I would start with a quote by Edewede Oriwoh: “The Internet of Things is not a concept; it is a network, the true technology-enabled Network of all networks.” I truly believe that this is just the beginning we are witnessing. As per Gartner, 20.4 billion connected “things” will be in use by 2020 with consumer segment having the largest number of users (60% of the market). The IoT endpoint spending worldwide is expected to be over $2.9 trillion. The cross-industry devices, such as those targeted at smart buildings (including LED lighting, HVAC, and physical security systems) will be in demand as connectivity is driven into higher-volume, lower-cost devices.
With the insurance industry trying hard to navigate what I believe to be a sinking ship, the IoT seems to present a ray of hope. IoT has enabled the evolution of core business models, centered on need servicing, data-driven decision-making, and predictive advisory. Traditionally, business models revolved around product provisioning and one-time sales. The IoT has presented an opportunity for cross-sale/up-sale, thus identifying new sources of revenue generation.
Insurance Pain Points
Currently, the insurance industry is plagued by a one-size-fits-all policy (think of current health, life insurance, and auto insurance you avail) instead of a target-based policy (what we have experienced in lending, and other FinTech verticals). Customer loyalty/experience was always and still is a sorry state in most insurance companies. Policy renewal, after-sales service for claims, etc., ranks low on the priority list. The touchpoints with customer occur only once or twice per year unless you get into trouble. (I’ve experienced this myself over the last seven years). Additionally, the antique data points (with no relation to risk prevention and monitoring) are being used for pricing and risk management. Due to limited data availability, insurance fraud often drags the financial performance of companies.
IoT – A ray of hope
“In God We Trust. All Others Must Bring Data.” – W. Edwards Deming, Statistician, professor & author
IoT is a network of physical objects that gathers as well as transmits information for data processing and insights. The collected data allows better decision-making in pricing, risk assessment, etc., for insurance companies. P&C lines were the first to adopt this through auto telematics. Recently, we have seen interest in other lines of insurance business such as health, home, industries, etc. Demands for drones for property inspection, usage-based insurance, sensors, and detectors are increasing particularly in commercial insurance (factories, warehouses, commercial vehicles, etc.).
The IoT will enable companies to shift their strategy from reactive restitution to proactive prevention. For example: Gemalto’s IoT solution enables remote monitoring of smart objects, thus eliminating middlemen. Smart Structures embeds sensors in its structure during concrete pouring, thus enabling the real-time health monitoring of its buildings.
Five key areas for IoT value addition for the insurance ecosystem:
Increasing the number of touchpoints: Traditionally, insurers interact with their customers only once or twice a year – for policy renewal or claims. IoT offers an opportunity to initiate a continuous, end-to-end dialogue, leading ultimately to a new personalized relationship. Example: Accenture has developed a connected home platform that connects the most relevant devices to homeowners and insurers, including cameras, window and door sensors, motion detectors, etc. It allows insurers’ CRM systems to monitor usage and trigger discounts as appropriate based on data, enhancing customer experience.
Product innovation: Startups are building new products such as usage-based insurance, short-term insurance, lifestyle products, etc. This enables low-risk customers to get customized products and be awarded for “good behavior.”
Fraud prevention and claims management: With novel data, companies can use analytics to weed out frauds and bogus claims. Wearables are enhancing fraud detection capabilities. As reported in the Insurance Journal, there was a case where a heart monitor’s data was used to prove an individual may have been involved in arson. According to the report, data recorded by a man’s cardiac pacemaker helped lead to his indictment on charges of aggravated arson and insurance fraud in a fire at his Ohio home.
Risk management: Having continuous real-time data enables companies to assess risks better, which in turn helps in pricing and underwriting to be more dynamic and personalized.
Enhanced customer base: An opportunity to reach more tech-savvy customers who are underinsured or do not want to take up insurance.
What’s next for the insurance ecosystem
Although there is a proliferation in connected devices (owing to the decreasing cost of hardware/software, enhanced data storage and processing frameworks, smartphone penetration, etc.), insurers have failed or are finding it hard to convince customers about the benefits. The challenge lies in scaling and the mass adoption of IoT-based insurance products. This is the only way it can have a meaningful impact on their profitability.
Although the key is to form partnerships in the industry’s ecosystem (IoT value chain), the question that remains is this: how do they move forward? There are many questions which insurers need to find the answers for. Will insurers tie up with multiple stakeholders in the value chain? Will it increase the complexity? The other option is to tie up with big industry players (like Accenture) to get a full-stack solution. But this reduces the flexibility and might impact the cost centers of the insurers.
There is another option – to partner with InsurTech startups (see below infographic), work with manufacturers, and build connections directly into the product. This helps in tapping into the expertise of IoT startups and quickly launching the product into the market. More information about IoT startups and partnerships can be found in the Disruptive Trends in InsurTech – Current and Beyond report.
Additionally, they may seek to tie up with other large tech firms (Amazon – Echo, Microsoft- Cortana, etc.) and nudge consumers towards purchasing.
Consumers also have not helped the insurer’s cause as they do not feel comfortable volunteering their information. The huge amount of data from connected insurance has made regulatory bodies to mandate consumer data protection policies. With the Data Protection (GDPR) regulation in EU, the going may get tougher as it lets customers take more control of their data. Also, questions remain on how to build standards, guidelines around data sharing, and how these standards will differ globally. Insurers and other IoT players need to find a common ground.
Also, insurers need to jump the wave from risk transfer (currently) to risk monitoring and management. Only then will they will be to provide a real-time, risk-based insurance product.
What’s in it for insurers?
The IoT enables insurers to revamp/add products to their current operations of selling insurance to consumers. It provides an opportunity for increasing their customer base across verticals by offering a better risk-based product. Additionally, it lets them increase their profitability by eliminating fraudulent claims and improve their top line through the cross-selling of insurance products.