Only hours after leaving for vacation, a homeowner saw anunexpected message flash across her smartphone: "Interiortemperature high, smoke detected…contacting fire department." Itmade for a brief vacation, but the notification may have saved ahouse. In this hypothetical scenario, sensors installed in aconnected home recorded an oven's malfunction and a rapid change intemperature before transmitting the information to authorities whocould help.

In the real world, connected residences stream reports aboutsecurity, temperature, air quality, moisture, noise and otherconditions, opening a new window for insurers into a trove ofdata. In North America, where an estimated 6% of homes havebeen connected, the trend toward joining the "Internet of Things" is expected to grow to amarket penetration of 28% by 2019, according to the market researchfirm Berg Insight. Widespread adoption of smartphones and tabletsis making the idea of remote monitoring of home conditions an easyand appealing prospect for consumers anticipating a better, andperhaps safer, quality of life.

Among insurers, opportunities for insights from connecteddevices will likely be enormous, even though using those devicesintroduces several challenges. Millions of devices sendingcontinuous streams of information may soon lead to unscalablemountains of data. Questions remain about how best to structurethat data and how to calibrate information provided by differenttechnology providers. Policyholders also raised issues of privacyand the illicit sharing of information, and insurers surely will betasked to show that home devices are secure and accurate in theirtransmissions.

Home-automation companies have issued their own assurances ofprivacy to consumers—and insurers will almost certainly have toface the security question with fresh eyes. To this end, insurersshould consider the example set in the auto telematics sphere andbegin their programs by offering discounts to policyholders foradopting some of the less intrusive smart technologies in theirhomes. Consumers may be more willing to share data from sensorsplaced on their water system than from a computer router thatindicates which resident is home and online. For an insurer's firstapproach in this field, simpler may be safer.

But once consumer concerns have been satisfied, or at leastresponsibly addressed, the potential for usage-based rating plansbecomes clearer. For a start, home devices allow insurers to monitorpotential causes of loss or even prevent damages from water,smoke, or heat before they can occur. This principle appliesespecially to secondary or seasonal residences, where an owner maynot have access to perform timely in-person inspections. In a fullyconnected home, it's expected that sensors will monitor use ofwater and electricity, detect motion, and signal the presence ofsmoke, carbon monoxide or carbon dioxide.

To derive useful insights, insurers must meet the challenge ofcapturing sufficient amounts of exposure data (in terms of homeyears) to complete an analysis. With the current connected-homepenetration of 6%, an insurer with 1% market share that partnerswith a smart-home technology provider with 1% market share couldexpect a total of about 15 claims per year from homes withconnected devices. That's almost certainly not enough data to yieldactionable insurance insights. To ensure a competitive advantage inpricing and underwriting, insurers should think creatively abouthow to obtain the greatest amount of data in the shortest time.Partnerships outside—and even within—the insurance industry maybecome key to reaching fresh insights.  

While data may be paramount for establishing rates, insurersshouldn't lose sight of what's most important in the eyes ofpolicyholders. Consumers are installing home devices to enrichtheir quality of life, from improving home security to savingenergy. Those are values that extend far beyond the realm ofinsurance. Some may be motivated by the prospect of reducing homeenergy costs, while others simply like the idea of operating lightsand appliances by remote control. But both groups appear to sensethe promise of the "Internet of Things" and may be on the way toembracing this new and potentially fruitful chapter in theinsurer-policyholder relationship.

Joe Wodark is product manager for connected-home research atVerisk Insurance Solutions, a Verisk Analytics (Nasdaq:VRSK)business.