Few industries will see as big an impact from the internet of things as the insurance sector. Indeed, IoT has the potential to touch nearly every facet of insurance, with the promises of both benefits and risks for carriers as well as their customers.
IoT will impact how insurance underwriting and pricing are done for markets including transportation, home, life, healthcare, workers’ compensation and commercial. And it will transform the way insurers gather information about customers and their environments to process claims, determine risks and calculate costs.
Primed for growth
The industry is primed for a big move into IoT. Recent industry research sheds some light on how insurance will be impacted by IoT. Research firm IDC, in a 2017 report that estimated global spending on IoT would grow 17% in 2017 to reach just over $800 billion and rise to nearly $1.4 trillion by 2021, said insurance would see the fastest spending growth of any industry.
During this period, the sector will experience a spending increase at a compound annual growth rate (CAGR) of 20%. A more recent research report predicted even more optimistic growth of 33% CAGR and reaching $9 billion by 2022.
The keys to this growth are the integration of real-time IoT data with AI-powered operational intelligence algorithms. Underwriters will no longer simply rely on actuarial data to insulate their company’s book of business from unacceptable exposure. Real-time operational IoT data will allow insurance companies to proactively prevent loss, ensure contractual compliance and detect fraud.
For example, in the area of auto insurance, vehicles equipped with sensors will provide data back to the carriers about the driving habits of insured individuals and the condition of automobiles and parts. This will help insurers correlate safe or unsafe driving patterns with unacceptable risk of accidents and injury. Unsafe drivers can be alerted before their behavior results in a loss, and premium incentives can be provided to safe drivers.
Automobile insurance pricing will become personalized and dynamic, shifting from being partly based on geographical zones and a forecast of miles driven to observed driving behavior, driving distance, commute route patterns and risks associated with those routes. As an increasingly large number of vehicles are connected to the cloud, more drivers will opt for this type of real-time, usage-based coverage.
Smart homes and buildings
The use of IoT technologies is beginning to transform homeowners’, renters’, workers’ compensation, commercial and general liability insurance.
In the home, connected, smart smoke detectors already help alert security monitoring firms to potential risk of fire. Insurers can offer discounted premiums in exchange for access to IoT home monitoring capabilities (such as smoke and leak-detection sensors) that can reduce the risk and scope of preventable loss. The sooner the homeowner is alerted to an event, the greater the likelihood of keeping damage to a minimum. That results in fewer costly claims for insurers.
Home security monitoring using cloud-connected video cameras and IoT perimeter sensors not only provides a sense of safety and security for the homeowner or renter, but also reduces the risk of burglary and improves the odds of recovering stolen assets.
Of course, the use of IoT sensors to protect assets extends beyond homeowners’ insurance to commercial use cases. Smart commercial facilities, such as office buildings, factories, stores and warehouses, will do more than just controlling lighting and building temperature. These facilities can utilize sensors to monitor valuable assets, detect fire, smoke, earthquakes and hazardous environmental conditions. When integrated with real-time worker notifications, such IoT connected sensors will be able to provide proactive alerts on a variety of dangerous conditions, protecting people as well as property from potential harm and loss. Companies that employ such technologies and are willing to share data with insurers will benefit from a safer operational environment and lower insurance premiums.
Health and fitness
Healthcare insurance providers are starting to gather health and fitness data — with the permission of their customers — to offer promotional programs that encourage good health maintenance practices. The emergence of connected wearable devices that provide personal health-related telemetry promises to usher in a new era of proactive health monitoring and maintenance.
These wearable technologies will have an impact not only on health insurance, but on disability, life and workers’ compensation lines as well. Individuals, employers and carriers all stand to benefit from gaining a better understanding of health-related risks in order to improve premium pricing and reduce costs of claims.
Just as nonsmokers receive preferentially priced health insurance premiums, active individuals may soon be able to receive such benefits. IoT devices will also be able to assist physicians with improving drug regimen compliance. Emerging smart pills contain ingestible sensors that can report when the pill has actually been taken by the patient. Patients who comply with their drug regimen may be at lower risk for adverse healthcare outcomes.
These are just a few examples of IoT’s potential beneficial impact on the insurance industry. But these benefits are not without their challenges. For insurers, one of the biggest challenges will be ensuring robust data security and privacy. Highly personalized insurance will require gathering, storing, processing and analyzing personally identifiable customer information. That data must not fall into the hands of cybercriminals. The costs of such a breach can be significant, including regulatory fines, lawsuits, damaged reputation and loss of trust.
Acquisition and analytic processing of the IoT data are additional significant challenges. Insurers will not simply be collecting and analyzing more data than they ever have; they must also collect and analyze that data in near real time to insure that the operational insights generated can be used to prevent or reduce loss. Traditional insurance companies will require a major upgrade of their IT capabilities to add real-time operational intelligence to their arsenal. Such operational intelligence will require acquiring advanced skills in technology areas such as IoT networking, cybersecurity, cloud computing, big data analytics and artificial intelligence. Finally, it will take time to blend the insurance domain knowledge of traditional underwriting professionals with the knowledge of professionals who are experts in emerging IoT-related technologies.
The good news is that most insurance companies are actively preparing to transform how they do business. The IoT-connected world will change the way both insurers and insured think about preventing loss and managing risk — largely for the better.