The Internet of Things has sparked so much conversation already, as consumers and businesses speculate about how it will impact them. A lot of this chat revolves around seemingly trivial things, like milk-ordering fridges and fitness-tracking watches, but this connectivity revolution will influence our lives in some less obvious areas, too. Insurance is a prime example of this.
Insurance at Present
With the economic downturn all but a distant memory and stable conditions now restored across much of the world, we have seen encouraging signs of growth in global insurance markets. Many of the providers that were quick to conserve capital as soon as the going got tough are now regaining confidence and optimism.
That’s not to say there aren’t challenges, though. Growth, while evident, is still slow, and low interest rates are affecting some trading environments. As competition increases and profit margins tighten, providers will increasingly look to seize new digital opportunities. The effective use of data will be key for a sector that has traditionally struggled when it comes to innovation.
This is where the Internet of Things comes in.
A World of Data
Cisco predicts the IoT will comprise 50 billion devices by 2020. This total includes a range of different objects, from the expected phones, tablets and computers to security systems and the sensors bringing everything together. Every single touch point is constantly collecting the data it needs to perform its intended action. This information is the key to a more efficient insurance industry, as well as lower premiums and better services for consumers.
Accurate Premiums for All
Currently, insurance prices vary based on so many changing factors. With car insurance as an example, the premium reflects the driver’s age, experience on the road and accident history. While this is all valuable data, it means the cost will be calculated based on assumption—the theory that an older driver will be more sensible, or that someone who has had one bump already is more likely to make further claims.
This approach is completely logical at present, but with the IoT’s help, we needn’t make assumptions.
It’s all about being able to better assess clients’ risk levels. As an insurer, instead of making educated guesses about how a 20-year-old male may drive his turbo-powered hatchback, the IoT enables you (with the consumer’s permission) to monitor the speeds at which he travels, his use of the brakes and the areas in which he regularly drives and parks. If this data suggests he’s more likely to have an accident or fall victim to theft, the premium can be increased accordingly. If he regularly drives below the speed limit and always opts for secured car parks, discounts or rewards can be applied instead. As a result, the insurance company no longer needs to overcharge low-risk clients to compensate for the accidents caused by its high-risk customers.
This shift is already taking place; a growing number of insurance firms are offering black-box policies, which involve fitting a tracking device to the customer’s car to monitor driving style. Once these can be connected to the Web, it becomes possible to keep an even closer eye on each driver’s behavior, and to adjust prices to reflect his or her actuarial risk.
Accidents, by their very nature, do happen. If a connected sensor could provide the relevant data, though, it would be possible to support claims and simplify the entire process. Once again, less money would be wasted.
This model doesn’t work just for motorists, either. Swap out the black box for a connected watch capable of monitoring its wearer’s exercise and sleeping patterns, and it can also be applied to health and life insurance. The provider can, once again, assess each applicant’s risk a lot more accurately when it knows what that applicant is up to on a day-to-day basis.
A Price Worth Paying
Installation of the necessary sensors and IoT devices comes at a cost, but it’s one that insurers should be ready to pay, given the rewards on offer. The kind of connectivity we’re moving toward will lead to new value propositions that will change the way in which providers make money.
The IoT will help companies create closer ties with their customers. In addition, it will lead to stronger relationships through which providers are able to monitor more closely, influence behaviors and deliver new, profitable value-added services.
The IoT’s growth is also likely to generate new kinds of risks, like those involving information security. As this happens, demand for new types of policies should start to show, opening more revenue streams for insurers.
In the Home
Cars are an obvious and easily relatable example, but there are various opportunities for the IoT to impact how we insure homes as well.
A key example of this is in France, where new legislation states that every home must be equipped with a smoke detector. One insurer is offering a service, utilizing IoT-connected alarms, to ensure that these devices are functioning properly at all times. Consequently, this can bring peace of mind for customers and reduce the chance of fire damage.
The point is that if sensors can warn homeowners and tenants of potential danger to their properties, they have a chance to take preventative action and avoid a claim altogether. With fewer claims to pay out for, insurers have the chance to lower premiums and keep customers happier without impacting their own profits.
The Next Steps
It’s pretty clear that IoT connectivity has a big part to play in the insurance industry, just as it has in most other areas of modern life. Business Insider, for instance, estimates that 50 million people in the United States alone will have tried usage-based insurance (UBI) by 2020. That’s not to say the path is completely clear, though.
One of the biggest obstacles surrounding the Internet of Things and its growth is privacy; people are understandably worried about what happens with their data, and many are reluctant to give it up. The key here is for insurance companies to make the incentives obvious—to be clear about what data they’re taking, why they’re collecting it and how its collection benefits the customer.
If someone can see that she is saving $150 (£100) a year because her insurer’s device is monitoring her driving style, she’ll be less likely to care that her driving is being remotely monitored.
Graeme Parton is a writer specializing in technology and working on behalf of Arqiva, a communications infrastructure and media services company. With a background in journalism and marketing, he has covered everything from big data and business intelligence to cloud computing and the Internet of Things.