May 09, 2014

An under-the-radar topic that was discussed at this past week's ACORD/LOMA Insurance Systems Forum was the potential impact of the Internet of Things on the insurance business.

Kaenan Hertz, executive director in the financial services customer practice at EY, says that with insurance already transitioning to a more digital business, insurers need to pay attention to trends that are emerging at ever-faster paces.

"You look at Facebook buying Moves. Monsanto buying [crop insurance data company started by former Google execs] Climate Corp. Google buying Nest. The connected home and connected health front. At the end of the day does a company like Fitbit have an advantage, or does Google have an advantage, because they know your home and your habits?"

That "advantage" is in leveraging data to establish risk profiles. And while those companies might not be insurance carriers yet, many have reasons to enter the business at some point. Google's self-driving cars, for example, will require a new kind of insurance. Why not provide it themselves?

Recently, the e-commerce site Overstock.com opened an insurance agency on its site. CEO Patrick Byrne told I&T that the company believes it can improve the insurance buying experience by incorporating its wealth of data into the process. Internet companies incorporating networked devices into the insurance buying process could claim a similar advantage.

And the devices could impact the financial structure of the insurance industry in a big way as well. If the Internet of Things delivers on its promise to reduce risk, that changes the very nature of insurance, says Celent analyst Donald Light. He says that adoption of the Internet of Things starts with deploying the devices that collect the data, then analyzing that data. But it's the third part -- which Light calls a "feedback and control loop" -- which could have financial implications.

"As the feedback and control loops takes advantage of the new insights losses will decrease -- and when that happens, premiums will follow," he says. "The dynamic changes: If you haven't opted in so far to telematics because you're a lousy driver, they'll give you an opportunity to improve. There's a definite chance that the majority of drivers are going to get better."

It's Light's famous forecast of "the end of auto insurance" on a macro scale, he explains.

"For the other lines of business, some are closer than others. Take homeowners -- there are new kinds of sensors finding water where its not supposed to be," he says "There are going to be early mover advantages. You see the new data, and suddenly your rates are out of whack -- and it's a price competitive market in the US."

ABOUT THE AUTHOR
Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, ...