June 2016, London, United Kingdom
Digital and big data collide in a brand new connected world for insurers
Insurers have their say on the Internet of Things. The digital data revolution has created more opportunities for information collection and sharing, plus increased competition based on data-driven insights.
The insurance industry has been adapting to a shifting digital landscape that has changed the roles of agents, companies and clients. The digital data revolution has created more opportunities for information collection and sharing, plus increased competition based on data-driven insights. Another shift is poised to change the industry and again disrupt existing relationships between customers, their data, and their insurance providers.
The Internet of Things (IoT) is the concept of connecting devices to the internet in order to expand the collection, control, access and use of data. Consumers may use these devices to play their favorite music as soon as they walk in the front door or track their health as they begin a new exercise regimen. Almost everything in the modern world can become connected, from cars and washers to ovens and smoke alarms.
Most, if not all, insurers have some kind of research or monitoring activity going on for IoT initiatives. It clearly parallels the Big Data efforts of two to three years ago, with much coverage still in the “Wild West” phase where ideas are exciting, but it is unclear what will survive.
Insurers are hedging their bets and monitoring as many applications as they can rather than pinning their hope to one application, because they don’t know the true value of IoT just yet.
IoT has become a major area of study. Many different insurance markets have done their own research, showing a broader trend of adoption, information improvement, and better workflows. Top statistics and data around the role of IoT include:
- An SMA survey showed 20% of insurance companies are currently piloting, testing or deploying an IoT project. That number rose 50% over a three-year period.
- Property insurance companies are increasingly using drones to assess damages after an incident has occurred. Cognizant estimates that drones will make insurance adjusters’ workflow 40% to 50% more efficient.
- By 2020, over 50 million US drivers will have tried usage-based insurance models that rely on IoT devices.
- Roughly 30% of the auto market is expected to involve telematics for the majority of policy interaction and pricing by 2025.
- Also by 2025, half of U.S. homes are expected to be connected through IoT devices for monitoring and system control.
- According to an Intel survey, 80% of respondents would be willing to share their health data anonymously to reduce health care costs.
These just begin to paint the picture of where insurance and IoT intersect. The adoption of IoT will cause major changes, but proper data policies and security measures can enable insurers to exploit the benefits of IoT.
Areas of IoT Invention in Insurance
Telematics has been at the forefront of IoT innovation across most industries, including insurance. It provides a good reference point for continued advancement of IoT and existing adoption already provides a strong area to study for value-added services. In broad terms, the industry will test and determine consumer preference for sensors – coming from Original Equipment Manufacturers (OEMs), tech companies, open-source initiatives, or insurers themselves – and the extent to which they can be used.
Telematics will continue to be a tightrope walk, especially as insurers try to balance benefits to their customers with benefits to the bottom line. This is especially true as auto lines increasingly rely on IoT technology.
Some auto insurers, who are offering a discount for good behaviors calculated by telematics, also have plans for surcharges for bad driving. When this goes live, it could present a significant concern for customers and harm an insurer’s image. Insurers are using their customers to harvest data and to perform analytics based on it.
The give-and-take of this relationship cannot be based solely on the use of data; customers will demand to be compensated for the collection as well. That discussion will play a role in many of the new opportunities IoT can bring.
The Connected Home
The home may be the next area to see IoT integration because consumers are using a variety of devices to control everything from their smoke alarms and air conditioners to locks and automated home security systems. For consumers, the technology is focusing on the smartphone and is relatively inexpensive to acquire and manage. Google is seen as the first major provider to work in this area and have a large potential customer base, but players exist for certain regions and wealthier citizens.
Half of U.S. homes are expected to be connected by 2025, but insurers will need a strong value proposition to capitalize here. Visibility will be essential to proper integration.
The questions that insurers wishing to leverage home connectivity must answer are: Who owns and controls this data? Who is responsible when data must be used to contact law enforcement, fire, or other civil services? When discussing the installation of systems into homes, consumers will need to become comfortable with the data and the tracking. To avoid privacy concerns, smart home technology will need to be extremely transparent. Value will also need to be a chief discussion point even though it may come with a non-insurance focus such as presenting a single hub to control all of a home’s systems.
Connected Life Policies
Insurers are looking to life policies as a potential honeypot when IoT starts to take off in people’s daily lives. Injecting IoT into these policies will allow insurers to measure behavior they have not been able to measure before. The technology is there but consumer use may not be, yet.
Wearables are at the heart of life policy hopes, but insurers may need to wait for more precise data and sensors to become available. There is also a question on their overall viability. Research has found that between 33% and 50% of people who own wearables lose interest and stop wearing them in the first year. It’s unclear if today’s wearables for the average consumer – outside of the workplace – can provide enough data to make up for a lack of use.
At the moment, IoT is being used to provide discounts for individuals who exercise or perform other healthy habits. The eventual reality is that consumers who have habits deemed “unhealthy” will be penalized, which may cause a backlash against such methodology.
The next stage in personal IoT evolution appears to be pills and other swallowable sensors – or even injected devices – that will look for chronic health conditions and play a role in health insurance. It may provide a clearer picture of health, but there will be significant education needed for customers to embrace the technology and related pricing.
Companies have already shown their willingness to pay to track assets and employ¬ees for their own management purposes. Insurance can act as another layer on these existing dashboards with an initial incentive for safer job sites or employee practices.
Commercial lines may have the easiest entrance if they leverage existing customer wants, such as system designs that reduce energy consumption or improve the organization of manufacturing processes. The main objective in this rollout must be an understanding of the business at hand and where savings outside of insurance are achieved.
Commercial policies also represent a significant opportunity as loss control is improved through new sensors, such as infrared detection of heat anomalies in electrical equipment, HVAC monitoring, water usage analytics for crops, and even construction equipment that checks for irregular vibrations to alert before there is significant damage.
A core trend of IoT adoption in other industries has been the adoption of consumer electronics by employees. Their use under the Bring-Your-Own-Device (BYOD) policies has helped businesses become more comfortable with these devices and more trusting of their security and safety in a business setting.
Insurance can capitalize on this because we’ve seen the use of home, auto and other IoT devices in commercial settings. The chief pain point of this setup, however, is that insurance companies are struggling to process the traditional data they’re able to collect, so it will take a shift for most to find the true value of such an IoT expansion.
Insurance, Innovation and IoT: Insurers have their say on the Internet of Things.
IoT is projected to play a major role in a wide variety of sectors, giving insurers data and control that was not previously possible. Every corner of the industry is looking to this data and connectivity as a way to dramatically improve service and control costs.
An area that has become a top discussion point is the realm of micro-insurance. One example is the concept of “connected crops” for small farms and third-world scenarios. Devices may allow policyholders to predict rainfall, flooding, or other issues related to an adverse season, helping farmers to plan for their crops and helping insurers to price risk properly.
As IoT expands, drones and cameras and other devices can create a digital crop portfolio and give a broader national picture that may help expand the risk pricing in industrialized nations where crop insurance is subsidized. Every market, no matter how new or ingrained, will face challenges, and insurers will only see large-scale adoption when they can provide the answers.
5 Key Challenges of IoT Strategies for Insurance
The inclusion of IoT isn’t standardized. Every insurer who wishes to include IoT sensors, data and products will have to create a specific regimen to ensure proper operation, security and analysis. Insurers will need to work on each capability, start¬ing with the capacity to store and process all of this new data while maintaining proper control over third-party partners.
Every advancement in IoT must remain cost-effective. The common inclination with new data and IoT is to lower premiums and provide discounts, which means less revenue. In an existing climate of reduced growth and profitability, insurers must be cautious about IoT inclusion. This report has identified five areas where the cost-risk-opportunity conversation may be the most difficult.
Handling the Data Flood
Even small pilot projects generate huge amounts of data. The size and scale of data in an environment where IoT has been made fully available could potentially dwarf anything the industry has seen. Analytics platforms that rely on Hadoop can process some of this, but a wide-scale collection will likely require a solution not yet known or developed.
Insurers will have to move their rollouts in stages. This runs the risk of customers jumping to the first to offer coverage in their area, or a company having too much information to handle if its rollout isn’t properly managed.
Data is also heavily fragmented and success in IoT will require significant work to overcome this. Analytics programs need a strong governance program to ensure that data is properly cleaned and cared for so as to be usable. In IoT, there are no standards for recording or reporting. That means that every potential product to support will require a significant time and monetary investment to add to a data collection and processing program so that all of the information is relatable.
Customers are driving the demand for IoT in general. They are also likely to drive demand for support of the devices they want to use. This could put insurers in a tough spot in terms of what devices to support. Insurers will have to weigh the cost of adding support for new devices versus the revenue increases that will come from that support.
It’s unclear if there is enough available information for insurers to make more than a semi-educated guess.