Companies in the travel, payments and FX space are faced with the constant threat of money changing hands before the transaction behind it can be treated as final. In an effort to protect themselves, they seek out insurance solutions.
The problem is traditional insurance was not built to adequately protect companies during these exposure windows. In many cases, insurance is purchased annually, priced on a snapshot of the business and is loosely attached to operations rather than built into them.
Embedded insurance, on the other hand, places protection inside the systems businesses already use. This means cover is part of the transaction rather than sitting in a policy document no one looks at until something goes wrong.
In this article, we cover:
Embedded insurance is built directly into a product, platform or payment flow, rather than bought as a separate policy. The protection is part of the product/service being sold or processed, so it is present at the point where the risk occurs.
Under the traditional insurance model, the business identifies a risk, approaches a broker or insurer, negotiates a policy and manages it separately from the product, platform and payment flows where the risk occurs. The cover exists in parallel to the business, and because of this, it doesn't accurately reflect how the business and its risk profile changes day to day.
Under the embedded insurance model, the cover is situated inside the company's payment systems, which changes what it is connected to. Rather than a standalone contract document that describes the business and its dealings abstractly, the policy is directly linked to the booking engine, payment platform or processing infrastructure that the business operates. In general, this means:
Embedded insurance is particularly attractive to sectors where exposure is constant and variable. For example, a tour operator's exposure changes with every booking they process, while an acquirer's chargeback exposure shifts with their processing volume and merchant mix.
An annual policy priced using last year's figures isn't accurate for these types of businesses. Embedded insurance offers the accuracy they need because it exists in the very infrastructure that generates the risk. Unlike traditional insurance policies, it is customised to the business and is built to perform in real time.
Embedded insurance works by sittinginside a business's transaction flow, and this shapes how itintegrates, how it is priced and how the claims process works:
Embedded insurance sits inside a business's infrastructure and attaches itself to the transaction flow directly. For a payment institution, that can mean protection embedded directly into card processing, while travel providers can build protection into the booking and payment journey. Because the cover is within the transaction flow, every transaction that creates exposure is protected the moment it occurs.
This type of integration is possible thanks to APIs. Once the insurer's systems are connected to the businesses' systems (such as a booking platform or processing infrastructure), transaction data passes between the two in real-time. This allows the insurer to see each booking or payment as it is processed to attach cover immediately.
The live connection gives a continuous view of exposure as it builds, meaning risk can be monitored and managed in real-time, rather than assessed in a panic after a major loss.
Embedded insurance changes as the business does. Being structured around live activity rather than fixed annual estimates suits the high-volume environments these sectors operate in. The exact structures on offer differ between providers, but policies can be structured in various ways depending on how the business operates:
The main benefit of this is that the cover reflects the business's real exposure, rather than a best guess. A business that grows through the year may discover at renewal that it has been underinsured for months – embedded insurance stops this from happening.
Embedded insurance changes how the claims process works because much of the information the insurer needs already exists in the systems the cover is attached to. However, the exact steps, documentation and timelines vary by provider.
When a covered event happens, such as an intermediary failing before they've passed on the funds, the out-of-pocket business notifies the insurer. It then shares the relevant documentation (booking confirmations, contracts/agreements with the failed intermediary and any relevant correspondence) so the insurer can investigate and verify the loss occurred. Then, once the claim is approved, the funds are reimbursed.
Because the protection was built around the transaction in the first place, the evidence trail is easier to investigate than it would be under a traditional insurance policy. This means that cover is easier to trigger at the moment it is required.
Embedded insurance is well-suited to travel, payments and FX companies because money moves before delivery or settlement, and existing regulations often move liability onto the business. Let's explore how embedded insurance benefits these businesses:
Travellers tend to pay for high-value bookings months in advance, and funds move between long chains of agents, operators and suppliers. This exposes tour operators, travel agencies, OTAs, homeworking groups, airlines, cruise operators and travel technology platforms to failure in the chain.
On top of that, The Package Travel Regulations places much of the financial liability on the travel business regardless of where a failure occurs in the chain. Without sufficient insurance cover, this makes travel one of the highest risk sectors card schemes process due to chargeback exposure.
Embedded insurance for travel companies protects against these points of failure across the travel ecosystem. Financial failure insurance, supplier failure insurance, scheduled airline failure insurance and pipeline funds insurance each protect against a different weak spot.
Acquiring banks and payment institutions are saddled with exposure that grows with processing volume. When a merchant becomes insolvent, the chargebacks that naturally follow become their responsibility.
Then there's the knock-on effect of card scheme monitoring to take into account. Visa's VAMP, for example, has a fraud and disputes threshold of just 1.5%. Breaching this comes with steep penalties that have the potential to cause major financial harm to payment providers.
Embedded insurance, such as acquirer chargeback insurance and card issuing settlement cover, are designed to integrate directly into payment institutions' processing and settlement flows. Acquirer chargeback insurance protects against the chargeback exposure that follows merchant insolvency while card issuing settlement cover protects card issuers against counterparty settlement default.
The goal for each is to ensure cover aligns with live activity, and this gives providers the assurance they need to take on higher-growth, higher-risk merchants that may be difficult to justify underwriting otherwise.
FX brokers make currency trades on behalf of their clients, but if a client becomes insolvent before settling, the broker is left out of pocket. On top of that, the financial exposure continues to grow when the market moves against the broker in the meantime. Brokers already manage this credit risk in the form of margining, collateralisation and risk protocols, but those controls only reduce the risk rather than eliminate it entirely.
Embedded insurance for FX brokers, such as FX settlement cover, protects against this exposure when a client fails to meet their contractual obligations. It works alongside the safeguards brokers already have in place, stepping in when they fail to fully cover the loss.
Embedded insurance is valuable to travel businesses, acquirers and payment institutions and FX brokers because it's built into the payment flows they oversee, it scales with business activity and it is designed around how the business operates on a day-to-day basis.
Now we've covered how it works, it's time to dig into the practical impact of embedded insurance and how it's set to evolve in the coming years. You can find part two of our embedded insurance series, How Travel and Payment Providers Are Using Embedded Insurance.
If you need insurance that reflects how your business really works, TMU Management is here to help. Our team will assess your challenges, understand your exposures and design a bespoke solution that fits your strategy.
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