Most insurers now have a defined ‘digital transformation’ programme in place, underpinned by the desire to become more data-driven and customer-centric. The Internet of Things (IoT) technology has been the catalyst for such digital transformation.
Insurers are now placing greater emphasis on prediction, prevention and assistance – based on the assumption that nobody wants to go through a claims process and that a product that gives early warning is going to be positive for both the consumer and the insurer.
With IoT enabling insurers to deliver prevention-first protection through connected devices, the technology is effectively changing the dynamic between insurer and customer to one less focused on claims and more advisory-oriented.
An example of prevention-first insurance is technology-driven car insurance leveraging IoT, whereby insurance premiums are dependent on driver behaviour. Undoubtedly, insurers with telematics programmes have benefitted by signing the ‘safer drivers’ to their motor books.
Sensor technology for cars that track mileage, location and driver behaviour has been around for several years. Through these devices insurers can better predict pricing and promote safer driving, while drivers can negotiate lower premiums on no accidents. Many insurers also offer free anti-theft tracking and roadside assistance through them.
This technology also helps reduce fraud. George Berekos, IoT specialist at analytics software and solutions company SAS, noted that a sub-industry of fraudulent whiplash claims in the UK cost billions to insurers (and eventually to policyholders).
IoT data can provide an accurate crash reconstruction view to claims handlers. By adding artificial intelligence to the IoT data, the insurer can get an estimate of the repair cost, thereby controlling also another source of fraud: overcharging for repairs by garages.
According to Berekos, the adoption and therefore the impact of IoT on the insurance market, at least in EMEA, is still rather low. For example, he pointed out that the usage-based insurance policies (telematics book) of one of the largest motor insurers in the UK still represents only 4.3% of its overall motor book.
“Young drivers in the UK have been signing up for usage-based insurance programmes just so they can afford very expensive annual premiums (£2,813 in Manchester), which in many cases exceed the purchase price of the car.
However, usage-based insurance programmes are still failing to be positioned as a mainstream proposition outside the distressed young drivers’ segment,” said Berekos.
He suggested this mismatch is due to ageing legacy IT systems that don’t allow for the enhancement of traditional risk models with a real-time stream of customer data. Also, organisational silos do not embrace the operationalisation of IoT data by core insurance functions.
Meanwhile, IT services company NTT DATA UK has worked with Collision Management Systems to bring IoT solutions to market for aggregating and analysing data from van/lorry telematics across different vehicles and manufacturers to produce a standardised model for fleet providers. This helps to understand how likely a collision is to occur and why, providing clarity on claims.
One application of telematics proving increasingly popular is in the area of home monitoring. With the UK suffering from worsening floods, insurers are keen to find ways to minimise claims.
RSA’s chief information officer, David Germain, explains the company was an early adopter of home sensor technologies, having started working with insurtechs after the winter of 2018, when many UK homes suffered burst pipes. The firm looked at what sensory technologies could be put on home infrastructure to provide early indication of possible water leakage, thereby enabling customers to resolve these issues ahead of time.
Other insurers followed, and this type of insurance has now become more commoditised.
In the commercial space, Aviva has partnered with SimpliSafe to pilot a smart digital risk-management solution. The security system includes a HD indoor camera, two water sensors, a temperature sensor, a motion sensor, a smoke detector and two entry sensors to reduce the likelihood of the most common disruptions.
Gareth Hemming, Aviva’s chief distribution officer, said: “Through the data that Aviva captures, our long-term ambition is to fundamentally change how we write business for those customers who we know to be a ‘better risk’ based on their adoption and utilising of security devices to protect their business.”
Meanwhile, FloodFlash, an insurtech launched in 2019 using sensor technology, now provides flood cover to UK businesses and landlords that it says previously couldn’t obtain insurance. When the sensor detects flooding, it sends them readings via mobile networks, enabling them to begin the claim process straightaway, as they don’t need to send anyone to the property.
“The client is in complete control. They choose the depth of water that triggers their claim, the amount they receive, and even where to place the sensor,” said Chris Hall, FloodFlash’s head of marketing. “This means they can create affordable cover and choose cheaper premiums if they have put flood resilience measures in place.”
Hall said the firm was the first insurer in the world to use a proprietary sensor to provide parametric insurance to the mass market.
“Every year more and more insurtechs are using parametric covers to take aim at perils that have an underinsurance problem.”
“The other big benefit is our claims are lightning-fast,” said Hall. “We pay in full within hours of a flood, not the months it takes traditional payouts to arrive.”
“That means clients can recover quicker, reducing claim values, stress and guaranteeing businesses survive – something that’s never been more important after years of pandemic disruption.”
The next level up is smart cities using analytics and IoT to predict and manage flood events.
US and UK cities have tended to use physics-based modelling based on simulations and visualisation tools to show where flooding has occurred. However, SAS is combining this approach with live sensor data and weather feeds to create dynamic simulations in real-time, with six-hour predictions to allow time to respond and prioritise response.
The US town of Cary in North Carolina has recently implemented a new SAS flood prediction solution powered by Microsoft Azure IoT. Data comes from solar-powered, cellular-enabled sensors that measure water height and depth, current flow and rainfall. This is uploaded to the cloud and combined with weather data, which can then be analysed and shared among town departments.
This should increase the town’s situational awareness of rising stream levels, and allow it to better predict where flooding might occur, deliver advanced warnings and improve an emergency response through automation.
It will take a few years of collecting data before a full assessment of the impact on the town’s insurance claims and premiums can be made. However, Berekos said insurers and reinsurers are already talking to them about how they can leverage this to drive better flood protection and reduce claims.
The use of IoT technology provides more opportunities for the insurer to interact with the policyholder.
“A telematics programme helps to create longevity,” suggested Berekos, “retaining consumers’ regular use beyond the novelty of the first few weeks of using the telematics app and leading them neatly into the reward and redemption journey where loyalty is built.”
RSA’s Germain argued this type of product will also help drive customisation.
“It’s the pricing of insurance that most consumers care about – that’s what creates the selection process,” he said. “We sort of broad-brush today, but If you can start to really granulise and tailor pricing by specific needs, making feature changes to the type of product you want, deselecting certain features, then we can really take it down to another level of customisation.”
The question customers will be asking revolves around “what do I get with that product, how does it work for me and my family?”
“At that point, the cost will be less important because you are getting the type of product that’s tailored totally to your needs,” Germain said.
Although IoT is now becoming embedded in many general insurance lines, it has yet to be widely applied in commercial markets.
“The use of IoT is growing in commercial business, but it’s still mostly in niche lines where those symbiotic or mutually beneficial data arrangements are clear and obvious,” pointed out Mark Toye, insurance technical director at NTT DATA UK.
One area where IoT has found widespread application is in shipping. RSA, for instance, uses satellite and sensory technology in its commercial lines book to track shipments globally.
Recently, Aon, in collaboration with insurtech Parsyl and with broad industry collaboration, introduced a specialised cargo insurance product that uses IoT to provide supply chain cover for the global distribution of Covid-19 vaccines.
The vaccine needs to be kept under strict temperature controls to remain useable, so sensors monitor its temperature during transportation. This real-time reporting of any temperature deviation mitigates losses of vaccines, while also providing financial protection to the companies distributing them.
Cargo containers illustrate how customers and insurers both benefit from sensor technology. Customers want real-time information and alerts on the state of what they’re transporting, which otherwise remains unknown until point of arrival, while the insurer can clearly understand when an event has occurred that is within the bounds of the policy.
“With IoT you have a set of data that has been mutually agreed, telling both parties when something has gone wrong. So when a claim happens, it’s relatively unambiguous. You don’t have to spend weeks or months digging through who said and did what. It becomes a much more commoditised market,” explained Toye.
This simplifies claims by quantifying what would potentially otherwise be subjective or require third-party assessment, and brings that information into a much faster operational process. It relies on a certain amount of impartiality regarding the data source – hence the benefit of using third parties to provide and analyse that data.
Insurance has always been a data-driven industry. What’s changing as a result of IoT is that there is now more alignment with real-time.
“Before, insurers tried to predict what will happen based on past events. Now they can look at live or near-live information and what’s actually happening to what they are insuring,” said Toye.
He believes the application of IoT depends on how commoditisable the type of insurance is. “In the commercial market many of the policies are far more bespoke. So the more commoditisable the business is, the more IoT will have an impact and allow us to make that more transactional.”
According to RSA’s Germain, IoT is an immature technology that the insurance industry is still trying to find a purpose for.
“I think frequent customer interaction is going to be very important for insurance. As these technologies start to play out, getting real-time information of usage – how you are using that product, how you can fine-tune that product – is how the relationship with the insurer will start to move.”
“We don’t know yet what business or service models are going to stand up, but through requests and direct interaction with customers, we will definitely see opportunities to develop new products and business models on the back of IoT.”