The Internet of Things (IoT) has entered the mainstream and will impact many parts of our lives. Insurance will be subject to disruption at levels never seen before. The IoT will eliminate certain risks (good for insureds, not so good for insurers) but will also introduce new risks and new methods of underwriting existing risks, allowing new coverages and processes.
We will offer some examples. We’d like your thoughts .
IoT and M2M
The Internet of Things (IoT) is the fancy name for Machine to Machine (M2M) communication capabilities. For example, we have all seen ads for new, ‘smart’ home protection services which will not only set off alarms in the event of break ins, but will also detect changes in temperature (risk of freezing pipe), moisture (floods), as well as allowing the user/homeowner to monitor everything remotely. This can extend to any number of scenarios in personal and commercial insurance.
Automobiles: From Usage-based Insurance to Usage-controlled No-insurance Needed
Much of the discussion on M2M in insurance has been focused on telematics and usage-based insurance (UBI). Although the evolution of usage-based insurance is still in its infancy, the road-map for a number of insurers goes like this: The machine’s in the car (or in the cell phone) transmit data to a machine at the insurance company which modifies the cost of insurance according to data-driven dynamic rate tables. The result: ‘good’ drivers will see, the cost decreasing, and ‘bad’ drivers will see costs going up, hopefully incenting them in the ‘good’ direction.
The next evolutionary stage, however, is to take some of the control away from drivers and make all drivers better. The machine in the car communicates with devices in the road and in other vehicles and takes control of some features, helping to prevent accidents. Some cars already have control mechanisms which will slow vehicles down or apply brakes if a sudden stop is anticipated ahead.
The logical conclusion to all of this is real disruption: The Autonomous Vehicle will use interactions with sensors and vehicles to completely control the vehicle. On this basis, many believe that accidents will be prevented almost entirely, pushing the cost of insurance down dramatically, or shifting the responsibility from the driver to the vehicle itself, where insurance protection will be in the hands of the vehicle OEMs. (Our colleague, Catherine Kargas, first introduced this to us in a post in this space. last August.)
For insurers, this is not good news. Lower (or no) premiums in automobile mean that there will be more capacity in other segments. This could cause further softening of rates, lower profits, and unhappy shareholders.
IoT to the Rescue
This is where technology gives back by increasing risk elements, allowing insurers to offer cover that was not available before. In a recent article in Insurance & Technology, John Sarich, vice president of strategy at VUE Software, cites a number of examples.
For example, crop insurance is “a little arcane when compared to other lines of insurance” as “it is difficult to monitor a farmer’s activities in relation to crop insurance guidelines and requirements.” However, by introducing sensors in the field that would accurately track activity (rainfall, number of acres planted, fertilizer used, etc.), there is greater precision and opportunities to offer products which better serve the insured and insurer.
Sarich cites construction equipment as another area where M2M can add value:
Insurance companies that insure construction and other heavy equipment can use the same technology described above for farming, to track construction equipment 24/7. For example, a road grader that is moving at 3am is likely in the process of being stolen. On the other hand, the contractor is able to track the exact number of hours that equipment is operating that becomes the basis of an audit trail for tracking construction costs as well as insurance exposure.
And there’s more…What do you think?
We are at the very early stages of IoT. Sarich says “the use cases for insurance will only be limited by the imagination of technologists and insurance managers.”
We’d like you to use your imagination: Where do you se IoT going next? What will be the ultimate conclusion?
The Internet of things (IoT) or the “Internet of everything” as Cisco brands it, will start with high value assets such as buildings, vehicles and perhaps even people via wearable technology, and will connect them to the internet through wireless technology. The IoT will also move to mid and lower value assets including every day things such as reading glasses, sports gear etc. as the price for this technology becomes cheaper. That way you’ll never lose anything. Where did I put those glasses?
The good news for the insurance industry is that we’ll know more about these assets – whether they are in good shape, whether they are being tampered with or moved, as well as the environment that surrounds and affects them. This in turn will provide a stronger link to risk and pricing of this risk.
In general the IoT should be a good thing and clearly an unavoidable change.
I’d also argue that this tracking and environmental knowledge will reduce claims costs and ultimately will result in a smaller insurance industry but likely a more profitable insurance industry. So there will be mixed blessings from this. For shareholders and policyholders this will be better. But for employees maybe not so much from an aggregate perspective because fewer people will be employed in the industry. That said different people will be required including technology types that read this type of blog post.
As for how the world will be in the future, William Gibson said it best with “The future is here, it’s just not evenly distributed”. There are a number examples of autonomous vehicles and wearable technology such as Google Glass. It’s still expensive and relatively rare, but it is available. So we can see the future unfolding by looking to these examples.
While some of the things we imagine will come true while others may not. I happen to work in the automotive space so we deal with a subset of the IoT that could be coined the “Internet of cars”. We give a fair bit of thought to “Connected vehicles” and the implications of vehicle to vehicle (V2V) and Vehicle to infrastructure (V2I) as well as Infrastructure to Vehicle (I2V) technology.
When we think about autonomous vehicles we think “Delivery drones” will be more prevalent than to vehicles for personal transport. The reason for this revolves around the emotional aspects of driving one’s own vehicle. Function is one thing but experiential factors such freedom, control over one’s destiny, and just plain fun, are why people will still want to control their own vehicle. In other words the “Autonomous vehicle” function will be an option just the way “Autopilot” is for an airplane.
Technology is not only about functionality. It must also consider the emotions it touches.