The Internet of Things (IoT) could bring to life the once fabledautomated home that those of us old enough to know, saw portrayedon our TV screens when the Jetsons were all the rage. Asreality catches up with fiction, IoT has the potential to transformP&C business models and business offerings, potentially changing the very notion of what an insurancecompany means to consumers and what its role is in their lives. Inour previous article, we presented an overview of coming IoT changes, including theshift of insurance premium mix from auto to home with thelikelihood of technologically advanced automobiles reducing thefrequency of accidents, and as shifts in consumer behavior anddemographics suggest that car ownership and usage may trend lower.In this article, we dig deeper into how insurers can use theconnected home as a significant revenue generator and as an entrypoint into other products and services

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Over the next decade, the IoT is likely to penetrate quickly,connecting half of all U.S. households, filling them with data andinteraction. Today your house can send you a text when your pipesspout a water leak—tomorrow embedded sensors could trigger anautomatic shut-down, while generating a work order for theneighborhood plumber.

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Consumers will likely see the connected home as a set ofpossibilities—expanded entertainment options, greater physicalcomfort, a connected lifestyle, and reduced risk—and use it to seekbroad solutions to everyday tasks and big life events. As theyembrace propositions that seamlessly combine these possibilities,consumers will blur existing market boundaries. Players such asAT&T are even linking connected car and smart home technologiesso users can control their homes from a vehicle dashboard.

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Insurers must look at this changing landscape with a speculativeeye and ask: What role do we want to play in this new ecosystem,and how do we want to engage our customers?

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In this new world, do insurance companies bundle insurance withhome security systems? Entertainment systems? Financial products?Do they advise or prescribe changes ("it's time to replace yourroof")? Do they manufacture or install sensors? These questions,which, with the exception of financial products have not been thetraditional purview of insurance, straddle two imperatives. First,know and focus on what you do well. Secondly, maintain ownership ofthe customer relationship, remaining the trusted party thathomeowners turn to for advice.

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Compared to the connected car, the connected home is a lessmature, less certain, and more complex insurance market. But itoffers potential expansion as auto markets are likely to shrink. Soas the current connected-home surfeit and chaos of choices quicklycoalesces into meaningful business models, P&C insurers must bethere, ready to preserve and expand relationships withhomeowners.

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They will face competition. For example, a smart door lock canprovide monitoring, control, and information on who is in thehouse. Imagine a home security company such as ADT cornering thatmarket, thus providing risk mitigation solutions similar to thoseof water cut-off valves. The result: A homeowner gives a biggershare of her mind and wallet to ADT—while reducing her perceivedneed for insurance.

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Of course such potential threats can also be opportunities forinsurers to enter adjacent markets. For example, imagine an insurercreating a "connected community" in which long-term infrastructureinvestments enable home automation and monitoring, weatheradvisories, and emergency services—in exchange for the homeownermaking a two- or three-year commitment.

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Just as consumers demanded that sundry remote control devicesevolve into a universal remote, they will likely demand ahub for the connected home. Control of the integrated hubwill be hotly contested. ADT and AT&T both seem to be aimingfor proprietary home-wide solutions. Qwirky's Wink hub is supportedby GE, Honeywell, and Philips. Apple has launched a HomeKitplatform; Google has Nest. All have different visions, businessmodels, monetization schemes, and timeframes to maturity—and toplay in the new integrated ecosystem, insurers must also.

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As insurers plan partnerships, data acquisition should beparamount. Perhaps the biggest promise of the IoT is the almostinfinite number of data points about homes and about homeownerbehavior that it will provide.  Insurers can turn thisseeming firehose of data into analysis that will improveunderwriting, expand services beyond insurance, and deepen customerrelationships—assuming it can be acquired.

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To do so, insurers have existing customer relationships and avalue pool from which they can offer discounts and other tangibleincentives. For example, State Farm and Liberty Mutual partnershipstie insurance discounts to specific home security systems. However,the influence of weather (rather than homeowner behavior) on homelosses puts a ceiling on potential opportunities in lossprevention. Furthermore, insurers are not "in"the home, in the samefashion as utilities, telecommunications providers, devicemanufacturers, or Internet companies such as Google. Even Amazon,which has recently launched a home services platform, is in manyways closer to unique homeowner data than any insurer.

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The evolving connected home market provides insurers withdiverse short- and long-term opportunities. But if they move in toomany directions at once, they risk being overwhelmed by morefocused competitors with more distinctive capabilities. Thusinsurers can best prepare by taking the following steps now:

  1. Think broadly about customer needs. What isyour relationship with customers, and how can you use thatrelationship to develop broad value propositions? What will you be,and what will you not be?
  2. Understand the business of data. What data doyou have or expect to have? How will data help you serve customers?Can you monetize data? What do you need to collect and/or harnessdata?
  3. Enhance your connections. Your future niche,and the data or other capabilities required to fill it, willrequire partnerships with other players in the connected home. Fastmovers will seal up the best partnerships.
  4. Make internal transformations. Whether it'sricher data analytics capabilities, more flexible risk-takingskills, increased customer centricity, or new competencies inadjacent areas, your strategy may also suggest internaltransformation initiatives.

Because it will inevitably grow, the connected home offersopportunities for P&C insurers (as do the connected car andconnected self, which we'll discuss in a coming article). Butbecause it is still evolving, the home frontier will be a WildWest. To maintain competitive advantage in this fast-moving space,insurers must start making bold strategic decisions now.

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Joseph Reifel is a partner at A.T. Kearney, a globalmanagement consulting firm, where he leads the FinancialInstitutions practice for the Americas. Alyssa Pei is apartner in A.T. Kearney's Financial Institutionspractice. Neeti Bhardwaj and Shamik Lala areprincipals with A.T. Kearney's Financial Institutions Practice. Allare based in Chicago.

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