The Internet of Things (IoT) has entered the mainstream and will impact many parts of our lives. Insurance will be subject to disruption at levels never seen before. The IoT will eliminate certain risks (good for insureds, not so good for insurers) but will also introduce new risks and new methods of underwriting existing risks, allowing new coverages and processes.
We will offer some examples. We’d like your thoughts .
IoT and M2M
The Internet of Things (IoT) is the fancy name for Machine to Machine (M2M) communication capabilities. For example, we have all seen ads for new, ‘smart’ home protection services which will not only set off alarms in the event of break ins, but will also detect changes in temperature (risk of freezing pipe), moisture (floods), as well as allowing the user/homeowner to monitor everything remotely. This can extend to any number of scenarios in personal and commercial insurance.
Automobiles: From Usage-based Insurance to Usage-controlled No-insurance Needed
Much of the discussion on M2M in insurance has been focused on telematics and usage-based insurance (UBI). Although the evolution of usage-based insurance is still in its infancy, the road-map for a number of insurers goes like this: The machine’s in the car (or in the cell phone) transmit data to a machine at the insurance company which modifies the cost of insurance according to data-driven dynamic rate tables. The result: ‘good’ drivers will see, the cost decreasing, and ‘bad’ drivers will see costs going up, hopefully incenting them in the ‘good’ direction.
The next evolutionary stage, however, is to take some of the control away from drivers and make all drivers better. The machine in the car communicates with devices in the road and in other vehicles and takes control of some features, helping to prevent accidents. Some cars already have control mechanisms which will slow vehicles down or apply brakes if a sudden stop is anticipated ahead.
The logical conclusion to all of this is real disruption: The Autonomous Vehicle will use interactions with sensors and vehicles to completely control the vehicle. On this basis, many believe that accidents will be prevented almost entirely, pushing the cost of insurance down dramatically, or shifting the responsibility from the driver to the vehicle itself, where insurance protection will be in the hands of the vehicle OEMs. (Our colleague, Cathereine Kargas, first introduced this to us in a post in this space. last August.)
For insurers, this is not good news. Lower (or no) premiums in automobile mean that there will be more capacity in other segments. This could cause further softening of rates, lower profits, and unhappy shareholders.
IoT to the Rescue
This is where technology gives back by increasing risk elements, allowing insurers to offer cover that was not available before. In a recent article in Insurance & Technology, John Sarich, vice president of strategy at VUE Software, cites a number of examples.
For example, crop insurance is “a little arcane when compared to other lines of insurance” as “it is difficult to monitor a farmer’s activities in relation to crop insurance guidelines and requirements.” However, by introducing sensors in the field that would accurately track activity (rainfall, number of acres planted, fertilizer used, etc.), there is greater precision and opportunities to offer products which better serve the insured and insurer.
Sarich cites construction equipment as another area where M2M can add value:
Insurance companies that insure construction and other heavy equipment can use the same technology described above for farming, to track construction equipment 24/7. For example, a road grader that is moving at 3am is likely in the process of being stolen. On the other hand, the contractor is able to track the exact number of hours that equipment is operating that becomes the basis of an audit trail for tracking construction costs as well as insurance exposure.
And there’s more…What do you think?
We are at the very early stages of IoT. Sarich says “the use cases for insurance will only be limited by the imagination of technologists and insurance managers.”
We’d like you to use your imagination: Where do you se IoT going next? What will be the ultimate conclusion?