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With Internet of Things, Can’t ‘Hide in the Herd’

Connected devices have the potential to fundamentally change the risk pooling nature of insurance.

The Internet of Things has the potential to fundamentally change the nature of society by increasing personalization of everything, according to Chris Taylor, who runs the Successful Workplace website and works as a marketing executive for the software company TIBCO. For industries that are focused on making decisions at scale -- like insurance -- the disruptive potential of such a shift reaches deep into the business, he says.

“Traditionally for insurance, the past was the only indicator of the future, the only available data was claim data, and you could pick out some demographic details to add,” Taylor tells us. “There was no personalization of the data. The best you could do was group analyze then draw broad conclusions.”

The risk-pooling concept that defines the insurance business, based on broader kinds of information like demographics and driving records, is threatened by obsolescence due to the new sources of data that the Internet of Things makes available, Taylor explains.

“People who had misfortune or poor skills could ‘hide in the herd.’ I think that’s a big change that we have to be careful about. All the detailed data is going to force [insurers] to make tough decisions. I’ll be interested in seeing if governments step in to maintain the herd protection.”

[Read about why insurers are looking for more data from their customers' connected cars.]

That’s because the regulatory framework around insurance and a lot of assumptions about how the economy works in general aren’t based on the high level of personalization offered by the Internet of Things, Taylor notes. The scale of personalization and one-to-one connection between customer and company is unprecedented -- and even the squeakiest-clean prospects risk overexposure.

“There’s the concept of the ‘database of ruin’ -- that there’s enough data to connect all of us to something embarrassing,” Taylor warns. “How we can regulate an economy built on non-personalization? It’s fine when individuals are moving data around, but machines don’t care.”

Taylor will chair the Internet of Things Summit at Interop New York later this month. Sessions will explore the impact of this emerging technology on industries of all kinds -- and the IT staff that supports it.

“People talk about the data flow, but it’s a lot more than just that. Software allowed us to perform things at scale -- now it can take that scale down to the person. How much do you cost the business that provides you services? There’s power in seeing each individual thing.”

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, distribution, core systems, customer interaction, and risk ... View Full Bio

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Nathan Golia
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Nathan Golia,
User Rank: Author
9/12/2014 | 3:54:58 PM
Re: Run, don't walk
That's why insurers have been shy about even suggesting using location data until recently, Laurie. The industry has a big trust deficit to make up.
Byurcan
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Byurcan,
User Rank: Author
9/12/2014 | 9:18:37 AM
Re: Run, don't walk
Very true Laurie, there are a lot of unintended consequences here.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
9/11/2014 | 4:31:31 PM
Re: Run, don't walk
I also wonder how differing data privacy reglations in different geographies could impact large insurers. I've already heard that the strict data privacy laws in Massachussetts for instance have made companies decide that they never want their data stored there. And in some Eruopean countries there are strict laws around says German data leaving Germany. To what extent will those kinds of laws prevent organizations from making full use of the data they will have in an Internet of Things-like environment?
Laurianne
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Laurianne,
User Rank: Author
9/11/2014 | 2:42:35 PM
Re: Run, don't walk
I have to be honest, the potential ability of insurers to see the minutia of our lives doesn't please me. That volunteer work you do in a distant neighborhood? Location data will be bad news for your car rate.  I'm sure we haven't thought of half of the examples yet.
Nathan Golia
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Nathan Golia,
User Rank: Author
9/11/2014 | 12:18:08 PM
Re: Run, don't walk
There's a chance, Chris. The industry has actually been quite self-limiting already in how far it's going so as not to spook customers. For example, traditionally usage-based insurance programs in the US didn't track your location. But now as I reported a few days ago more insurers are exploring the idea of using location data more. That of course requires you to opt-in to send that data. How regulators or the public at large will react, though, is still to be seen.
ChrisMurphy
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ChrisMurphy,
User Rank: Apprentice
9/11/2014 | 9:45:17 AM
Re: Run, don't walk
Regulation of such efforts will come. Is there any chance for the industry to get ahead of that with self-regulating guidelines, to head off the kind of abuses that spark draconian government regs? 
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
9/11/2014 | 9:05:25 AM
Run, don't walk
IoT is moving so quickly now and insurance companies (and most financial services firms) are only beginning to experiment with the technology. The direct connection to the customer will be unprecedented in financial services, but companies had better start to at least "jog" when it comes to IoT. Right now, many companies in other verticals are "running," while the IoT technology providers (look at Apple's announcement this week) are literally "sprinting" ahead.
Kelly22
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Kelly22,
User Rank: Author
9/10/2014 | 12:08:09 PM
Nowhere to hide
Interesting article, Nate. IoT has big implications for insurers and policyholders, and it's sure to complicate processes for both parties. The 'database of ruin' is a scary concept and I'm sure many customers won't be thrilled about insurers having the ability to see every minute piece of their data. 
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