The IoT is already playing a significant role in managing risk and reducing and predicting claims — defining insurance 2.0. Connected homes can now use sensors to warn owners of the risk of potential fires or flooding. Driverless cars, which might not be able to eliminate car accidents by themselves, will change the balance of risk management and mitigation.
Doctors can now access data from wearable devices, preventing a serious problem by monitoring patients’ activity in real-time and notifying them to adjust their behavior before it has an adverse effect.
Insurance 2.0 is a game changer — and insurers will need to decide quickly which way they turn at the crossroads. The IoT is not an IT implementation — it is a change of business model. Much depends on the level of adoption of technology, but if some of the more astute organizations within the industry change their business models soon, then the rest of the industry could change as quickly as the next 12 months.
There is no doubt that a world where car accidents are a thing of the past, medical conditions are diagnosed and prevented before they occur, and household accidents like flooding or fire are prevented before they happen, would improve life considerably. The truth is that technology and innovation are also allowing us to move closer and closer to preventing, if not eliminating, risk completely.
This means living in a world where risk itself is reduced. The increased prevalence of connected devices, combined with technological advancements, show very little sign of abating, and so the insurance industry finds itself at a crossroads. Does it turn left and continue down the path of traditional-style risk mitigation that will most likely lead to reduced gross written premiums (GWP) and loss of brand identity? Or does it turn right onto the data-driven superhighway and embrace a new way of operating? The point is that there is only one option available.
The new normal of insurance will look very different from today's model, and a significant change of mind-set will be required if insurers are to truly benefit from the more proactive approach of Insurance 2.0. Where they might once have only had one interaction with a customer every year — perhaps at premium renewal — this model must change so that insurers become relationship-focused every second of the day.
As an industry that has been built on mitigating risks of all shapes and sizes through a traditional system of premiums and claims, these advancements make the future less certain. A recent Capgemini report suggests that the value of claims relating to risk is set to suffer a potential loss in value of 20 to 40 percent, which could have profound implications for insurance demand and premium income.
Insurers must find ways to access the data provided by customers from technology, including smart phones, wearables, industrial monitors and IoT-connected devices to add greater value. Insurers will differentiate themselves by the value of the relationship they add to their customers, as well as the flexibility of their premiums. Those able to leverage data to provide the best service will be the most successful.
A new model
In this new data-driven IoT model, insurers and policyholders will collaborate to create a partnership focused on improving overall quality of life. For example, an insurer will be able to monitor water activity in an industrial property, and provide advice on any chronic performance issues via immediate alerts.
This model adds considerable value for customers and also provides important opportunities for insurers to identify good and bad risks, minimize claims payouts and upsell relevant products and services — creating a win-win situation for both parties.
Tom King (firstname.lastname@example.org) is the senior director and industry principal of insurance at Pegasystems. He has more than 25 years of experience in the insurance industry. Keith Gage (email@example.com) is a vice president in Capgemini's Financial Services Global Business Unit and leads a portfolio of insurance accounts within Capgemini's Insurance Sector. He has more than 20 years of experience in the industry.