,709/2018).

Thiago Junqueira and Igor Násser are partners at Chalfin, Goldberg & Vainboim Associated Lawyers. Dr Junqueira can be contacted on +55 (21) 3970 7214 or by email: thiago.junqueira@cgvadvogados.com.br. Mr Násser can be contacted on +55 (21) 3970 7200 or by email: igor.ramos@cgvadvogados.com.br.

Thiago Junqueira and Igor Násser

Chalfin, Goldberg & Vainboim Associated Lawyers