The Internet of Things has the potential to revolutionize the insurance industry, given the vast amount of real-time data that could soon be available to support underwriting, pricing, and claims management decisions. Yet that doesn't mean implementing and monetizing this tremendous opportunity will be easy or without significant challenges for carriers.
Insurers live and breathe data. Most of what they gather now is already experiential, such as claims history, or whether loss control elements are in place. But a lot of it is correlational, such as type of industry or property involved, geographic location, credit history, and age.
Insurers have done a pretty good job serving consumers and making a living with these traditional data sources. However, the emerging Internet of Things (IoT) can theoretically take data collection and predictive analytics to new levels of granularity by providing real-time information about the status of people, property, and equipment via Web-connected sensors. Whether that translates into increased relevance and improved profitability depends on what insurers can do with such raw data.
The most practical example of the IoT in action is telematics for usage-based auto insurance. Installing a monitoring device into a vehicle or downloading one onto a driver's smartphone can provide carriers with 24/7 updates about where, when and how fast an insured travels, as well as assessing their turning and braking habits, traffic navigation skills, and reaction time.
Not far down the road, such efforts will be supplemented by the expanded use of additional sensors that alert drivers about the proximity of other vehicles or risky travel conditions, and which can prompt cars to slow down or stop if a collision is imminent or if operators don't react quickly enough.
This same IoT technology can have applications in a number of other coverages. In personal lines, "smart" homes will allow insureds to monitor their property and control elements remotely, probably off a smartphone application. They (and their insurer) can receive alerts about overheating wires, boilers or outright fires; anyone entering their house; as well as potentially dangerous changes in temperature, wind speed, roof pressure, or carbon monoxide levels. Carriers could provide loss control advice to minimize each threat and perhaps take action unilaterally to protect insured properties.
Meanwhile, life and health insurers could monitor a policyholder's vital signs, exercise experience, location, calorie intake, and general activities to identify helpful (and hazardous) behavior and support wellness programs, while factoring such information into their rates.
On the commercial side, telematic data can help insurers and policyholders spot and control the risk of loss for commercial vehicles, warehouses, factory floors, retail outlets, and office buildings. Commercial property and workers' compensation are two key lines that would benefit from the additional data and insights IoT could provide.
So, what's the possible downside risk of IoT for insurers and their customers? The industry faces a number of challenges in realizing the potential benefits of such invasive technology, including:
- Making sense of the new data: If insurers aren't careful, they could drown in all the additional telematic information they collect. Their numbers-crunchers will be called on to draw clear correlations and make some hard choices about exactly what insurers need to know to do business more proficiently.
- Profiting off the new data: In usage-based insurance, early adopters are offering discounts just for allowing the collection of telematic data. At some point, carriers will have to decide who has earned such discounts with superior driving experience, while others may face higher charges if they don't meet quality benchmarks.
- How to deal with telematic holdouts: What about those who don't jump on the IoT bandwagon? Will insurers end up surcharging anyone who declines to allow their cars, homes, or businesses to be monitored?
- Regulatory resistance: When insurers finally do start raising rates for those who don't meet quality benchmarks or who refuse to be monitored, will regulators object? Also, will they insist on "looking under the hood" to assess the validity of IoT-based insurer underwriting and pricing decisions?
- Privacy and security: The more people are connected via the Web, the higher the risk of a cyber-breach. What kind of liability and reputational risk might insurers face if hackers compromise a policyholder's car, home, or business via the telematic devices installed to monitor them? What new security measures must be put in place to raise the bar and prevent intrusions?
These concerns must all be addressed, but none are likely to be deal-breakers. The IoT genie is out of the bottle. Real-time monitoring is probably here to stay. The only question is how insurers can make the most effective use of this promising new technology, to their own benefit as well as that of their customers.
Sam J. Friedman (samfriedman@deloitte.com) is the research team leader at Deloitte's Center for Financial Services in New York. These opinions are his own. For many years, he was the Editor in Chief of National Underwriter's P&C edition. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.