The internet of things (IoT) is disrupting all kinds of industries and insurance is no exception. Despite adoption being relatively slow so far, there is no denying that it has the potential to revolutionise the industry, giving insurers the power to provide an enhanced customer experience with improved data transparency, more accurate pricing strategies, and new products and propositions.
In the following three parts, we discuss the different technologies driving this disruption, in addition to methods for embedding these technologies into a range of insurance propositions.
The number of connected devices is increasing at an exponential rate. Gartner claims that in 2015 there were 6.4 billion connected devices globally. However, by 2021 they believe this figure will rise to 20.8 billion1. This assessment is considerably smaller than other reports, with Ericsson believing there will be 28 billion, and Intel positing that there will be a staggering 200 billion devices globally by 2021 . Although there is disparity in these figures, they all support the same message: the IoT is growing rapidly, and relentlessly.
For insurers, the key will be to understand where to strategically position themselves to best capitalise on opportunities presented by the IoT. Insurance Nexus’ IoT Progress Survey provides a useful insight into where customers are most engaged with the IoT, reporting that 58% of survey respondents were most likely to engage in car insurance, and 10% were most likely to engage with this technology in their home2.
Interestingly, the current hype is geared towards personal lines. However, research suggests that there are also sizeable opportunities in the commercial space. Intel states that “most IoT smart devices are not in your home or phone – they are in factories, businesses and healthcare.” They believe that the total worth of global IoT technology will reach $6.2 trillion by 2025, with $2.5 trillion of this in healthcare, and a further $2.3 trillion in manufacturing3. With this in mind, insurers should not only be thinking about personal lines, but commercial ones too.
Another consideration for insurers is when they should engage. As easy as it is to get excited by the hype surrounding this technology, it must be noted that consumer adoption is low in the UK. It is little wonder therefore, that Insurance Nexus’ IoT Progress Survey reveals that 52% of respondents believe that the main impact of the IoT will be in two to five years’ time – not immediately4.
Notwithstanding, there are major players in the market that have already started to partner with startups and alter their propositions to meet this anticipated demand. For example, both Aviva and Allianz have partnered with companies whose smart devices enhance their propositions. In both cases, it appears that they are distributing these sensors to their policyholders to gauge customer feedback. Following the example of Aviva and Allianz, it would be prudent for insurers to start experimenting with IoT-enabled insurance propositions now in anticipation of growing demand in the future.
The benefits for those that do are extensive. Customer empowerment undoubtedly leads to an improved customer experience. The ability for a customer to see, with complete transparency, the drivers that are affecting their risk and thus their premium, gives them more of an incentive to engage with risk management. In turn, this risk management can be monitored (responsibly) by the insurer to identify a positive change in risk. The resulting data acquired from IoT devices can be fed into pricing models, allowing for a more accurate technical price and, subsequently, a fairer premium for the customer; leading ultimately to a more attractive operating profit for the carrier.
On the other hand, for an insurer to successfully experiment with and scale an IoT-enabled proposition, they will need to overcome several barriers. First, the IoT market and the technology within it is still immature. Although many devices are consumer-centric and work well on a small scale, few are currently versatile enough to suit the needs of insurers’ diverse books of business, and consequently are difficult to scale.
In addition, insurers must consider that when they incorporate this technology into a proposition, there may be hidden vulnerabilities in the technology that could cause claims as opposed to stopping them. This, combined with the fact that cyber policies currently tend to be priced without historical data to benchmark risk, could lead to a bigger exposure for the insurer, which could harm profitability. Additionally, if the technology does fail, the insurer must guarantee the cyber security of both the customer’s sensor and the data within it, which is a concern.
More ingrained in the industry, however, is a desire to integrate value-added services (such as IoT) into the legacy system architecture of the business, and a culture of caution and scepticism towards new technologies. Legacy systems slow progress in the short-term, but a cautious culture can inhibit the ‘fail-fast’ approach of innovation.
There are several ways to overcome these obstacles. Firstly, insurers could set up a dedicated team in the business with the autonomy to experiment with embedding IoT in to propositions.
Alternatively, if an insurer wants to create an IoT-enabled proposition in a specific book of business such as home or motor insurance, then it would be prudent to enter the space via partnership with a start-up. This allows the insurer to build and test the product in conjunction with a third party quickly, whereas in-house product development could be more expensive and time-consuming.
Finally, if the insurer is keen to simply experiment with a proof of concept in the IoT space it may be wise to collaborate with a service provider, such as a tech consultancy or analytics provider. This would allow the insurer to sample several different areas of IoT engagement and narrow their focus to the technology that best suits their product range and customer base.
From our research, it is evident that the IoT will transform the insurance industry. A rapidly growing number of connected devices, leading to an increasingly transparent society with vast amounts of IoT-derived risk data, can be leveraged by insurers to better understand needs of their personal and business customers.
Analysing this data, using next generation technologies such as advanced analytics and artificial intelligence, insurers can provide more accurate premiums, personalised levels of cover, or entirely new propositions for emerging risks.
However, insurers must be strategic. With immature technology and customer adoption currently low, insurers need to test, learn and tailor their IoT approach to suit their customer base. When a full-scale proposition becomes commercially viable, it is important for insurers to then overcome cultural scepticism about the technology, and scale their IoT-enabled propositions quickly. In the end, the insurers that manage to do this effectively will undoubtedly reap the benefits.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.