Part 2 of a two-part series.
With the emergence of the Internet of Things (IoT), commercial insurers need to rethink their role in the insurance ecosystem, develop new partnerships and prepare for the challenges ahead.
One of the first decisions is whether to pursue IoT cautiously or take a big-bang approach. We see insurers having three choices when it comes to pacing their IoT implementation:
Primitive. The carrier has a basic partnership with an equipment vendor from which it buys data through web service calls. Alternatively, the carrier can leverage customer-provided data to generate predictive insights, but the investment is limited to cloud-based analytical services.
Intermediate. The carrier delivers IoT-linked insurance and assistance services by forging partnerships with a platform owner and a machine/equipment vendor. The data is pushed to the insurer’s IoT cloud by the gateway provider.
Mature. This role requires the greatest investment. The carrier owns and operates an end-to-end IoT ecosystem. This obliges the insurer to deploy sensors to collect and aggregate data on its IoT platform to generate valuable insights. The data can be monetized by sharing it with third parties that offer complementary analytical solutions.
The type and level of offering will depend on the data available for the insurer to roll into a product. Data sharing models can be basic, with partners providing such data as proof of ownership and proof of activation, or they can be intermediate, with data available on asset usage, breakdowns and maintenance. An advanced offering would require real-time data generated by equipment/machines/gateways developed in-house, or by a qualified service provider. Such data helps derive the full benefits from data-driven product offerings, like real-time event handling and straight-through claims processing.
Choosing Ecosystem Partners
In our view, carriers need to forge partnerships with multiple entities throughout the data value chain (see figure below). The real-time data is owned by the carrier or connected device vendors and equipment manufacturers, and is transmitted by communication infrastructure providers to the insurer’s cloud platform. Third-party providers will generate external intelligence data that can be used in conjunction with IoT data.
For example, State Farm is working with IoT device makers to offer a unified connected device to drive long-term revenue growth, and Liberty Mutual has partnered with Google to implement Nest smoke alarms to reduce the risk of fire and lower insurance premiums.
Challenges and Cost Considerations
For all its benefits, IoT also presents multiple challenges, including the following:
Product differentiation. Smart, connected products can be a key competitive differentiator. New products should utilize the most critical data sets available and generate the most relevant insights for customers.
Data ownership and quality. Huge volumes of data create quality issues, and although third-parties might own critical data, it might not be accessible for carrier consumption. Data must be obtained from authentic sources, with periodic “sanity checks” to ensure quality.
Data security and privacy. Assessing cyber-security risks and identifying a mitigation strategy are mandatory. Personal data must be secure at all times and comply with industry and government regulations.
Device and architectural capabilities. Expertise in device installation and the handling of large data sets are also critical requirements. Real-time data should be processed at the edge before moving to the cloud to help carriers extract meaningful data points and cancel data noise.
Transformation, adoption, alignment. Successful IoT adoption requires employees to accept and trust the tools, understand how they work, and use them correctly.
Cost considerations. To optimize cost efficiency, carriers should work with an integrator to optimize the IoT ecosystem without reinventing the wheel; performing low-cost assessments through pilots and minimum viable products; and future-proof solutions by choosing scalable and compatible technologies.
Solutions for the Real World
As can already been seen in connected homes today, albeit slower than some would like, the IoT is making a real-world impact. We recently worked on two pilots that demonstrate IoT’s value in commercial insurance.
Smart auto insurance for young drivers.
Traditionally, insurers charge high premiums for covering teen drivers given their aggressive driving habits and higher accident rates. But generalizing the driving patterns of young drivers is a sub-optimal approach to premium calculations, with no incentive for customers. We worked with a leading insurer in the UK to develop a “Young Driver” mobile app to capture and score real-time driving behavior and provide feedback via web-based analytics reports. Safe driving is promoted with rewards and premium discounts. By utilizing meaningful data from telematics devices, the insurer can reduce losses and improve policyholder satisfaction.
Smart buildings for proactive maintenance.
We worked with a commercial insurer in Europe to instantly recognize and monitor accidents, breakdowns and structural deterioration by capturing and analyzing data through connected sensors. This proactive approach uses analytics modeling to gain prognostic insights for underwriting, which helps the insurer reduce claims and optimize premiums through actual, risk-based pricing mechanisms.
There’s little doubt that the ongoing investment and interest in IoT will be a gamer-changer for forward-thinkers across industries. It’s time for commercial insurers to carve out their role and establish their place in the new data value chain within the insurance ecosystem.