One of the best (worst??) features of the interwebs is how you can drill down ever further into what ever rabbit hole strikes your fancy. In the spring, a young man’s thoughts turn to…fishing. At least ’round here.
Earlier this month, a couple of different research projects amplified each other.
The blog on voice computing paired up with some discussions with an insurtech startup working in the smart home arena. One hyperlink led to another and soon Amazon had a number of packages in transit.
Changing Nature of Risk is ACT’s working group that looks at new exposures and coverage availability for agents and carriers. One of our advisories is an exploration of the Internet of Things (IoT). Rather than regurgitate that here, if you need a refresher, take a quick gander.
Insurance and IoT
Ernst and Young wrote a white paper in 2016 on the opportunities that IoT provides to the insurance industry. As might be surmised, in an analysis of seven industries, insurance comes in last in terms of the number of companies able to use insights from new data sources to boost customer value.*
In E&Y’s view, that data can come from 4 different sources.
- Wearable technology that provides health metrics
- Sensors attached to mobile objects reporting on location or performance
- Location based sensors such as home thermostats
- Geospatial Information Systems that provide information on huge systems such as hydrological data
These sensors are then connected into communication networks that provide insights that were previously unavailable. Think about how your use of a mapping program on your phone enables real time updates on traffic congestion.
All of this data is communicated with cloud based applications that turn that data into information in real time.
This information provides three distinct advantages to insurance carriers. First, because the data is real time and direct from the sensors, a direct connection to experience with less unintentional (or otherwise) filtering. More accurate data means more accurate insights.
Second the direct connection can provide a closer relationship to the insured and facilitates an understanding of how the insured’s needs change over time.
Finally, that greater customer intimacy provides the ability to develop customized insurance products with features that appeal to customers.
The implications for how an insurance company could use these insights to improve underwriting and pricing algorithms are huge. Imagine being able to identify changing loss trends even before the claims payments have been made and changing pricing models instantaneously.
An insurance company could develop products that allow customers to up sell themselves on features and benefits that they value. Or even more radical, down sell less desirable customer segments.
New Capabilities, New Opportunities
Potentially the most revolutionary aspect of all of this new information is a radical restructuring of the insurance value proposition.
Historically, the primary reason most insurance products were bought was the promise of payment after loss. But what happens to our industry when the numbers of losses and total claims decrease by 10, 20 or even 50 percent?
Perhaps you are out of state on vacation and a temperature device in your home reports that interior temperatures are dangerously low and your pipes may freeze. A technician could be dispatched to service your furnace.
Water damage claim averted.
Or possibly your iHeartMyself device reports potentially deadly arrhythmia. A medical professional is automatically notified and an Uber is dispatched to take you to the local hospital for the appropriate treatment.
Major hospital stay and expensive rehab avoided.
Dan Burrus, a noted speaker and futurist, has defined two principals for future trends: hard vs soft. “A hard trend is something that will happen: a future fact. A soft trend is something that might happen: a future maybe.”
That there will be significant loss reduction in some existing lines of business and segments is a hard trend. Whether or not the changing nature of risk and new exposures will replace some or all of those claims dollars is unknown.
As an example, statistics say that 90% of vehicle accidents are caused by human mistakes. If autonomous vehicles are only half again as safe as we are, then when most or all vehicles are autonomous, we should see a 40+ % decrease in accident frequency. Even though we’re quite a few years away from most vehicles on the road being autonomous, the reduction in losses could be dramatic.
Some members of the Society of Automobile Engineers working on autonomous cars believe that their vehicles will eliminate 80% of human caused accidents. Combine that with smart road surfaces reporting weather conditions and traffic flow rates.
Perhaps a majority of vehicle accidents can be eliminated.
While this might be the most dramatic example of how IoT can affect the insurance industry, it is not the only one. IoT will mitigate losses in multiple lines.
- What does that do to demand for insurance products?
- How does an insurance organization realign the value proposition when the potential for losses decrease dramatically?
- What happens to an industry when dramatic, fundamental changes take place to the underlying economics?
Long Story Short
The Internet of Things is being embraced in many industries. Connecting sensors to cloud applications in order to gain new insights and create new value and services is proceeding at a rapid pace. Although insurance lags in these developments, both established players and new startups are working to leverage these new capabilities.
Hardware manufacturers are developing loss control devices. Industrial equipment manufactures are instrumenting their products so that performance can be remotely monitored. Biometric wearables get smarter and more capable every day.
Software companies and app developers are building reporting and control capabilities. Insurance companies are forming partnerships with established companies and start ups alike.
The world is becoming more interconnected every day. The best way to get a feel for what is possible is to plug yourself into the world of sensors and connected devices.
A simple place to start is in your home. Purchase a smart thermostat or a Phillips Hue Lighting starter kit. A smart thermostat will provide a taste of the possibilities but operate in the background.
Phillips LED lightbulbs aren’t the least expensive on the market, but the Phillips app is well designed and feature rich. The color changing bulbs are a bit pricey, but the white-only lights aren’t too bad at $ 12 per bulb. Note that you will need one Hue bridge (included in the starter kit) to plug into your router.
Once you get your bulbs installed you can create routines that will welcome you home, turn out lights when you leave, and make lights turn on and off when you are out of town to make it appear that you are still home.
See how you’re reducing your exposures and potential losses?
Once you get some experience with IoT, you might find that you’re adding security cameras or smart outlets to control other devices.
Think I’m all wet, or right on? Hit me up with your objections, or raves on how you are using connected devices to improve your life and what you think they mean for the insurance industry.
*Ernst and Young: The Internet of Things in Insurance © 2016 EGYM Limited