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J. Michael Skiba, MBA, PhD
J. Michael Skiba, MBA, PhD

Vice President Counter Fraud Strategies

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The Internet of Things: How Does It Impact The Insurance Industry

By Michael Skiba The Internet of Things: How Does It Impact The Insurance Industry 5 December 2016

- Researchers have revealed very alarming statistics about how the Internet of Things (IoT) will impact almost every single individual walking the planet in a very short period of time. Almost every industry will be affected by the number of devices in the world and their relative connection to each other. Imagine a time when your refrigerator can sense that you are in need of milk or eggs and electronically communicate with your local store to order these items. Or when your fitness tracker “talks” to your home thermostat and lowers the heat based on your core temperature. The insurance industry will be no exception to the impact of IoT; and savvy carriers will need to embrace this revolution in order to maintain an advantage in an already highly competitive market. 

 

So what important issues do insurance carriers need to be aware of in order to use IoT to their advantage?

 

  • The relationship between devices is not based on simple connections; this is a highly complex technological environment.
  • This is a new area of business potential, so new “start-up” IoT solution providers are being developed on a daily basis. As this topic is in its infancy, carriers should be cautioned as these providers are navigating relatively new areas. It is also important to assess the use of this data; most solution providers lack the ability to offer any data analytical capabilities; they may only offer raw data.
  • Having a single stream of data may be insufficient for an insurance carrier to use for analysis; multiple streams that are connected create the most robust data for analysis, interpretation, and application. Using a single set of data from a smoke detector may not be useful unless merged with other information, such as the behavior of the owner.
  • The first step for insurers is to start collecting the data, from as many sources as possible. This data can then be compiled for application.

 

The IoT is ripe with many challenges, including privacy concerns regarding the data that is being collected. Connected devices are a privileged source of personal information, similar to a continued form of surveillance; therefore, carriers must ensure that they have the legal right to obtain it. When used singly, data is not as harmful as when it is aggregated, which creates a dangerous snapshot of the individual.

 

Although many challenges exist, carriers can effectively leverage the Internet of Things to make themselves more profitable. Put simply, it is all about data. Carriers need to gain access to the data, but then utilize intelligent systems to translate this immense amount of information into a “workable” form. Software systems, such as those offered by INFORM, use rules, algorithms, fuzzy logic, and predictive analytics to assess risk in real time. Existing sources of data (policy info, claims info, etc ...) can be merged with IoT data to create incredibly robust and valuable information for analysis and highly effective application.

 

The benefits of using data analytics with IoT data are many:

 

  • Reduce severity and frequency of claims. 24/7 monitoring of risk and the ability to predict loss exposure will help to more accurately assess future losses.
  • More accurate risk assessment. The immense data that will be available from IoT devices can be used to more accurately predict risk at the initial point of sale and underwriting process.
  • Better customer service. Developing pricing models based on the information gathered from IoT data can be directly communicated to the insured to create a “transparent” view of policy premiums. Providing this perspective to the insured will help to increase customer satisfaction and loyalty.
  • More streamlined claims handling. Sensors and monitoring using devices can help to capture loss information and also alert appropriate parties in the event of a loss.

 

What are specific ways that carriers can use data analytics with IoT data?

 

For automobiles that are connected, insurers can offer driving location monitoring or vehicle performance monitoring, all creating additional revenue for the carrier. With regard to premiums, carriers can offer rating and scoring plans based on driver usage.

 

This usage based insurance (UBI) model is a contemporary approach to premium rating and is already being used by several carriers. It has already proven itself as a highly accurate method for premium rating. From a claims perspective, this data can be used for tracking and monitoring in a loss situation.


In life insurance applications, data analytics can assist with lifestyle screening and also be used for premium rating based on lifestyle and activity.


For residential and commercial buildings, home connection incentives can be offered to assist with monitoring. At the point of sale, data analytics can be useful as behavior monitoring. From the claims perspective, video and sensor verification of loss facts is possible.

 

The Internet of Things will revolutionize the insurance industry in almost all areas. Carriers should first focus on collecting data and then on connecting this immense amount of information through analytics in order to effectively analyze, interpret, and apply it in their respective lines of business.

 

> Download the PDF report here.