Data & Analytics

02:30 PM
Mark Breading
Mark Breading
Commentary
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Insurance, Innovation & the Internet of Things

What we've seen with vehicle telematics is just the tip of the iceberg. Imagine the same types of implications (and more) for every tangible item that the industry insures.

The Internet of Things is a hot topic these days. In the eyes of a few P&C insurance leaders, it is more than just a new tech trend to study -- it is the path to differentiation and a new future for the insurance industry. But let’s step back and explore why some are thinking in those terms, how the Internet of Things (IoT) might affect the industry, and what companies are actually doing about it. 

What’s the big deal?
The first era of the Internet was all about connecting people with information. That’s what the basic protocols of TCP/IP, http, and html were all about: making it easy to find and view information. The last decade has been more about connecting people with people -- the whole social media phenomenon.

But a new Internet era about things has begun -- not just the connection of the devices used by people, but also the connection of tangible items directly to the Internet and each other. Almost any physical thing you can imagine can be, and is being, connected to the Internet, such as packages, machines, buildings, roads, clothing, animals, and even human bodies. The collection of information coming from all of these things enables them to be constantly monitored and managed.

[Previously from Breading: Are Insurers Ahead or Behind on Analytics?]

And, as it turns out, this is a very big deal. A real-time information flow from things, coupled with wireless communications, GPS, and analytics, allows us to proactively intervene to improve the efficiency or effectiveness of that thing, anticipate and avoid problems, and predict and improve future usage.

How might it affect P&C insurance?
The question for insurance is whether or not this is a game-changer for our industry, or if it is mostly just applicable to others. The resounding response is that for P&C (and incidentally for life insurance as well), the potential for the IoT to be a driver of industry transformation is high. What we’ve seen with vehicle telematics is just the tip of the iceberg. Most insurers believe that telematics will reshape the private passenger auto insurance market and have a big impact on insurance for other private and commercial vehicles as well.

Imagine the same types of implications (and more) for every tangible item that the industry insures. Rather than evaluating risk, packaging coverages, and determining price based only on historical information, insurers now have the opportunity to rethink all aspects of the business based on real-time information. Sure, loss history information will still be critical to understanding risk, but no longer will post-sale activities be mostly about premiums, policy changes, and claims. Now the industry will be practicing loss control on steroids -- proactively suggesting loss avoidance and safety techniques with every type of insurance -- and offering related services that improve risk management.

When the implications of IoT are fully understood, there will be a ripple effect on customers, distribution, product, price, claims, and policy service. Virtually every part of the business will require rethinking and reimaging. In other words, innovation will be paramount.    

What are insurers doing about IoT?
SMA research in the third quarter assessed nine emerging technologies, including IoT. Insurance executives clearly believe that IoT has direct implications for insurance and will be a major force of change. When asked about the potential for innovation and transformation, 74% of the 88 respondents said that IoT will be a major disruptive force within five years, and 54% think that it will occur in three years! This appears to be a technology trend that many insurers are watching and beginning to act upon.

If that many of your peers believe IoT will transform the industry that soon, your company should probably be developing strategies right now. In fact, a number of companies have active pilots underway and are aggressively investing in IoT. The SMA survey also revealed that 74% of insurers plan to invest in IoT by 2016, with 7% planning significant spending.

Watch carefully what the 7% are planning and doing -- these are the innovators, the industry disruptors. From discussions with insurers, it is clear that these leaders are not just coming from the largest P&C companies, but also from the aggressive mid-tier companies looking to become the next Tier 1 players.  

The IoT holds great potential and carries great risk for P&C insurers. And the intersection with other emerging technologies, such as drones, driverless cars, wearable devices, and 3D printing, will make for an interesting and exciting time for insurers. The call to action for IoT is simple: Get started! Understand the potential! Start some pilots! Your competitors already have strategies and activities in motion.

For more, you can reference SMA’s research report, "Emerging Technologies: Reshaping the Next-Gen Insurer."  

Mark Breading, SMA partner, is a recognized expert in advanced technologies and their implications for the insurance industry. He has exceptional knowledge of data and analytics, customer communications in insurance, enterprise content management, and advanced technologies ... View Full Bio

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KBurger
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KBurger,
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11/21/2014 | 2:55:45 PM
Re: Business models
The partnership concept certainly isn't new -- auto dealers and insurers already partner around coverage/financing, for example. The future partnerships, however, will have a lot to do with new kinds of coverage and protection products, that will be a new wrinkle.
Kelly22
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Kelly22,
User Rank: Author
11/21/2014 | 2:45:19 PM
Re: Business models
Good point, it's not hard to imagine a future where insurers partner with fitness tracker providers, hospitals, etc. to improve their customer experience. That would be a challenge for both businesses involved, of course, and the privacy and security of consumer data would be a priority. But if customers want untraditional health benefits - like a discount for a certain amount of steps taken per day - wearable tech is something insurers will need to explore. 
KBurger
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KBurger,
User Rank: Author
11/21/2014 | 2:31:11 PM
Re: Business models
I suspect that what might move this along will be some creative and untraditional partnerships between insurance companies and firms that are taking the lead in wearables, Internet of Things and other connected technology. For example, insurers and auto manufacturers; insurers and hospitals; insurers and providers of fitness trackers, etc. Of course these kinds of partnerships will have to navigate privacy, security and regulatory considerations that perhaps the non-insurers haven't had to consider. Still, this might be the best way to come up with offerings that truly meet the needs and expectations of customers.
Kelly22
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Kelly22,
User Rank: Author
11/21/2014 | 2:22:40 PM
Re: Business models
It's good to see that some insurers are taking charge and embracing new technologies. It'll be interesting to see what industry innovators come up with over the next couple of years, and whether those mid-tier businesses are disruptive enough to join the top tier in 2015.
KBurger
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KBurger,
User Rank: Author
10/31/2014 | 10:27:34 PM
Re: Business models
Very interesting analysis, Mark, and good point, Nate. This moment reminds me a bit (superficially, but still) of what's happening in payments right now. Tremendous innovation, mobile potentially will transform the payments business,and lots of new and potentially disruptive players. So far it looks like the innovation and most aggressive moves are coming from the non-bank players -- banks definitely are part of the ecosystem but it doesn't seem like they are leading the charge. Will insurers take the lead in driving IoT business applications, or will they let others (manufacturers, etc.) shape this? The SMA research indicates that insurers are prepared to be aggressive and take the lead, which is very encouraging. Insurers as innovators? Who knew?
Nathan Golia
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Nathan Golia,
User Rank: Author
10/31/2014 | 3:23:43 PM
Business models
Thanks Mark. You and I have had a lot of conversations about the potential of the IoT in insurance this year. I think that it's more than a tech question, though. The very nature of how insurance works could be changed by this kind of technology. Hopefully industry players can adapt to the right kind of pricing and customer interaction — otherwise new competitors could seize market share.
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