Connected Devices & Insurance: Wire Your Life, Get a Discount

October 4, 2018

MONTHLY ANALYSIS

50 billion devices will be connected to the Internet by 2020

It is estimated that up to 50 billion devices will be connected to the Internet by 2020. This equates to approximately six devices for every person in the world. Of course, connectivity comes with a cost. Leading companies are budgeting more than $100 million annually developing IoT systems today. Companies as diverse as GE, IBM, Cisco, Samsung, and Monsanto are currently investing billions into their IoT and analytics initiatives. – Ron Schaber, Second Vice President, Munich American Reassurance Company, in The Internet of Things and Life/Living Benefits Insurance

Insurance is one of the industries where connected devices will drive significant transformation. Driven by the ability to collect real-time health condition data, health maintenance organizations, businesses, and insurers will be armed with a foresight into appropriate risk management and loss prevention opportunities, as well as understand the impact of wellness programs and how to tune them for increased treatment efficiency and individual productivity. Some estimates even suggest that for every $1 spent on preventive care, employers can expect a $3 return. IBM shares that sensor-equipped devices transmit huge amounts of data and advanced analytical capabilities are needed to gain actionable insights.

Samsung, for example, is already experimenting with health insurance + IoT model. At the end of 2017, Samsung announced its collaboration with UnitedHealthcare and Qualcomm Life to offer Samsung Gear Fit2 Pro and Samsung Gear Sport in the UnitedHealthcare Motion™ wellness program. UnitedHealthcare members can choose Gear Fit2 Pro or Gear Sport, along with a pair of Level Active Wireless headphones, to stay on top of their personal fitness and wellness goals and even earn more than $1,000 per year by meeting certain daily walking goals. The wearables feature a Samsung-developed custom app called F.I.T., which tracks frequency, intensity, and tenacity of walking goals, as defined by UnitedHealthcare.

Earlier in 2017, Apple and Aetna were in discussions to bring the Apple Watch to millions of Aetna customers. The insurer, which covers 23 million, offered an Apple Watch to its 50,000 employees as part of its corporate wellness program. Aetna was reportedly negotiating with Apple on a plan to offer a free or discounted Apple Watch as a perk to its members. Previously, at the end of 2016, Aetna made Apple Watch available to select large employers and individual customers during open enrollment season.

Aetna’s idea is that the special watches will be loaded with apps co-developed by Aetna and Apple to fit into corporate wellness programs. Apps can remind users to take required medications on time or prompt them to refill prescriptions, for example.

Seeking a passive way to measure patients’ vital signs and other biometrics, more than 40% of healthcare organizations across the world will use IoT-enabled biosensors by 2019, according to IDC.

Over 500 million smart wearable devices will be sold by 2021

With over 500 million units of smart wearable devices expected to be sold by 2021 (including more than 80 million smartwatches, 5.6 million body-worn cameras, almost 64 million wristbands, over 22 million sports watches, and millions of units in other categories), and the advancements in sensory technology, underwriting is getting to a whole another level with the opportunity to put together historical data and detailed streams of current data from a variety of connected devices to more accurately predict risk, influence future behavior, and incentivize desired outcomes.

Skyrocketing number of connected devices creates a unique opportunity for insurers to vastly improve risk assessment using evolving hallmarks of one’s physical condition, home condition, or driving patterns. Better use of IoT and sensor data means insurers have the opportunity to:

  • Establish direct, unmediated customer relationships

  • Gain more granular and precise understanding of who their customers are and how their needs change over time

  • Individualize offerings of products, features, and access options

An increasing number of insurers and technology companies are finding ways to pass on the benefits of advanced analytics onto the end user. As Jon Carter, UK Head of Business Development – Connected Home, Deutsche Telekom AG, fairly noted, This is a race to the surf, so to speak, with IoT being the next big wave to hit the insurance market. This will be much bigger than the move to direct sales or price aggregators. IoT will have a huge(ly) disruptive effect on insurance and we could see an upending of their entire model. As the earlier disruptions to hit this industry, the first movers will be the ones that define the landscape and capture the future value, as well as protect themselves from further disintermediation.

Aside from improving the customer experience, leveraging smart connected devices could help insurers cut costs rather significantly. Automation can cut the cost of the claims process by as much as 30%. Beam, with its connected toothbrush, hopes to reduce the cost of premiums by up to 25%.

IoT + auto insurance = safe driving practices and fraud prevention

According to Aviva fraud investigation, 9 out of 10 insurance claims involve fraud. Losses are generally passed onto clients in forms of raised premiums at the renewal. Fraud exists today largely due to a lack of precision in assessing the accident and lack of data from the accident. Meanwhile, behavioral patterns and accident risk are directly dependent on the driving style, weather conditions, pavement quality, and other parameters which are interconnected and have to be considered — all of them are trackable today.

SAS shares that the average car contains over 300 sensors, but the vast majority of them generate information that is neither useful nor interesting to insurers most of the time. It is, therefore, important to consider how to identify what is important and when that data source needs to be considered. The company believes that the priority should be to identify how the information can help the customer, and to make it specific to the customer’s need, whilst supporting the business goals and objectives of the insurer.

Progressive, for example, has a Snapshot program that personalizes driver’s rate based on their actual driving (usage-based insurance). That means you pay based on how and how much you drive instead of just traditional factors. The promise is simple — drive safe and save; drive extra safe and save even more.

There are still other pricing factors, and the rate may increase with high-risk driving. But generally, drivers are in control of what they pay for car insurance, and most drivers earn a discount. In fact, Progressive claims that Snapshot rewards the average driver with a $130 discount. Upon sign-up, drivers get a plug-in device, drive with Snapshot for their first policy period (usually about six months), and check progress on how they are doing in the Snapshot app or online.

With State Farm’s Drive Safe & Save telematics programme, for example, a smartphone and beacon tell the insurer exactly how the customer is driving. By using basic information from a vehicle’s OnStar®communication service or mobile devices, State Farm calculates a discount — which could be up to 50%. An InsurTech startup Metromile claims to be saving its users up to $500 per year on average when pay-per-mile insurance and using Metromile Tag!

In 2015, USAA led a $24 million round for San Francisco-based Automatic Labs, which built smart car technology that tracks driving behavior when plugged into a vehicle’s electronic system. That same year, USAA rolled out the device to its members as a way for parents to keep tabs on teen drivers called Automatic License+. USAA, one of the nation’s foremost insurance and financial services providers for military families known for its industry-leading customer satisfaction, serves 11 million members.

Explaining a real-world example of how Automatic works, Automatic’s co-founder and CEO, Thejo Kote, said, Automatic tracks your mileage for you so submitting for reimbursement is a breeze. Each expense includes important data like your mileage, route map, start/end address, and even a visual receipt, so your expenses are accurate and defendable. You can access your full history and add the details of a trip to expense reports right from your phone, anywhere in the world. Best of all, with the Automatic Apple Watch app, you don’t even need to use your phone — it’s just a tap of your watch.

In other words, USAA and suit of other investors, are very interested in a granular look into one’s behavior to sharpen their predictive analytics capabilities and risk assessment.

Folksam, for example, a customer-owned mutual insurance company in Sweden, has created an offering called Köra Säkert (Safe Driving) to incentivize customers to drive more safely. This offering is based on a pay-how-you-drive concept, where the customer can influence their car insurance premium.

When signing up for the service, the customer receives a small LED indicator that can be mounted on the car’s dashboard to inform the driver if they are speeding. A red, yellow or green light provides feedback to the driver on whether they are sticking to the speed limit or not. This indicator communicates with the telematics unit, and an app provides feedback that can encourage safer and more environmentally-friendly driving. The long-term goal is to save lives and reduce the number of traffic accidents; the incentive could also result in a discount of up to 20% on drivers’ insurance premiums.

Healthcare + wearables = preventative care, accurate policy for edge cases

There is a number of examples aside from Apple and Samsung that bring together healthcare and insurance. Condition monitoring devices can be used to track health and adjust policies based on risks associated with lifestyle. Some examples of linking personal devices to insurance include Erie Insurance’s tie-up with Google Glass and Beam’s connected toothbrush (the Beam Brush).

Oscar Healthcare, for example, started experimenting with enticing people to lead a healthy lifestyle for financial benefits four years ago. Through the partnership with wearable device company Misfit, Oscar Healthcare offers a program that links customer biometric information straight to their health insurance. With this program, Oscar clients can opt to receive a free Misfit wristband pedometer that will connect automatically to Oscar’s app. Once set up, the Oscar Misfit pays people to walk — each day they get a new target for the number of steps to take. If users hit the goal 20 times, they are rewarded with an Amazon $20 gift card (up to $240 a year).

A more budget-friendly counterpart to Apple Watch — FitBit — partnered with American healthcare insurer UnitedHealthcare in January 2018 on a type 2 diabetes management pilot program. Participants will be given either a Fitbit Charge 2 or Ionic, which they’ll use along with a Dexcom monitor, to see how their activity levels are impacting their glucose levels. Participants will get personalized coaching to help them increase glucose control and minimize medications. The heavy involvement in tracking chronic conditions and investments in developing smart solutions for millions of affected are tied directly with the ability to more accurately predict the risks related with extending policies to those individuals.

Smarter homes = bigger discounts

American Family Insurance, Liberty Mutual, State Farm and a number of other insurers have partnered with companies — including Google home automation unit Nest — that provide smart products for residences. In return for using the devices, policyholders may qualify for discounts on their home insurance.

Several years ago, Nest refreshed its line of three devices and made a deal with American Family Insurance and Liberty Mutual Insurance to offset the costs of a Nest Protect smoke detector, and establish a monthly discount for homes that link their Nest smoke detectors to the insurance firms. American Family was the first insurer to have the program up and running (only in the state of Minnesota though). The insurer sent customers the Protect (which costs $99) at no cost, and the customer hooked the Protect up via the ‘Works with Nest’ program. That enabled the Protect to share some data with the insurance firm so it knows if the customer’s house has working smoke detectors.

American Family shared that customers using other connected security systems might get the 5% monthly discount provided the customer has a connected home device that has alerts for fire risk, theft risk or water leaks. The customer also has to demonstrate that the device has access to a dependable internet connection and offers a way to send notifications via email, text messages and/or a mobile app.

Another major insurer, USAA, invested in Los Angeles-based Flo Technologies, which created a smart device that hooks up to a residential plumbing system that proactively detects leaks to reduce potentially catastrophic issues. The startup estimated that it costs $8,800 per insurance claim for water damage for businesses. The hardware connects to software installed on a smartphone that monitors water usage and can be used to shut off the water supply. It doesn’t use sensors to detect leaks, but leverages proprietary technology to automatically run tests scouting for potential issues. The system does have sensors that identify temperatures, particularly before pipes may freeze. In the past, USAA has piloted startup technology with its millions of members as a strategic partner.

The tradeoff

With the digital transformation in the insurance industry, largely powered by proliferation of connected devices and ever-advancing analytical capabilities (involving AI/ML) comes a tradeoff — zero-privacy policy.

A high-tech bargain goes: wire your home with Internet-connected devices and get a discount on your home insurance policy in return. The same goes for wearables and telematics. To push a widespread adoption, there has to be a tangible incentive for customers to wire all aspects of their lives and continuously share that information with a number of providers.

MIT Technology Review fairly notes that offers similar to the ones we have covered earlier could speed up the adoption of smart gadgets, revamp the insurance business, and transform how we manage our homes. In the future, your insurer might call a plumber before a pipe bursts, for example. With a feed of data from your home, an insurer could help you prioritize maintenance tasks and fix problems such as leaky pipes before they caused major damage. Liberty Mutual, for example, offered additional discounts for customers who choose to electronically share that their smart home safety devices are functioning properly.

However, as a number of professionals always emphasize, the data needed to help prevent leaks or burglaries will also introduce new risks, such as vulnerabilities to data loss or ransomware. Who owns that data anyway? Data management, data ownership, data security and fraud are, in fact, some of the major challenges ahead as the adoption of connected devices transforms the business of insurance.

SAS emphasized that data created and made available through IoT enables insurers to better understand risk. But data ownership remains a challenge for many insurers. Newer, bigger data sets from IoT sources add a new dimension. The challenge is to process this explosion of data in a timely manner to make the right business decisions. Addressing the challenges arising from big data volumes generated by IoT requires an enterprise data management strategy. This is important in merging the new IoT-sourced data with traditional data like customer and policy records. This data management strategy should provide unified solutions, tools, methodologies and workflows for managing IoT data as a core asset.

Data security and fraud policies in the world of connected smart devices are particularly damaging if gone wrong. According to SAS, the vast quantity of data that will flow between the connected vehicle, connected home, and the insurance company is vulnerable to interception. The new IoT-based products that insurers introduce are also likely to lead to new types of application and claims fraud. Insurers will need to invest more heavily in IoT data security and fraud protection.

While realizing the full potential of IoT for insurance will not be without challenges, its early exploitation is already producing positive results. IoT undoubtedly makes losses easier to predict and prevent. Smart home devices, wearables and driverless cars will usher in a shift toward a new type of customer relationship where insurance becomes less reactive and more preventative. The winners will be organizations that overcome today’s obstacles to embrace change and capitalize on uncertainty. - Norman Black, Principal Industry Consultant, SAS

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