For home insurers, IoT brings tremendous challenges, and opportunities. It brings the opportunity to: reduce claims, predict premiums more accurately, and build better relationships with homeowners. But it also lowers demand for insurance as IoT devices make houses safer reducing the need for insurance. Home insurers will need to go beyond partnering with smart device players. They will need to have their own suite of added value services that benefit the consumer. While they still have leverage with homeowners needing insurance, they should start to do that as soon as possible.
Reducing Premium Payments, New Revenue Opportunities and the Impact of IoT
In the US in 2014 property damage was still the cause of 97.3 % of claims: fire, lightning and debris 25.9%, wind and hail 27.3 wind and hail, 33.7% for water, and 2.5% for theft. Of those water damage had increased year-on-year since 2010. Homeowners insurance losses, net of reinsurance, rose to $39.9 billion in 2014 from $35.5 billion in 2013, according to SNL Financial. (Source: http://www.iii.org/fact-statistic/homeowners-and-renters-insurance).
For home insurers, IoT promises an opportunity to reduce those claims through warning and prevention. A simple flood sensor can send a message to your phone enabling you to reduce damage if you have a burst pipe. A more sophisticated flood sensor can work with other equipment to shut off your water. Other sensors on your roof and boiler can warn you of damaged or old equipment. In aviation safety sensors already play a key part with proven usage cases. These cases can be modified for the consumer to improve safety and save money.
In the longer term, sensors can feedback information and drive behavioral changes in consumers. Data can show consumers how unsafe they are and what corrective actions they can take.
IoT also offers an opportunity for new revenue streams through offering these warning and prevention services. The insurance industry is already aware of this and is working with the IoT industry. There are numerous examples: John Hancock with Fitbit to encourage a healthier lifestyle, State Farm with Nest and ADT, and the car insurance market. In the case of the car insurance market experimentation around usage-based insurance (UBI ) and telematics has been on-going for some time with many key lessons learned around new business models.
In the home insurance market, there is still incredible potential for growth. Insurance companies have been offering discounts for homeowners who install home security services, but theft only took up 2.5% of overall home payments in 2014. The real opportunity and challenge is with water, wind, and fire.
What for Insurance Companies When Nobody Needs Insurance
But there is a problem looming for insurers: in a future world where smart devices are predicting, eliminating or minimizing damage; benefiting insurance companies by reducing payments, they are also creating a world where insurance is not necessary. Obviously, devices are not nearly that smart yet, but they are improving all the time. It is likely that consumers will first: decide that a comprehensive policy is not necessary and that the risk is not that high so they don’t need to pay that much. Insurance companies will have to tailor packages in response, pushing down premiums. This phenomenon has already started in the car industry.
Grasping the Opportunity while they still have Leverage
As their traditional business model changes, insurers will have to start to offer value to their customers in other ways. The natural fit of which would be to offer these preventive services. At the moment, some insurance companies have created partnerships with smart device companies, but are then only offering homeowners discounts on premiums for taking up certain smart devices.
While this strategy lowers possible claim payouts, it doesn’t help to solve the long-term goal of enabling them to make money from the services or supplying the hardware. In order to do that they need to proactively engage in the collection and ownership of the data. Only then can they learn and respond with the right package of services for their customers. One way is to work with the smart device brands and set up agreements around data sharing; another, more radical, is to create their own IoT platforms.
Either way, they have to move while they still have leverage with those IoT smart device companies and with consumers.
What do I mean? In this transition phase, when homeowners still need traditional insurance, home insurance companies can use the incentive of discounts on premiums for them to give up their data. But the smarter devices get, and the need for premiums decreases, the less leverage the home insurance company will have. At the same time, the consumer will already have a house full of devices, developed some brand loyalty; further closing out insurance providers. The same goes for negotiations with smart device makers. While smart device penetration stands at only 10 to 20%, device makers are willing to make compromises to get exposure to insurance company customers. But, as their market share increases, they will not need their help.
The Correct Strategy for Insurers to Positively Engage Customers
Insurers need to be very careful how they position and market their IoT services in order to avoid getting a negative image for data collection.
Privacy and access to personal data are increasingly bigger issues with consumers. We are not happy that many companies have our data, but we have learned to accept it in certain circumstances. For example, Google or Facebook, because we want the free services and have become used to the ads. Similarly, while smart device companies collect our data, the argument they are doing it to personalize the services they offer seems plausible.
But home insurance companies up to now have not offered services that we can interact with on a daily basis. Their engagement with customers is difficult to handle positively – Most people are ultimately unhappy with their premium evaluation, no matter it is fair or not. If a homeowner knows that their door sensor information is going to an insurance company, they may think the company will use it to undermine a possible premium claim in future.
Of course, pre-IoT insurance companies rightly investigated claims, but with sensors, it adds another layer for the consumer to accept. Insurance companies will rightly argue that monitoring will be used to: catch more cases of fraud, more accurately predict premiums, and ultimately reduce the premiums of good homeowners – still it is a difficult sell to get across.
In order to bridge the gap the insurance companies need to frame the benefits and objectives clearly enough:
- The data will lower premiums for good actors.
- The system of sensors will also prevent a disaster which is in both parties interests. For example, verify your fire alarm’s health.
- Exactly what kind of data is being collected.
Solving the Problem of Lack of Compelling Services in the Short Term
Many of the value-add services that will stick in the minds of consumers are a work in progress. In the meantime, in order to persuade consumers to allow their data to be collected, they need to offer services that are already successful in the home. If the homeowner is able to play with the app, add fun and convenience to their home, then the insurance company will be more welcome.
They also need to decide whether they offer these services in the form of partnerships with brands like Nest or by creating the devices and services themselves.
Gaining Expertise Quickly and Winning in a New Market
Ultimately, to create these services, the insurer needs to collect data from many different kinds of sensors – smoke, water, motion, gas, among many others. These sensors will be Zigbee or Z-wave and so a central hub and cloud will be necessary to collect the data; to organize, convert and analyze it.
As we are near the beginning of a critical learning phase for IoT in home damage and prevention improvement services. The insurance company that is able to define those value added services has an opportunity to gain significant market share. If they want to win the race to create those services, it is in their best interests to work with experienced smart home players and utilize their expertise.
Finally, whether the insurance company is planning to brand its’ own sensors, or work with an established player, it is in its best interests to work with a hub partner who can connect with as many different kinds of smart devices as possible. By working with a hub partner that has a large ecosystem of partners, the insurance company can keep the homeowner interested by offering him immediate services, while, at the same time, slowly introduce its own sensors and build out its service capabilities.
To find out more how IoT can be used by insurers to improve profitability in the short-term and long-term, contact us firstname.lastname@example.org. Or click here.