The Future of Insurance: An IoT Perspective

Background:

Industry experts, such as Arm (a leading semiconductor IP company whose technologies reach nearly three-quarters of the global population), predict there will be one trillion IoT (internet of things) devices by 2035. This boom in IoT devices will result in greater production of data: producing up to 44 zettabytes (a zettabyte is 1021) this year alone. IoT devices and the invaluable data they collect will allow insurance carriers to engage customers and more accurately assess risk, which in turn will allow for more flexible pricing models than those typically offered by insurance. However, a majority of US insurance carriers are not prepared for this data flow and only one-fifth have a strategy in place to leverage IoT devices (LexisNexis, 2018).

Source: Statista

Future Solutions for Insurance Companies:

Insurance carriers can prepare to harness the IoT and data boom by addressing the following three areas.

  • Technology: Adoption of agile operating models and methodology is a key step to ensure the technology platform can leverage and process both internal and external data in a timely manner to make key business decisions.
    • Insurtechs are potential partners who can leverage technology and offer scale that might be too difficult or costly to implement internally.
  • Culture: Shift to a top-down approach that empowers all employee levels to foster innovation and break down barriers to enable and support collaboration and innovation.
  • Skills: Invest in employees to ensure they have the necessary education and skills for  the future to contribute and remain competitive.
Source: Big Data Quarterly: Securing IoT With Automated Connectivity Management: Lessons Learned From the Connected Car

Case Studies:

The most common approach taken by insurance carriers to leverage IoT devices has been usage-based insurance solutions that connect through a smartphone app or a plug-in device. Progressive, a pioneer in this space, has offered the Snapshot discount for some time. The device (or app) tracks consumers driving behavior, including time of day and duration, allowing customers to receive personalized pricing. State Farm is testing a similar offering through its HiRoad brand, which leverages consumers’ smartphones to track good driving behavior and reward with up to 50 percent discounts on monthly insurance rates. (At present, the State Farm solution is currently only available in Rhode Island and is unclear if it will expand nationally). Allstate has similar products with its Drivewise and Milewise products; both require its smartphone app and a plug-in device to collect data and provide customized pricing based on how customers drive and how far. As with State Farm, these solutions are not currently available nationwide.

Surprisingly, GEICO has been a late-comer to usage-based insurance products and telematics. GEICO began testing its DriveEasy app in mid-2019 after watching Progressive pull-ahead by over 10 points in its loss ratio. Nationwide has been making moves in the past few months, partnering with major car manufacturers such as Toyota and Ford, to connect cars through the Nationwide SmartRide telematics product. SmartRide tracks customers’ driving behavior either through the app or a plug-in device and then provides customized discounts on a monthly basis.

Potential Implications:

As IoT technology improves and becomes cheaper, cars and driving will increasingly use IoT devices to better engage customers and provide more customized pricing. Customers and insurance carriers both benefit from this use of data; customers receive rewards for good driving behavior, and insurance carriers lower loss ratios. The benefit to insurance carriers is particularly important in an environment where risk has been difficult to predict, including for home insurance. Insurance carriers who are prepared for the surge in IoT device derived customer data will be best positioned to grow in the market. Digital-native companies, or fast adapters, will have advantages in this emerging insurance business model.

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Author: Janah Hammach, Senior Analyst, Finance & Insurance Practice, Fletcher/CSI