The Internet of Things (IoT) could bring to life the once fabled automated home that those of us old enough to know, saw portrayed on our TV screens when the Jetsons were all the rage. As reality catches up with fiction, IoT has the potential to transform P&C business models and business offerings, potentially changing the very notion of what an insurance company means to consumers and what its role is in their lives. In our previous article, we presented an overview of coming IoT changes, including the shift of insurance premium mix from auto to home with the likelihood of technologically advanced automobiles reducing the frequency of accidents, and as shifts in consumer behavior and demographics suggest that car ownership and usage may trend lower. In this article, we dig deeper into how insurers can use the connected home as a significant revenue generator and as an entry point into other products and services

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

Consumers will likely see the connected home as a set of possibilities—expanded entertainment options, greater physical comfort, a connected lifestyle, and reduced risk—and use it to seek broad solutions to everyday tasks and big life events. As they embrace propositions that seamlessly combine these possibilities, consumers will blur existing market boundaries. Players such as AT&T are even linking connected car and smart home technologies so users can control their homes from a vehicle dashboard.

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

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

Compared to the connected car, the connected home is a less mature, less certain, and more complex insurance market. But it offers potential expansion as auto markets are likely to shrink. So as the current connected-home surfeit and chaos of choices quickly coalesces into meaningful business models, P&C insurers must be there, ready to preserve and expand relationships with homeowners.

They will face competition. For example, a smart door lock can provide monitoring, control, and information on who is in the house. Imagine a home security company such as ADT cornering that market, thus providing risk mitigation solutions similar to those of water cut-off valves. The result: A homeowner gives a bigger share of her mind and wallet to ADT—while reducing her perceived need for insurance.

Of course such potential threats can also be opportunities for insurers to enter adjacent markets. For example, imagine an insurer creating a "connected community" in which long-term infrastructure investments enable home automation and monitoring, weather advisories, and emergency services—in exchange for the homeowner making a two- or three-year commitment.

Just as consumers demanded that sundry remote control devices evolve into a universal remote, they will likely demand a hub for the connected home. Control of the integrated hub will be hotly contested. ADT and AT&T both seem to be aiming for proprietary home-wide solutions. Qwirky's Wink hub is supported by GE, Honeywell, and Philips. Apple has launched a HomeKit platform; Google has Nest. All have different visions, business models, monetization schemes, and timeframes to maturity—and to play in the new integrated ecosystem, insurers must also.

As insurers plan partnerships, data acquisition should be paramount. Perhaps the biggest promise of the IoT is the almost infinite number of data points about homes and about homeowner behavior that it will provide. Insurers can turn this seeming firehose of data into analysis that will improve underwriting, expand services beyond insurance, and deepen customer relationships—assuming it can be acquired.

To do so, insurers have existing customer relationships and a value pool from which they can offer discounts and other tangible incentives. For example, State Farm and Liberty Mutual partnerships tie insurance discounts to specific home security systems. However, the influence of weather (rather than homeowner behavior) on home losses puts a ceiling on potential opportunities in loss prevention. Furthermore, insurers are not "in"the home, in the same fashion as utilities, telecommunications providers, device manufacturers, or Internet companies such as Google. Even Amazon, which has recently launched a home services platform, is in many ways closer to unique homeowner data than any insurer.

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

Think broadly about customer needs. What is your relationship with customers, and how can you use that relationship to develop broad value propositions? What will you be, and what will you not be?
Understand the business of data. What data do you have or expect to have? How will data help you serve customers? Can you monetize data? What do you need to collect and/or harness data?
Enhance your connections. Your future niche, and the data or other capabilities required to fill it, will require partnerships with other players in the connected home. Fast movers will seal up the best partnerships.
Make internal transformations. Whether it's richer data analytics capabilities, more flexible risk-taking skills, increased customer centricity, or new competencies in adjacent areas, your strategy may also suggest internal transformation initiatives.

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

Joseph Reifel is a partner at A.T. Kearney, a global management consulting firm, where he leads the Financial Institutions practice for the Americas. Alyssa Pei is a partner in A.T. Kearney's Financial Institutions practice. Neeti Bhardwaj and Shamik Lala are principals with A.T. Kearney's Financial Institutions Practice. All are based in Chicago.

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The connected home: The next frontier for P&C insurers?

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