Connected insurance – what is it and how insurance agencies can benefit from it?
Recent years have shown clearly that emerging technologies have an immense impact on the insurance industry. Starting from the automotive and health insurance sectors and finishing at property insurance market – all of these have been transformed by new technologies. The reason is clear – the insurance industry has to cope with many challenges and rising complexity. This, in turn, might be considered both as an advantage and business risk. Companies which will see the potential of converting this industry transformation into tangible opportunities will benefit from it in the first place.
One of the trends that immensely disrupt insurance sector is The Internet of Things – products, sensors, services and tools which can communicate and interact with one other. In the Insurance industry, the adoption of IoT opens completely new market opportunities especially for the three main insurance business lines – Automotive, Property, and Health: which altogether are called the Connected Insurance.
And the potential of growth in this Connected Insurance sector is huge. According to PwC and Strategy& report: ‘the expected Compound Annual Growth Rate (CAGR) for the period 2017-2022 of global cross-industry Connected Car revenues is around +24%’. In the same report we can read that: ‘Focusing on the Insurance field, service and pricing models are already becoming significantly sophisticated. In the Smart Home area, home devices expected growth rate for the coming years (CAGR 2015-2019) is +50%. Also for Connected Health, a strong growth is foreseen: for example, the number of sold wearable devices will triple by the end of 2019.’
Source: PwC and Strategy& report: Connected Insurance: our view about the Italian Market
It is clear that the adoption of IoT products will enable significant opportunities, both in terms of business efficiency and financial growth. Therefore let’s have a look at how the Internet of Things is changing the nature of the three most profitable Insurance sectors – Automotive, Property, and Heath.
Automotive insurance sector is the most mature when it comes to new technologies implementation. In order to broaden the current customer base and improve profitability it has started to employ Connected Car concept several years ago. Because of the maturity of this implementation we can already perceive significant benefits for the entire value chain derived from it. Admittedly because of the IoT adoption insurance companies reinforced risk and pricing capabilities, developed more customized and cost-effective products, reduced claims costs and its frequency, as well as reinforced selective retention.
To find out more about how IoT in general, and telematics specifically changes the nature of Automotive Insurance Industry read this
According to the Association of British Insurers, the average home now houses contents worth £35,000 – nearly £1 trillion in total. And that doesn’t include the value of the property itself. It’s therefore obvious that property insurance will only gain in popularity. But that is the theory.
Unfortunately, consumers often feel like the partnership with their insurer is unbalanced, that the supplier holds all the cards and they simply feel like the system isn’t working for them. That isn’t just bad for householders, it is also a ticking timebomb for the multi-billion dollar insurance market. But emerging technology now offers the very real prospect of re-empowering customers by giving them control over the risk reduction.
Managing the risk.
The basic function of property and casualty (P&C) insurance is the risk transfer. P&C insurance primary aim is to reduce the financial unpredictability and make the accidental loss cost more feasible for the customers. To accomplish that consumers pay a fee (premium) to the insurance company assuming that when the loss happen insurer will reimburse it. Distributing the losses of a few to a large number of customers, Insurance company in turn spreads the financial and business risk. The more premium payers it has, the more accurately an insurer is able to estimate losses and policy cost. However, the number of losses encountered by policyholders changes over time due to weather, human behavior or technology transformation. Thus, insurers have to constantly gather and analyze loss data in order to review how much to collect in premiums. And this is the moment when the IoT comes to play a crucial role.
Thanks to a connected home insurance model, the Insurance company can effectively, nearly real-time collect individualized data about a home’s real activities, its actual security capabilities, and its owners’ lifestyles. This, in turn, enables insurers to adjust price policies to the personal risk profiles and to the way householders really live their lives. With the use of advanced algorithms and data from heterogeneous sensors Insurer is able to measure and analyze various elements such as:
- Security – thanks to connected alarm systems Insurance Company can detect intrusions and call homeowners, contact centers or law enforcement authorities. Improved home security means reduced frequency and magnitude of claims.
- Water – with the use of sensors Insurer can quickly detect water leaks from tanks or appliances, and contact homeowners so the damage can be minimized and therefore, the amount of claim reduced.
- Fire alarms – using specialized detectors Insurer can distinguish between steam and smoke, shut off appliances if necessary or contact relevant services.
- Weather – with the use of environmental sensors Insurer can prevent damage, moving shades up/down or closing doors automatically.
These are just a few examples of how IoT can be implemented to the P&C sector. Generally, the amount of sensors which can give actionable insight into customers’ behavior is enormous (light bulbs, security cameras, smoke and carbon monoxide detectors, thermostats, video-enabled doorbells, water flow meters, water leak detection sensors, water shutoff valves) and can be perfectly adjusted to the specific Insurer’s needs. In Sparkbit we’ve got extensive experience in delivering highly scalable solutions that gather and analyse data from heterogeneous sensors and devices. To find out more about it read this
Besides the risk mitigation and financial benefits, there is one more extensive advantage coming from the IoT adoption in P&C – enhanced customer engagement. Thanks to new technologies consumers can:
- better understand the risk they are exposed to
- monitor the progression of those risks; and
- receive insight to mitigate damages.
This, in turn, encourages safer behavior and enable greater awareness, which can be translated into profitable outcomes. Security and safety services built on information coming from smart devices lead to the prevention or mitigation of certain losses.
In traditional health insurance, the insurance premium is determined on the basis of simple demographic data such as age, sex, place of residence, occupation. You do not need to be a financial specialist to know intuitively that such calculation of premiums is imprecise and leads to many mistakes that translate into insurer’s losses. The need for more complex data analysis is obvious and the potential of IoT here can be fully uncovered.
In the connected health concept, with the usage of the wearable IoT devices insurer has the broad and complete customer’s profile which includes habits, behaviour and personal routines. Thanks to IoT insurer may be able to track whether the customer drinks, smokes or lead a mostly sedentary lifestyle. Their premiums would likely increase, whereas conversely, a person who does not use substances and exercises often would see their premiums decrease.
What’s even more interesting, in theory, this premium could rise and fall in real time. Perhaps a month of increased sedentary lifestyle would increase a person’s premium for just that month before returning to their baseline premium in the next month as their sports activities return to their more standard frequency. As a result, IoT devices could incentivize customers to lead healthier lifestyles because the consequences of not doing so would be more tangible and more immediate (a larger premium at the end of the month)
This model translates into measurable financial benefits for the insurance company as it means less of their customers would be likely to lead riskier lives, increasing the likelihood that they’ll end up profitable.
However, one important question can now arise – are there any technologies that allow a reliable analysis of our health? The answer is unambiguous. There are currently tools to analyze our health such as Apple Watch (if you want to know how apple watch can become a portable ECG read this or other wearables (Fitbit, Miband, Galaxy Watch). Technological giants, however, do not rest on their laurels. At the time when you are reading this, intensive work is underway on successive portable devices for measuring our health.
Google, for example, aims to build headphones that can track one’s health. The company was granted a patent in July 2018 titles “in-ear health monitoring”, which combines auditory experiences with health tracking. The obvious aim is to gather data on customers’ health while they’re listening to their favorite music. While doing its normal tasks, the device will also capture the user’s body temperature, creating a database of temperature norms. Apple, in turn, recently unveiled an API for application developers to use data stored in its health apps so that people can share it with doctors, hospitals etc.
Also in Sparkbit we’ve delivered solution that uses wearables. In our project we used smart watches to monitor quantity and quality of sleep. These data in turn helped us verify whether the driver is rested and ready for a ride or his/her condition eliminate safe driving.
As far as the risk selection layer is concerned, connected devices can be indirectly or directly used to select risks at an underwriting stage resulting in low-risk customer acquisition and loss ratio portfolio limitation.
The partnership is the key to success
Insurance market leaders could have the ambition to play the crucial role in building an insurtech ecosystem in order to effectively serve customers needs and enlarge their core offerings, as well as to get access to the right technologies (e.g. the right devices providers for a specific risk, the IoT solution providers to ingest and normalize data). To do this it is necessary to find a reputable and trusted partner with the expertise in delivering highly scalable IoT solutions.
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