Have you heard of the Internet of Things (IoT)? If you have not, odds are that your reflex would be to take out your phone and look it up. We are all “connected.”
IoT is a short phrase referring to the way our world is becoming connected by computers and how that data which is being collected is used for improving systems. The IoT is already creating exciting opportunities, which will only get more interesting, along with posing challenging questions for the property & casualty insurance market. For as long as the insurance industry has existed, it judged forward risk and established policy premiums based on historical information and actuarial tables.
IoT in auto insurance
In the future, the IoT will enable insurers to establish premiums on a more personal basis, on the assumption that it has access to certain behavioral and lifestyle data. We are already seeing the vanguard of this trend, through the introduction of devices installed in vehicles that collect and report data on driving patterns and are able to detect aggressive driving tendencies (driving fast, braking hard), as well as how frequently and for how long a vehicle is used. Most of these systems operate by connecting to the cars’ OBD-II ports (the same port your mechanic uses to diagnose the always-helpful “check engine” light). But, smartphones’ accelerometers can also be used, creating the possibility of collecting and reporting not just the speed of the car, but also its rate of acceleration and sudden changes in direction.
Beyond rewarding good or penalizing bad driving habits in the form of higher premiums, the technology may also be used to help recreate the circumstances of an accident for the purposes of assigning liability. Again speed, braking distance and other metrics play an important role.
Potential for wearable devices
Similarly, the health insurance industry has long rewarded healthy living. For example, employers are offered discounts for employees who participate in a wellness program, and individuals are offered discounts for having a gym membership. The IoT has the potential to take this to another level through wearable devices. Some insurers are already offering discounts to policyholders who wear Fitbit and similar devices, and who agree to share their exercise tracking data.
But could (or should) this technology be used in other ways — for example, to deny coverage? Some insurance companies already require a medical examination before issuing a life insurance policy. Will the future bring with it a requirement for the data generated by wearables prior to issuing a policy (or setting a rate) for life and/or health insurance?
Might the same argument be made for automobile insurance? Virtually every car manufactured in the last 25 years has an OBD-II port. Should insurance companies insist on seeing this stored data so that they can judge risk, based on actual behavior, rather than on “average risk” derived from historical experience? An on-board computer would be an impeccable character witness, but how would that request be received by those individuals seeking insurance?
The Internet of Things is going to fundamentally change the way the insurance industry assesses risk. It is also causing a new social discussion to take place around if, and how, new data and access to that data should be used by insurance companies to determine risk, set rates, and determine liability.
Steve Graves (firstname.lastname@example.org) is co-founder of McObject, provider of real-time embedded database technology. McObject offers real-time data management technology used across a wide range of industries and market segments, including finance, IoT and aerospace.