Insurance is a simple business: the better you can calculate and price risk, the more money you make. To do that, insurers aggregate their policyholders into predefined categories that historically correlate with certain risk levels. Risk at the policy level is pretty passive.
But what if insurers could move away from the aggregate and into the personal? What if they could calculate the risk for each person individually? What if premiums could go up and down in real time as risk changes? Now that would be a bonanza!
Despite the huge potential, both insurers and consumers are still just testing the waters when it comes to IoT-enabled insurance policies.
The first insurance line to get the IoT treatment was auto insurance, as early as 10 years ago. Most auto insurers have some sort of IoT-powered policy. Consumer response, however, has been lackluster.
IoT-powered policies until now were somewhat of a pilot or proof of concept, said Norman Black, EMEA industry principal consultant, insurance practice for SAS, a business intelligence and data management software and services company. "The industry is now preparing to scale," he added.
Insurers are increasingly offering IoT-enabled policies for home and health insurance, as well. John Hancock's life insurance, for example, uses Fitbit data to reward policyholders for healthy living. Healthy habits, such as going to the gym, earn points for the policy holder. At year's end, one's "Vitality Status" is calculated according to the number of accumulated points. The higher one's status is, the more he can save on premiums and rewards.
French insurer, AXA is partnering with IoT companies to pilot use cases for a connected home insurance. BNP Paribas Cardif also has an Internet-of-Things insurance offering. Beam Dental's dental insurance uses a smart-toothbrush. A brushing score, measured by how well one uses a toothbrush, can earn up to a 16.1 percent reduction in premiums.
"We are at a tipping point and people will start responding to the offers," Black said, noting he expects IoT-powered policies to reach a 50-60 percent adoption rate in five years or so, up from two or three percent currently.
Market acceptance of IoT-based policies hinges on insurers' ability to process and leverage the data collected from policyholder's devices.
“IoT takes data management to a different level. This really is BIG data,” Black said. IoT forces insurers to filter, process and react to data in real time. To illustrate the colossal effort that is needed to power such a shift, one should consider that insurers currently collect just a handful of data points about each policyholder every year. Collecting and processing real time data across the entire policyholder base will require a complete change to IT infrastructure and perhaps, a reorganization of human capital to support it.
From the consumer side, adoption will probably remain low until insurers have the full capabilities to make those offerings robust and enticing. With low consumer demand, the upfront investment might not be justified. It is somewhat of a chicken and egg dilemma.
IoT-enabled policies will not just impact risk assessment and underwriting, but will also change the relationship insurers have with their policyholders, moving from a passive relationship full of friction to a continuous and beneficial one.
The data collected from IoT devices can provide insurers with many more possible touch points with policyholders, including elements of gamification, alerts or cross-selling.
Though adoption levels are still low, many feel the move towards personalized risk assessment powered by IoT is inevitable. "If the insurance industry does not do it, someone else will," Black said, adding that many of his client are working to expand the scope of such offerings.
"They don’t want to be uberized,” he concluded.