Once, insurance was a community resource, but over time it shifted away from its middle-class origins. The insulation from risk and loss that it provides became a privilege that far fewer people could afford.

Chinese texts from 700BC tell us that public granaries were an early form of insurance, indemnifying members against famine and supporting mutual survival in adverse circumstances. Members contributed cereal to a communal reserve during the harvest period, which was kept in stock and sold at affordable prices during periods of scarcity or when local traders inflated prices if commodities were in short supply. The granary reinvested any unused surplus into the community through items such as water pumps, grain mills, or school supplies. Similarly, Greek and Roman ‘benevolent societies’ from 600BC offered a prototype of health and life insurance; these societies provided care for families of deceased members and covered the costs of funeral rites. More recently, English ‘friendly societies’ in the 18th century insured members against sickness and old age during the Industrial Revolution. In the case of female societies, they also received payments at childbirth. The low membership fees meant that access was widespread: ‘friendly societies’ were predominantly a middle- or working-class practice.

Modern Insurance
The modern insurance model has become prohibitively expensive for a significant segment of the population. Hefty budgets are spent on advertising campaigns to attract new clients. Because the insurers must break even in expectation, they drive up the price of insurance to cover customer acquisition costs. The resulting churn between competing carriers is expensive: customer matching costs alone can represent 28% of the average premium paid to auto-insurers1. These higher prices for insurance exclude both the portion of the population that can no longer afford it, and those who no longer perceive the premium as worthwhile, either choosing, or being forced, to self-insure.

Embedded Insurance
Embedded insurance, however, bypasses these costs by capturing the top of the insurance funnel. First, this significantly increases the pool of customers buying insurance. Moreover, it counters the adverse selection of marketing-driven acquisition models. Finally, by adding low-risk insureds to the carrier’s pool, they can offer lower-cost policies to both low- and high-risk customers. That decrease in cost, in turn, shifts down the average cost curve, attracting even more clients who previously self-insured.

This increase in pool size is valuable to the insurer and attractive to the insured while producing a net-positive social impact.

In the case of health insurance, if more people can acquire coverage at an accessible cost, the rate of health- and non-health-related debt decreases2. Research on the impact of the Massachusetts’ health reform, for example, found that healthcare coverage “reduced the total amount of debt that was past due, the fraction of all debt that was past due, improved credit scores and reduced personal bankruptcies”3. Increasing the financial security of communities by means of insurance also stimulates spending in local economies as individuals have more dependable disposable income to spend on goods and services4. Finally, increased insurance coverage also has a positive impact in workplace productivity and economic output5. In this field alone, it is estimated that uninsured productivity losses reduce U.S. GDP by $260 billion per annum6: one study found that uninsured workers missed almost five more days of work than insured workers per year7.

Next time, we will explore the death of the ‘switch-and-save model’!

Contributing Authors from Oxford University:
Jacqueline Dai, Laura Fritsch, James Hall, and Mungo Wilson

1. Honka, E., 2014. Quantifying search and switching costs in the US auto insurance industry. The RAND Journal of Economics, 45(4), pp.847-884.
2. Hu, L., Kaestner, R., Mazumder, B., Miller, S. and Wong, A., 2016. The effect of the Patient Protection and Affordable Care Act Medicaid expansions on financial wellbeing (No. w22170). National Bureau of economic research.
3. Mazumder, B. and Miller, S., 2016. The effects of the Massachusetts health reform on household financial distress. American Economic Journal: Economic Policy, 8(3), pp.284-313.
4. Dupor, B. and Guerrero, R., 2021. The Aggregate and Local Economic Effects of Government Financed Health Care. Economic Inquiry, 59(2), pp.662-670
5. Davis, K., Collins, S.R., Doty, M.M., Ho, A. and Holmgren, A.L., 2005. Health and productivity among US workers. Issue Brief (Commonw Fund), 856(856), pp.1-10.
6. Mattke, S., Balakrishnan, A., Bergamo, G. and Newberry, S.J., 2007. A review of methods to measure health-related productivity loss. American Journal of Managed Care, 13(4), p.211.
7. Dizioli, A. and Pinheiro, R., 2016. Health insurance as a productive factor. Labour Economics, 40, pp.1-24.