Internet of Things (IoT) in the Insurance Industry

The Internet of Things (IoT) is set to be one of the biggest technological transformations on the horizon, promising to radically change the way we live and how we conduct business on an everyday basis. The insurance industry has reached a turning point created by the convergence of new technologies and the need for core infrastructure investments, risk modeling improvements and growing demands to increase profitability using underwriting metrics.

The arrival of the Internet of Things (IoT) represents a transformative shift for the economy, similar to the introduction of the PC. This seemingly sudden trend has been decades in the making, but is just now hitting a tipping point. Change can lead to positive business strategies and improve the customer experience.

What is IoT?

The IoT refers to the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.

Applications of the IoT range from smart homes with equipment that consumers can control with their voices, wearables and smartwatches, to connected cars, or vehicles that are able to optimize its own operation and maintenance, and smart cities where the IoT promises to solve traffic congestion issues and reduce noise, crime and pollution.

The insurance industry has always been in the limelight for several positives as well as negative reasons. With true innovation and revolutionary change very rare in the insurance sector, many of the big and developing insurance companies are often seen talking about bringing change in this field. So far we have witnessed the reforms and changes brought by the emergence of the Internet of Things technology across our homes, workplaces, power supply, roads and water management systems, however, a little-known fact is that technology can be further used for revolutionising the insurance industry as well.

Internet of Things for tackling risks in the Insurance Industry

Known as well as unknown risks are the part and parcel of the insurance industry and with the ability of the Internet of Things technology to use sensors and minute communication devices makes the accessing of granular data easier as well as quicker.

In a way, the IoT has already come to car insurance, via programs the industry calls telematics. Telematics devices operate much the same way an aeroplane black boxes. The gadget gathers second-by-second data about the car’s operation and allows an insurance company to offer lower prices for safe drivers.

The use of telematics, and by inference the IoT, in the vehicle insurance sector is gaining momentum rapidly since it enables insurers to run their processes more easily and efficiently in the event of a claim, and in theory to pass savings on to drivers.

Telematics devices are often the very first IoT- related experience that every insurer comes across. These telematics devices make use of thousands of minute sensors which help in better connectivity and are often used in large bridges and buildings for detecting all kinds of potential risk and structural defects.

Implications for car insurance from the IoT— If cars truly do all carry a type of black box, insurers may be able to significantly change the way they handle the claims process after an accident. Plus, usage-based insurance could offer insurance companies a truly mind-boggling amount of primary data that they could then use to mitigate potential losses. The options seem endless kind of like the internet.

 The Internet of Things(IoT) includes any physical object with a unique identifier that can transmit data to other objects using technologies such as Wi-Fi, radio frequency identification, quick response codes, bar codes, sensors and Bluetooth. These physical objects can be medical devices, clothing, thermostats, wearable devices, home appliances, cars or other transmitters. Gartner, an Internet technology research and consulting firm, predicts there will be 26 billion units installed by 2020.

Another typical example of the Internet of Things technology reforming the insurance industry is the monitoring of health information of the insurers by the insurance companies. This is done in compliance with wearable gadgets such as the FitBit band, etc. which helps these insurance companies in keeping a track of the health of all insured individuals.

However, the context of insurance does not simply stop there. Insurance companies that offer agricultural insurance make use of tiny sensors and IoT- inspired devices for keeping track of livestock, a practice which helps them in calculating the rate as well as price of agricultural insurance accurately and effectively. These sensors are usually implanted into the animals for tracking and identifying their health and number from time to time.

The Connected Cow

There is research program in progress in Europe using GPS collars for dairy cows. The aim is to improve the milk production yield at reduced cost. One insurance use for this technology, relates to real-time monitoring of the health of the herd. When a potentially sick cow is identified, then the virtual electric fence can be used to automatically separate and quarantine the sick individual away from the rest of the herd, thus reducing the chance of widespread infection.

Future Insurance with IoT

We have already seen the positive effects of IoT across our homes and offices, connecting our entire life together in a huge connected cloud. 

So how exactly will the Internet of Things technology reform the insurance industry?

To start with, the kind of self-connecting ecosystem that IoT will create in the insurance industry will bring positive effects on all the processes involved, such as better consumer involvement, process optimisation as well as preventive care in case of mishaps. With the sensors and ever- efficient gadgets making their way into the field of insurance, insurers will be able to connect the dots as well as mitigate risks much before they reach a threshold level. Internet of Things also makes sure that there is better product development, underwriting, sales, deliveries, distribution as well as claims and services being offered to the insurers exactly as claimed by the insurance companies. The Internet of Things technology will make the concept of insurance and risk management simple and quick for all customers.

Diagram Credit: McKinsey Global Institute

Business Improvements through Smarter Data

As stated earlier, IoT is not a new concept for the insurance industry. It was originally implemented in the Property and Casualty segment using a concept known as usage-based insurance for vehicles. In other words, as drivers drive, insurers remotely gather data and actuaries analyse performance in near real-time. The automation of once-manual tracking allows underwriters to improve pricing and insurers can close claims more quickly and improve loss adjustment ratios. The end result of this process improvement is a positive customer experience.

Insurance companies learned that by applying an IoT methodology to how their customers interacted with risk behind the wheel, they could gather the raw materials data they needed to help create a lift in overall profitability. And they could do this while rewarding their less risky customers with discounts and enhancing their value proposition to the consumer (emergency road side assistance, vehicle recovery, vehicle maintenance alerts, etc.). But this was just the beginning.

Insurance companies realise that they can improve all aspects of their business processes by using modern data analytics captured using connected IoT solutions. For example, interactions with existing products — when combined with demographic information and retail spending habits — help insurance companies understand who to better target with their products and improve market timing.

Building a Seamless Omnichannel Experience using IoT Sensors

To create a better customer experience, enterprises are using IoT sensors to collect and share customer preferences and build a seamless omnichannel strategy. Insurers can use IoT solutions to better understand group and individual buying behaviour and more insightful analytics allow them to offer consumers the services and products they want, on demand.

For more personalised experiences customers can opt to share their mobile profile when they engage with an insurer. This is similar to how loyalty programs work in the retail market. This strategy offers a 360 degree view of the customer and better educates them about the insurance buying cycle, investment services, transparency into the insurance process and claims services.

Life and annuity companies are also beginning to reap the benefits of IoT for underwriting profitability. Group and individual life providers, workers comp, specialty and payers are looking for ways to measure their customers’ adherence to proven healthy outcomes. Some companies are improving their group life and health premiums by outfitting their employees with IoT sensors, like Fitbit, that offer a more holistic view of the outcomes of exercise and health programs. Reinsurers, globals and complex lines are benefiting from the IoT by tapping into sensor data to view a more robust picture of the risks being underwritten around the globe.

The Importance of Securing the IoT for Insurers

With cyber terrorism on the rise, insurance companies are looking to use IoT data in support of key global threat indicators tied to commercial business continuance and cyber breach products. Cyber threats compromise retailers and place personal identifiable information at risk. Enterprise and mid-tier insurers are looking for ways to consolidate cyber risk data into a score, similar to a credit rating, to denote how to best underwrite cyber breach policies. Insurance companies are looking for automation metrics to indicate a policyholder’s cyber threat posture and help manage these risks on a personal and commercial level.

Connected healthcare Insurance:

 There has been a considerable increase in global longevity along with the occurrence of lifestyle illnesses and ailments, which in turn has put the model of traditional healthcare service to shame. Today, there is an ever- increasing need for advanced healthcare services and better insurance methods for ensuring faster health as well as monetary arrangements of all insurers. In a world where insurance companies and insurers go hand in hand, there are chances for better health tracking as well as risk management.

Connected commuting Insurance: 

With the automobile industry adopting the concept of Internet of Things, there are increased provisions for improvement in the automobile, commuting and commutation arena. This is the reason why several of the insurance companies have now started to invest in driving behaviour analytics as well as automobile performance. This will assist them in keeping track of not only the automobile; rather all related driver’s data as well. Now, these tiny yet crucial pieces of information are required by the insurance companies as well as the manufacturers of vehicles for differentiating product experience as well as for advanced risk settlement and segmentation.

Image Credit: Actuarial Club

Actionable Insights of Internet of Things in the Insurance Industry

What will be more interesting to see as well as experience will be the insurance companies talking about actionable insights, such as the ability to pick up all required data directly from your connected devices? This collected data will further enable insurers to identify and track patterns as well as trends based on the behaviour of the insured.

With the help of IoT, insurance companies will gain better access to all real- time data, hence enabling them to analyse all new information while also connecting it with all the historical information. This in turn, is a great way of making effective predictions and developing great preventive measures, practices which define the insurance industry most appropriately.

Where IoT conjures up ideas of fridges that order your groceries, connected devices recall in-car telematics systems, health-related wearables and most recently, home control systems such as Hive and Nest (thermostats controlled via smartphones and remote monitored smoke and carbon monoxide detectors). 

But as consumers get used to controlling their environment with the click of an app button or monitoring their fitness, appointments and car health via a smartwatch, what are the implications for the insurance industry? As connected devices begin to impact on consumer behaviour, will we begin to see dramatic changes not just in individuals’ risk profiles but in the very risks companies insure? 

The implications of connected devices for the insurance industry are threefold: 

• To change the customer engagement landscape in terms of service improvements, raising competitiveness above the price bar 
• To change customers’ behaviour and approach to risk in order to improve their risk profiles 
• To change the nature of risks insured, moving away from physical accident and theft into virtual perils including data and financial 

Is Lifestyle-Based Insurance Next?

Wearable technology, ingestible sensors and many other health technologies have profound benefits for consumers, insurers and doctors. If you look at the development stages for auto insurance over the past decade, you can see the potential for lifestyle-based insurance in the future.

Auto Insurance(Lifestyle based):

Lifestyle based Insurance:

How will the Internet of Things (IoT) transform the Insurance sector?

There are five practices that may emerge in this industry as a result of the Internet of Things:

Note: Carriers refers to Insurance companies

I. Geo-spacial Applications: As an example, auto insurance carriers now use what they call “telematics” to gather history of speed, distance, turning and braking patterns, time of day and much more from the vehicles of prospective policy owners in order to price and maintain “usage-based” insurance (“UBI”). Premiums are lowest for responsible drivers. For the carrier, this will drive premium growth, reduced loss ratios and improved margins. In the near future, weather data supplements pushed to the car will trigger warnings such as: “Hail storm approaching”. These will benefit both the policyholder and the carrier by avoiding a claim.

II. Environmental Sensors: Homes, office buildings, warehouses and factories have sensors installed to detect temperature, smoke, toxic fumes, mold, earthquake motion or other hazardous conditions. With two-way communication, these IoT devices can also provide predictive alerts on potentially dangerous conditions in the near future. Carriers offering home owner’s, commercial property, worker’s compensation and general liability lines would all be able to “write right risk” and improve loss ratios based on IoT connected environmental sensors.

III. Connected Biometrics: Kids or teenagers may already be bored with their fitbits, but life, disability, medical and worker’s comp insurance executives should remain excited about “wearables”. A number of large employers/companies have established programs that award points to employees having healthy lifestyles as documented by their daily activity, calorie burn, heart rate and sleep pattern history uploaded daily. With supplemental GPS data, wearables could monitor and report on compliance to the rehabilitation protocol of a disability claimant. Improved compliance would shorten the time until return to work. In both scenarios above, the plan sponsor, employees and carrier all benefit from improved understanding of risk, more accurate pricing and reduced claims cost. In the future, blood chemistry associated with impending heart attack could trigger a proactive alert and preventative or mitigating action. An employer could detect substance abuse by workers on the job and initiate proactive intervention.

IV. Diagnostics: Some of the very first applications of connected sensors, the pre-cursors to the IoT, were in factories using process control automation. IT executives got excited when IBM announced a “phone home” error log dump capability when their new (!) 3090 mainframe had a hiccup. Today, small, inexpensive, but highly intelligent sensors are embedded in a huge variety of products including appliances, toys, consumer electronics, industrial machines, vehicles etc. As manufacturers of these devices embed and enable IoT, specialty insurance carriers offering extended warranty protection on these products will also offer predictive and preventative service prior to product breakdown or component failure. Maintaining happy policy owners will improve cross and up-sell likelihood for additional insurance products.

V. Carrier Process Transformation: While this has been more about data gathering and exchange with the policy owner’s IoT devices, the most significant change is occurring within the carriers. With 21 billion devices gathering and sending data, carriers must immediately re-imagine how they will store, sift through and use their portion of what respected industry analyst IDC predicts will be 50 trillion gigabytes of data produced by the IoT in 2020! The challenge of turning data into usable insight will be immense.

First, carriers will require much larger and more sophisticated IT, data warehousing, analytics and business analyst teams to make meaning out of the data gathered. One of many examples is the detection of changes in risk warranting a premium adjustment. As a result, carriers will also have to beef up their process re-engineering ranks to put insight into action – adapting how the various carrier business functions, such as New Business, Underwriting, Policy Administration and Claims respond to and launch actions on behalf of their policy owners and agents.

Accenture identified three dimensions of the sector that will be most affected;

• 1) Consumer Expecting - not just a product but a unique “always-on” service oriented experience
• 2) Offerings and Risks - Moving from product to service, without ignoring the impact of new risk pools
• 3) Competition - New competitors creating contestable markets from unexpected industries.

Conclusion 

There is no doubt that we are about to see, if it hasn’t started already, a fundamental shift in the way insurers assess, manage and compensate risk. The order of the day is very much that prevention is just as important as the cure. Claims will not be eradicated, but insurance will also be about service. 

Discovering that insurance is more than ever about a service proposition will not be enough, according to some commentators. The whole industry is going to have to come to the realisation that customer expectations are set outside the insurance industry.

The growing reliance on data to provide these services is also going to be a balancing act. Insurers will have to walk the tightrope carefully to maintain their carefully won trust. Customers are well aware that they share data with the companies they choose to interact with. However increasingly the data shared by devices is deeply personal. In many parts of people’s lives, things that were private have become public. In using the Internet of Things personal privacy will have a trade-off disadvantage and people have to see that the benefits outweigh the drawbacks. 

This will change the organisation because service is becoming so much more of the value proposition. How can you create a common point of contact for the service rather than approaching everything from an underwriting point? It will be good to see an increased emphasis on preventing injuries and damage rather than dealing with the consequences of the events

It is unrealistic to expect that the Internet of Things will bring about a complete removal of risk. That is not possible. Risk will undoubtedly shift towards the virtual world from the physical. Connected devices will make this possible by reducing much of the current physical peril that comes largely as a result of human error. Home monitoring devices such as Nest and the imminent arrival of the driverless cars, buses and trucks will see a shift towards new customer behaviours. Insurance is set to become less a protection against the past and more a warranty for the future. 

IoT is disrupting the insurance industry, bringing about new competitors, potential partners and changing how products and services can be delivered. NTT DATA recommends that insurance companies should prioritise the development of partnerships with the smart home gateway firms who will ultimately control the flow of this data. Insurers are now presented with a wonderful opportunity to use digital technologies and the IoT to create business opportunities and rethink existing products.

The Internet of Things is not a futuristic innovation any more. It is here, and it has the great potential to transform the insurance industry.

In order to stay relevant, insurers need to streamline processes and build data capabilities in the short term due to these technological and customer trends. In the long term, they must prepare for new customer and product portfolios, and compete with new industry players. IoT technologies, combined with data and analytics, will have a big impact on insurance.

IoT also opens a range of new business opportunities for a variety of players.

These opportunities tend to fall into three broad strategic categories, each reflecting a different type of enterprise:

• “Enablers” that develop and implement the underlying technology
• “Engagers” that design, create, integrate, and deliver IoT services to customers
• “Enhancers” that devise their own value-added services, on top of the services provided by Engagers, that are unique to the Internet of Things

Rarely in the past, if ever, has a single technological platform combined this much complexity, speed of development, global reach, and novelty among customers. 

So in a nutshell, as new sources of data about the people and things we are insuring become available, we gain new opportunities to identify and manage risk. In many cases, we can incentivise customers to play an active part by sharing data and, based on the insights from that data, modify their behavior to reduce risk. It’s a fantastic model for the insurance industry, one that offers greater transparency and value for all stakeholders.

IoT for insurance is here. It is no longer something that insurers are just thinking about as something they need to start considering in the future.

Are we ready for “Smart” insurance?

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Credit: Raj Anand, iotworm, Verizon, Nicholas Chen