How the Internet of Things is Affecting the Commercial Insurance Industry
The emergence of the Internet of Things (IoT) is expected to disrupt and revolutionize traditional businesses at an unprecedented rate. The commercial insurance industry, which has been traditionally slow to change, stands to benefit greatly from these new technologies.
Before digging into how IoT will affect insurance, let’s cover what we mean when we use the term IoT in this context. In a nutshell, IoT is a network of smart devices (things) connected to the Internet. All of the devices in this network can interact, in addition to collecting and sharing data about the way they are used and about their environment. This can include any number of objects and technologies – from smart homes and self-driving cars to wearable fitness devices and fully automated and connected manufacturing centers.
There are more than 26 billion of these networked devices currently in existence, and this number is projected to reach 75 billion by 2025. This prevalence of devices with connective capabilities and the possibility of real-time communication between them is what’s enabling IoT to exponentially increase efficiency and add capabilities across a wide range of industries.
These devices are communicating with each other on their own and gathering massive amounts of data which is, in turn, enabling faster decision-making, accurate predictive analytics and even full automation of processes that were previously heavily human-dependent. This means that IoT is poised to become a key enabler in driving digital transformation and increasing operational efficiency across a number of industries.
What Does the Proliferation of IoT Mean for the Future of Commercial Insurance?
Commercial insurance companies have, for the most part, remained structurally unchanged over the past 200 years. However, recently emerging technologies, spearheaded by IoT, are evolving the way insurance is priced, purchased, and operated. Insurers will increasingly be able to implement and use IoT to better predict and evaluate risk, improve customer experiences, make the claims process more efficient, and create better insurance products overall.
Let’s dive into the specifics of how IoT will alter how the insurance industry functions:
IoT Will Make Getting Business Insurance Easier
The insurance industry is currently in the midst of a massive digital transformation. In today’s digitally-savvy, fast-paced business environment, customers want results right away.
This is why companies all along the insurance chain of every size and line of business are making efforts to improve customer service and the customer experience by utilizing digital means.
However, so far it hasn’t gone to plan. A paltry 15% of users say they are happy with their insurer’s digital experience. Additionally, one of the biggest factors affecting the high customer churn in insurance is inefficiencies in the claims process. Customers will quickly grow tired of their insurer and look for a change if the claims process remains frustrating.
This is where the proliferation of IoT is first expected to manifest itself in insurance. It will allow the continuous gathering and sharing of data across systems, thus speeding up and optimizing the claims process, eliminating data duplications, and largely removing customer frustrations. Buyers will no longer have to spend months wading through paperwork and can instead move through the process of acquiring insurance and resolving claims more efficiently from their devices. Additionally, they will finally have the tools to easily track their coverage and claims through digital platforms.
More Data Means Better Insurance Rating Models
The insurance business model is based on the ability of the insurance provider to assess risk.
This is why data has always been at the heart of the insurance business – the way insurance risk and returns are modeled relies heavily on data to drive decisions.
Typically, insurers have had to rely on past experience, long-term analytics, and information provided by the insured parties to create relatively broad risk groups and assign premiums to them. While consideration for rate adjustments are entertained by insurance companies, there can still be some inequity in how the rating structure functions.
However, the constantly available stream of data from IoT devices has the potential to change this significantly. It will allow insurers to make vastly more accurate, customized risk-assessments. The good risk will still subsidize the poor risk, and there’s no real way around this. However, increasingly accurate risk models will result in more equitable premiums.
Data from connected devices will also allow insurers to understand their customers on a deeper level thanks to the access they now have to more accurate and comprehensive information. This will help insurers in creating products that will tackle specific issues their customers are facing like never before, and drive strategic initiatives.
Emerging Industries Will Have Better Insurance Options
Emerging industries (i.e. cannabis, crypto, drones, etc.) will also benefit from the implementation of IoT in insurance. Given the lack of real prior experience, shifting legal landscapes and high risk associated with these industries, they have traditionally had a very hard time getting insured properly.
The data collection ability that IoT is bringing will allow insurers to move more quickly, without waiting for years of data and experience to accumulate before being able to successfully model and assess the associated risks. This will allow them to offer solid products quickly, which will, in turn, allow these industries to grow even more rapidly.
IoT Can Help Insurers Prevent Losses
What we’ve talked about thus far has centered around how IoT can improve the existing models and operations of the insurance industry. However, as the influence of IoT devices grows deeper so does their potential to fundamentally disrupt the very nature of insurance.
Connected devices and massive real-time data streams will not only allow insurers to accurately predict potential losses but also alert customers of potential loss before it occurs. While this is outside the traditional role that insurance has played thus far, the reality is that insurers will want to reduce the number of claims they have to pay out, and in this case, the age-old adage holds: “An ounce of prevention is worth a pound of cure.”
Challenges of Integrating IoT with Commercial Insurance
Implementing IoT in insurance, while seemingly inevitable, will bring with it a set of new challenges, and can exacerbate existing problems:
Privacy: While massive streams of data from IoT will help customers get better insurance, there will also be severe privacy implications. Who will own this data, the customer or the insurer? Also, what happens if the IoT devices capture something the user would rather keep private? The challenge will be to ensure that the customer understands and consents to the way this data is gathered and used.
Security: Networks of connected devices will be vulnerable to cyberattacks. Heavy investment in cybersecurity will be required before a greater shift to using IoT more extensively will be required.
Changing Expertise: The process of integrating IoT into the insurance industry will require massive investment into new talent. Positions with a blend of skills in insurance and technology that currently don’t necessarily exist will have to be created and staffed.
Storing and Processing Massive Amounts of Data: Insurance companies will need to quickly develop capabilities to store trillions of gigabytes of data produced by IoT devices and process them into usable insights.
Changing the Nature of Insurance: Existing insurance management strategies will not work with the new types of information gathered by connected devices. Not only will insurance companies have to develop new strategies, but a complete overhaul of the existing mindsets will be required to unlock the full advantages of new technologies penetrating the industry.
Establishing Trust: IoT technology is still relatively new, and it will take time for its widespread integration into the insurance chain.
What does this all mean for you, the insurance buyer?
IoT technology is constantly evolving and will force all businesses, including yours, to adapt or be left behind. This evolution will take time and will encounter stumbling blocks as previously mentioned.
However, doing nothing should not be an option. How you integrate technology into your normal business practice should be at the top of any business strategy. This should include an efficient administrative method of purchasing insurance. To learn more, reach out to our team of expert brokers.