The rise of the Internet of things could change every link in the insurance value chain, according to “The Internet of Things and the Insurance Value Chain,” from Celent, creating new business opportunities for early adopters and saddling late adopters with adverse selection.
Donald Light, director of Celent's Americas P&C insurance practice, explains that the Internet of things (IoT) consists of three interdependent components: things with networked sensors, such as automobiles, machines, buildings and people; data stores, whether they are local or in the cloud; and analytics engines. In an IoT infrastructure, the sensors embedded in the objects collect and transmit data regarding their internal states or environment to the stores, where they are analyzed or fed into models and then fed back to the objects or users (see diagram) offering unprecedented opportunities for insurers that embrace the technology.
Light suggests insurers begin now to prepare to make use of the data created by these objects by identifying the parts of their book of business that have the potential for connections to IoT, and then decide how they can get there faster than the competition.
“From an industry point of view, it’s really an adverse selection game,” Light says. “If I know more about the risks, and I have the secret sauce the closed loop, which reduces losses (see diagram) I can offer some of my policyholders a better deal. I can get the kind of policyholders I want and the others go off to other insurance companies that are not being as smart about pricing and underwriting.”
Preparing for the influx of new data types will be a challenge, he says, as the embedded sensors collect graphics and text, and potentially scientific data, which most insurers have little experience with, he says.
“If you think about the generation of this data from these sensors, it is real time, or near real time, day after day,” Light says, and will require changes to underwriting systems and processes. “If we go back to telematics, a lot of the actuarial work has been done as far as figuring out correlations for pricing. They will have to use big data techniques to store it and throw analytics fire power at it.”
With a more accurate picture of the exposures, hazards and risks, insurers could offer feedback and control processes to change loss-related behavior and performance, Light says. “There are fire suppression systems and security systems and other safety systems getting real-time readouts, and they can give the insurance company writing those policies new insights as to how they are being maintained, real time and over time, and they have that controlled feedback loop. They could call up that policyholder and say here’s how you can get better, here’s how you can reduce your premium.’”
The value to policyholders is potentially reduced premiums; for insurers, the benefit is reduced loss costs and expenses, all of which must be balanced against the expense of creating, maintaining and utilizing the IoT infrastructure, Light explains. The question for insurers then could become whether insurers will pursue a strategy that potentially makes it smaller and reduces premiums, or find alternative revenue sources that build on its loss-reduction role.
While the IoT is clearly on the rise, there are several contingencies that could determine the rates of adoption, including the development of efficient and useful sensor technology and sensor networks; the deployment of networked sensors and insurers’ big data analytic capabilities to store, model, and create products, pricing algorithms, and underwriting decisions, Light says.
“This is going to create opportunities for first movers to collect the data and turn it into a competitive advantage in terms of pricing and underwriting,” Light says.
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