Smart sensors and commercial insurance: the investment case for IoT
The Internet of Things (IoT) is already established as potentially the most important innovation in insurance in many years. In essence, it is the generation of data to improve decision making.The real value of the “Connected World” is in creating new information and insights that we previously did not have, to improve how we operate and become more efficient. Generation of that data is the first essential aspect. Analyzing and interpreting the data is the next stage of value added. An industry built on the application of information is in prime position to make the most of the benefit from this new innovation.
Data and the Insurance Industry
At its heart, insurance is about the use of information to price customer risk.
The more knowledge we have about a particular customer, the better able we are to understand the risk of loss and the better able we are to price that potential loss accordingly. Information / knowledge / data has always been at the very heart of what insurers do, from the first formal insurance contract. From the very earliest beginnings of the insurance industry, the most successful were those who best understood which risks to take on, at which price.
While at the nascent stages, the insurance industry is beginning to embrace IoT more and more energetically. However, most of the initiatives and investments we see today are focused on personal risk – telematics, home insurance, health insurance, life insurance. Yet the greatest value potential surely lies in commercial/ business / industrial insurance where differentiated underwriting can make the most difference.To date, we see no applications in this environment. In part, this is because the technology and product development in commercial / business IoT is itself at its very earliest stages. Insurers ready to innovate can be at the forefront of industry developments.
Use IoT to re-define how risk is priced
IoT offers a real opportunity to completely re-set how the insurance industry undertakes risk pricing. While sophisticated, pricing of insurance risk today will essentially boil down to prior loss experience of a similar risk and the spreading of risk across a large pool of similar customers to mitigate inevitable singularity or specific risk. The longer we know a particular customer, the more we can understand how much risk they entail, and the larger they are the more their specific risk is dispersed.
Yet what if we can take insights to a deeper level? Differentiate in much more detail the specific risks each individual customer is taking. Build up behavioral patterns by customer. Compare and benchmark each customer. Even better, build up warning signals of rising risk of loss so action can be taken to prevent that loss happening. This type of information can – and will – take the underwriting of commercial / business / industrial risk to a new level of sophistication. By building entirely new knowledge.
A well-designed sensor network can give insurers specific customer insight. Is the customer operating best practice to protect their assets from a risk event? Does the particular environment at each customer lead to greater or lesser risk of a loss event? Experienced industry specific insurance writers can highlight the factors that lead to a loss event. Sensors can then monitor those factors and provide real-time information to the client / insurer on the status and notifications set to indicate whether risk levels are high. Over time, as more and more data is gathered from comparable clients, more information can be gathered to highlight whether an individual client is higher or lower risk and premiums set accordingly. Customer specific risk can be priced more precisely.
Continuous monitoring of the client’s physical environment, assets, and status of risk factors can also give early warning signals of a potential loss event. As the potential for an event rises, the customer /insurer is able to take action to prevent a loss occurring. As with medicine so with insurance: prevention is less costly and more effective than remedial action.
Moreover, the client has clear incentive to act on the information as it can lead to lower premiums and reduced business disruption. And the data that is generated will give the customer valuable quantitative insight into their own operations that can improve their productivity. Truly, implementation of sophisticated sensor networks, designed on an industry-by-industry basis, is a win-win for customer and insurer. And the more sensor solutions are deployed the more data is generated and the better the insights from that data. Over time the information and intelligence from the data can create ever more value for both insurer and customer.
Should we think much bigger?
As a concept, the Internet of Things has been so widely discussed that much of what is happening today appears underwhelming. The promises are huge, but what is the tangible benefit of connecting one’s microwave to one’s fridge or hifi? The real take-off will come when we start to see the tangible (monetary) benefits that come from improving productivity and asset utilization. I.e. wide scale deployment in the business environment. The industry is at a very nascent stage: the most visionary companies understand the potential but struggle to find a meaningful product. The majority of companies are aware but do not fully understand the implications or the technology and as the user cases that prove the ROI of investing in sensor networks are thin on the ground, budget holders are reluctant to commit cash flows. Start-ups, on the other hand, are constrained by limited distribution and marketing budget.
The insurance industry as an IoT leader
Given the scale and breadth of customers and the clear synergies between the goals of the insurer and their business customers, the insurance industry could position itself at the forefront of the connected world. Could IoT offer an entirely new commercial opportunity for insurers that is huge in scale? The question should instead be “Why Not?”. The industry has unparalleled distribution. And it has an immense capacity to handle and utilize data. As we start to generate “big data” the next stage in development for the IoT industry will be to interpret the data and start to recognize patterns and generate greater value-add insights to their customers beyond specific insurance-related factors.
Insurers can change their relationship with their clients. Rather than simply being service providers, IoT offers the opportunity for deeper engagement, the provision of real business-enhancing services, and the ability to become true partners.
Want to know more about how sensor technology can transform insurance? You can find 30MHz at the IoT Tech Expo Global in London next week; 23-24th January. They will be exhibiting at stand 249.
Nathan Griffiths is Chairman & Non-executive Director at 30MHz