Internet of Things: A bane or boon for the insurance sector?

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By Ajith Sankaran
Senior Vice President – Market Intelligence, Blueocean Market Intelligence

Insurance is not often the sector that comes to mind when talking about the Internet of Things. However, there is increasing evidence that the Internet of Things will definitely have an impact on this industry. The key questions are: how big will the impact be? Will the impact be positive or negative?

How Will Internet of Things Impact the Insurance Sector?

The potentially all pervasive nature of the Internet of Things (IoT) implies that whether we like it or not, more and more devices around us are going to be smarter and “always” connected. This essentially means the amount of “control” and constant monitoring of how these devices and the individuals who use them are behaving can be tracked by anyone who is given the mandate to do so. It is not hard to imagine a scenario where these devices are seamlessly connected to insurance providers as “norm,” thus enabling insurance providers to keep a constant watch over the consumer and how he or she is using these devices.

What is Happening Today?

Scenarios are endless, and in some cases, are already happening. For example:

  • According to IHS Automotive, the number of cars connected to the Internet worldwide will grow more than six fold to 152 million in 2020 from 23 million in 2013. Car insurance companies could offer discounts or increase policy rates based on driving habits that are monitored by a device that is plugged into the car. Progressive, one of the leading car insurance firms in the United States, offers a “usage based insurance” program called as Progressive Snapshot®, which provides a “personalized rate based on your driving.”
  • In October 2012, USAA patented a device that is installed at homes and tracks various parameters, such as temperature, wind speed, mechanical vibration and humidity, which can lead to damages for an insured home.
  • In Jan 2014, Google acquired Nest, a manufacturer of smart thermostats and smoke detectors for $3.2 billion.

It’s evident the foundational technological infrastructure for IoT will have a significant impact on the insurance sector. A study by Acquity Group, part of Accenture Interactive, indicates more than two thirds of consumers plan to buy connected technology for their homes by 2019. The top four of the connected technologies, namely smart thermostats, connected security systems, smart refrigerators and wearable fitness devices, are very relevant to the insurance sector.

According to ABI Research, the installed base of active wireless connected devices will exceed 16 billion in 2014, about 20% more than in 2013. The number of devices will more than double from the current level, with 40.9 billion forecasted for 2020.

While the estimates and projections made by different analyst firms and technology vendors does vary, the overall story is clear: the impact of IoT on the insurance sector is already beginning to happen and is projected to grow rapidly.

Areas of Positive Impact for the Insurance Industry

Reduced loss costs, claims and expenses – IoT has the potential to dramatically improve human device interaction. For example, in cars and other vehicles, IoT-based driver assistance and warning systems can reduce the number of accidents as well as vehicular damage. Other potential use cases include active home automation systems that can prevent hazards and risks such as theft and fire. This can help users to act more responsibly and carefully, which in turn can reduce accidents and failures leading to insurance claims.

New sales opportunities – With IoT, the insurers can acquire a lot of data about the consumer, enabling more customization and micro targeting.

Dynamic, optimized pricing – IoT will enable more personalized, flexible, precise and “based on usage and behavior” insurance pricing. For example, a person’s home insurance premium can be increased based on things such as a frequent ripping of smoke alarms.

New go-to-market avenues – IoT will enable increased levels of bundling and cross-selling of products and services, and insurance services bundled with products can help insurance firms to expand to new areas.

Areas of Negative Impact for Insurance Industry

Increased risk and new categories of risk – Already there are increasing concerns regarding the potential threats when every device a person uses, the house he or she lives in, and the vehicles he or she drives all become “connected.” As of now, IoT is very much hackable. Many of these threats have not even been identified, and when examining the potential complexity from a multitude of standards and systems, we may never be able to anticipate all threats. This essentially could lead to more and more claims for insurance firms.At a broader level, the potential cascading effect of a major attack can affect larger entities and ecosystems, such as buildings, transportation grids, power grids and healthcare. The insurance liability of any such incident would be very high. 

Data privacy and security concerns – Two of the big barriers insurance vendors need to address are the increasing concerns around data privacy and security from users. Many consumers are bound to be concerned about how much data all these connected devices would be connecting and how secure the collected data would be.

Potential irrelevance, in future – In the long term, high levels of automation and much smarter IoT devices and systems could reduce the “human error element” completely, thereby reducing the need for insurance and leading to much lower premiums or even the complete absence of insurance. Having said that, one could argue that potential revenue loss from one insurance segment from the impact of IoT can be more than made up by growth of new opportunities resulting from IoT.

It is no longer a question of if IoT will have an impact on the insurance sector, but how significant it will be. In this article we largely focused on the consumer segment of the insurance market. However, IoT could also have a huge impact on the business segment too.

The jury is still out on whether the impact will be positive or negative, and it is largely in the hands of the insurance vendors to leverage IoT in an effective, ethical manner.

Photo:  Green Energy Futures – David Dodge, Flickr

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October 8, 2014

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