Ovum believes that the global insurance industry is entering a distinct phase of disruptive change driven by the Internet of Things (IoT). While the insurance industry has undergone significant technology-driven change in the last fifteen years, the basic insurance modus operandi has remained the same.
However, as the industry enters this new phase, emerging IoT-based insurance propositions threaten to undermine today’s long established insurance offerings particularly in some of the largest mainstream sectors.
How IoT is changing the nature of insurance
An offering that integrates IoT-based technology can change the fundamental nature of some of today’s insurance propositions, particularly personal P&C and small commercial lines.
Here are some of the ways in which IoT will transform today’s mainstream insurance offering:
#1: Sophisticated insurance offerings will be available to the mass market – While the technology to support ‘IoT-like’ insurance offerings (for example stolen vehicle recovery (SVR) devices and advanced security systems) have been available for a number of years, the use of these has been restricted to very high-value assets, vehicles or properties. With the growing ubiquity and functionality of sensors and the falling unit costs, IoT technology will allow insurers to offer highly sophisticated insurance offerings, previously only feasible within small high-value niches, to a mass market.
#2: Minimize or avoid potential claims – IoT devices can not only detect an incident but also initiate an automated response to minimize the cost of a claim. For example, sensors that detect a property flood caused by an appliance failure or pipe burst can be linked to IoT-based actuators that will shut off water and electricity supplies to minimize any damage, even if the home owner is not present. IoT can also be used to preemptively avoid the need for a claim entirely. Sensors could detect abnormal temperature or voltage levels in machinery used by a small business to provide advanced warning of a future failure and thus avoid unexpected breaks in production, spoiled raw materials, or costly equipment repairs.
#3: Support comprehensive coverage – While the specific type of sensors may vary, the same basic IoT data capture and transmission infrastructure can be utilized across vehicles, property, and wearables. As well as driving efficiency, this offers the possibility of integrating different areas of coverage, such as auto, property, life, and pet insurance, into a comprehensive offering, rather than numerous discrete policies. But insurers must ensure they invest in the appropriate flexible back-end systems so that this data can be pooled, analyzed and new value gleaned.
#4: Enable accurate usage and risk-based charging – IoT-based offerings will also allow carriers to offer true usage and risk-based insurance, with the premium rates being adjusted according to the risk posed at any point in time. For example, auto insurance would be charged at a high premium rate when driving late at night, in winter, on country roads, but would be reduced when driving during daylight hours on a major highway, and reduced yet further when the car is parked and locked in a garage. In addition, a driver’s specific behavior (such as a tendency to brake or accelerate harshly) can be taken into account to derive an accurate risk score.
#5: Encourage modification of risky behavior – If an insurer incorporates feedback to policyholders as part of an IoT-based offering, there is considerable scope to influence or modify potentially risky behavior to the benefit of both the customer and carrier. There are already many examples of apps that offer feedback on driving habits, and there is growing evidence that these do reduce poor driving behavior. Other examples include using IoT technology to monitor tire and brake pad wear and encouraging policyholders to renew these before they compromise safety. Similarly, apps that monitor activity levels or calorie intake can help life insurance policyholders maintain a healthier lifestyle.
#6: Provide a platform for innovative new service elements – With many policyholders perceiving mainstream personal insurance offerings as undifferentiated commodity products, IoT technologies can provide a platform for the development of innovative services that can minimize the use of policyholder time, improve data capture accuracy, and enhance customer satisfaction, especially in areas such as claims submission. Examples of such services could include the use of voice-controlled interaction to perform verbal inventories, and the use of webcams to assess coverage needs or simplify claims submissions.