Customers are happier than ever to provide more data if it means lower rates or better incentives. So, when will insurance companies embrace the internet of things? Sooner than you might think.
How IoT Can Change the Insurance Industry’s Ground Game
Almost everything in the world around us — height, shirt size, bank balance, distance in miles from the moon — can be quantified. More and more of late, technologies have sprung up that provide us with more, and more accurate, ways of quantifying the things that are important to us, than at any previous time in human history. These (largely untapped) data sources are a potential goldmine for a sector like the insurance industry—where you’re only as good as your datasets, and where success or failure hinges on your ability to creatively onboard new sources of information. That is where the internet of things (IoT for short) comes in.
What the heck is IoT?
IoT refers to any network of everyday physical objects equipped with sensors, connected both to one another and the larger internet, that are able to collect and transfer data without human intervention. As a shorthand, IoT covers everything from the FitBit on someone’s wrist to their Nest thermostat to an internet-connected heart monitor. It’s a wide umbrella, but the gist is that IoT devices begin with the question, “What would be useful to measure?” And then figure out how to do so.
IoT can be instrumental to the future of the insurance industry. IoT devices are effective, relatively cheap to incorporate or implement, and can change the way insurers do business for the better. So what exactly is the potential upside to an IoT future for insurers?
Consumers and clients are already on board
Let’s start with the low-hanging fruit: IoT can be instrumental in bringing insurers and their policyholders closer together, and improving client relationships at very little cost to both parties. Many businesses and consumers are happy and willing to share more data with an insurer if it means they save money on their policies in the long run. Whether that means smart factories and smart homes, automobile sensors, or even wearable technologies for employees, insurers can now get unprecedented insight into the nuts and bolts of supply chains or even aggregated driving habits in diverse geographies.
Until now, the primary point of interaction between an insurance company and the insured was the point of catastrophe. You get into a fender bender at your local intersection, then call your insurance company from the scene to report the damage. But IoT devices shift the relationship between insurer and insured from passive to proactive. Rather than entering into the equation at the moment that everything has already gone wrong, insurers can use IoT sensors to advise policyholders on behaviors that curb risk and, in the process, lower their premiums. Whether that means avoiding a certain intersection where accidents occur more often, rewarding a policyholder for walking 20,000 steps a day, or encouraging someone to swap out the batteries on their smoke detector, suddenly both the client and the insurer have way more agency, and from that agency sprouts a closer and friendlier relationship between insurer and insured.
If you can mitigate risk and improve risk assessments with simple, first-hand data and, at the same time, offer clients a more competitive rate on their policy, that’s a win-win situation. Whether it’s a USB dongle in your car that monitors your driving and, as a reward for good behavior on the road, reduces your insurance rate, or an IoT sensor that integrates and monitors your house’s fire alarms and smoke detectors, both mitigating fire risk and lowering home insurance premiums, the net outcome is a world where customers are happy, and insurers are more efficient. There’s no greater optimization for insurance companies and customers than actually avoiding the entire claims process in the first place. No customer wants to be the victim of an avoidable catastrophe and no insurer wants to insure against unnecessary risk. Thus you have companies like John Hancock encouraging fitness trackers as a way not just of mitigating risks but fundamentally investing in and growing good customer relationships.
IoT devices communicate seamlessly with each other and save clients money
IoT integrates systems so that they communicate seamlessly with one another and link information back to the user’s premiums and policy – without first traveling through an outmoded human-centric database. Because of this, IoT devices can establish incentive programs that shortcut unnecessary red tape and still reduce the total price tag for both insurers and their clients. In a more broad example, the Theorem Concept (a partnership with DroneDeploy) uses drones to speed up the claim process and survey damage without endangering employees, ultimately getting a clearer picture of potentially fraudulent cases.
But the fundamental alchemy of IoT networks—what companies who integrate the Internet of Things into their business models do so well—is to engage customers in ways that were previously thought impossible. IoT devices are so effective at mobilizing policyholder engagement and streamlining insurer-client relationships that it might almost seem easier to start a brand new insurance company built from the ground up with these new technologies at its center (a la Lemonade) than it is to modernize an established insurance leader, but the truth is major insurers already possess all of the resources necessary to innovate. What they’re lacking is specialized experience in, and emphasis on, digital innovation.
IoT can give insurers a fuller picture of client behavior
IoT isn’t just ideal for incentivizing good client behavior. It can also monitor that the insured party is keeping up their end of the bargain by fulfilling regulatory obligations. If insurers can confirm that the insured is being a model customer, they can also tier policy premiums to reflect that sort of good behavior in the long run. The policyholder will be thrilled at the opportunity to save money simply by fulfilling their obligations, and the insurer further minimizes the risk of whatever contingency they’ve insured against.
To drag this out of the realm of abstraction, let’s say an insurer’s client is responsible for sequestering a certain amount of carbon dioxide per year. IoT technologies can ensure that they don’t exceed those emissions requirements, that the carbon is, indeed, sequestered, and that their overall policy adjusts to reflect good corporate governance on their part. But it doesn’t just have to be a corporate client, FloodFlash is using IoT humidity sensors to automatically detect flooding without customers ever having to issue a claim. Before you find out your basement is flooded, your insurance company is already working on your case. Companies like Progressive or Metromile likewise use IoT sensors to get to know their customers, how they drive, how much, when, and where to. Insurance companies can know of an accident literally before someone calls 911 or identify risky behavior before it turns into a costly payout.
Getting away from zero-sum thinking
None of the three IoT use-cases above really presents a winner and a loser. One thing IoT does so well is facilitate new scenarios between insurers and clients that are non-zero-sum. With the advent of more accurate, more prevalent, and more innovative methods for turning a world of data into a handful of information come better client relationships, more exact rate adjustments, and more efficient and effective insurers.
Change isn’t something that is going to happen on its own or by mandate. In order to set up a system that’s responsive to a world of IoT devices, insurers need to first make sure their system is fully integrated, modernized and properly puts information from IoT devices into perspective.
Change isn’t something that is going to happen on its own or by mandate. In order to set up a system that’s responsive to a world of IoT devices, insurers need to first make sure their system is fully integrated, modernized and properly puts information from IoT devices into perspective. That requires a company-wide effort to swap out old legacy systems and make their organizations more interconnected. It also means seeing the forest through the trees. But the prospective benefits? Those are (practically) unquantifiable.
Excited about IoT but unsure where to start? Interested in legacy modernization or just plain curious about software? Theorem has an expert on call. Reach out for a free consultation with one of our specialists today.