Depending on who you read, the scope of the Internet of Things (IoT) could range anywhere from 26bn (Ericsson1) to 38bn (Jupiter research2) by 2020.
Depending on who you read, the scope of the Internet of Things (IoT) could range anywhere from 26bn (Ericsson1) to 38bn (Jupiter research2) by 2020. What is clear is that it is a phenomenon that is only going to grow. If ‘Internet of Things’ sounds simply too vague, too pie in the sky to pin down what this means for the Insurance community, it is perhaps better to refer to the trend as one of Connected Devices.
Where IoT conjures up ideas of fridges that order in their own groceries, connected devices recalls in-car telematics systems, health-related wearables and most recently, home control systems such as Hive and Nest (thermostats controlled via smartphone and remote monitored smoke and carbon monoxide detectors).
But as consumers get used to controlling their environment with the click of an app button or monitoring their fitness, appointments and car health via a smart-watch, what are the implications for the insurance industry? As connected devices begin to impact on consumer behavior, will we begin to see dramatic changes not just in individuals’ risk profiles but in the very risks companies insure?
In fact, the implications of connected devices for the insurance industry are threefold:
- To change the customer engagement landscape in terms of service improvements, raising competitiveness above the price bar
- To change customers’ behavior and approach to risk to improve their risk profiles
- To change the nature of risks insured, moving away from physical accident and theft into virtual perils including data and financial
Driving competitive advantage through service improvements
First of all, the use of connected devices need not be by the insured party. Insurers can use connected devices to improve their own response to events, often before the consumer has had a chance to respond.
“We can do a number of things to provide a better experience for your custom-ers. One of the products we introduced to the travel market is called Air Care: if a customer’s flight is delayed for a couple of hours, we take feeds from flight tracking and weather, using that to monitor and eliminate the need for them to file claims,” states Dean Sivley, president of Berkshire Hathaway Travel Protection. Sivley goes on to reveal that one of the biggest frustrations for the travel insurance customer is filing claims and receiving the money. With Air Care, Sivley states that the claim is effectively automatically filed and the money can be in the customer’s account before they have even left the airport.
Berkshire Hathaway Travel Protection’s Sivley notes that for a connected device strategy to work effectively, it must be seamlessly integrated into an omnichan-nel customer experience. That is to say, that customer interactions begun using a connected device may require a transfer to customer support to help the traveler. He explains: “One of our groups is called MyAssist. We work with compa¬nies like Verizon Telematics, where they are delivering some of the connected device options in car; however, when a driver needs a live-agent to solve complex requests or want their hands-free for safety - we are there to assist.
For example, trying to search the directions and make a reservation with a restaurant — those are requests that are easier and safer for our agents to handle. Perhaps they want us to use the Internet to obtain restaurant reviews, and give them a more informed solution while on the move.”This is clearly not a direct insurance benefit however it covers two key elements of improved customer service and engagement. On the one hand, the customer interaction with its insurance company is greatly improved through value added services. Reasonable expectation is that this will contribute to the brand’s consideration come renewal time. On the other, there is an indirect insurance risk benefit wherein the customer is engaged in a seamless, hands-free interaction to find information that they might otherwise have ill-advisedly been distracted at the wheel trying to find themselves.
However insurers use connected devices to improve the customer experience at point of use, increasing interactions beyond the typical annual renewal event and elevating the product beyond a commoditized distress purchase can only help insurers stand out in an aggregator-led marketplace.
Changing customer behavior to reduce risk
While improving customer engagement and brand consideration in a highly commoditized, price-driven world is important, insurers are also looking to connected devices to create win/ win situations by helping clients improve risk profiles. The most effective way to achieve this thus far, had been using such devices to guide customers towards improving their behavior.
Most commonly, this had taken the form of driver education software on mobile phones and/or automatically generated reports from so-called black box telemat¬ics. These have predominantly been the domain of younger drivers however there are signs that this is entering the overall driving population.
“Our data leads us to believe that we have a potentially reduced risk of begin-ning drivers who participate in our Teen Safe Driver Program,” reveals American Family’s chief business development officer Peter Gunder. ”It’s not a compulsory program but is voluntary, focused on helping young drivers to develop safe-driving habits that can prevent accidents and save lives. The program gives peace of mind to parents and encourages conversations between them and their teens. The program is available to American Family customers at no charge and provides a coaching opportunity that parents and their young drivers say they value and appreciate.”
Modified behavior is not limited to driving. In the travel industry, using connected devices and equity of the mobile phone means travel insurers are able provide better assistance to travelers during the times they need help the most — around travel mishaps, like flight delays and missed connections. “When you’re travelling and on a route that we are monitoring we can notify you that you are likely to experience a delay. But we will also be looking at other options, so that you can alter what you do. Besides being a customer service benefit, we can then avoid paying out on a delay or missed connection claim,” states Sivley.
Connected devices expand beyond motor insurance for Gunder’s American Family: “In June we announced a partnership with Nest in which we provide the Nest Protect product to our Minnesota customers at no cost to them. This is a smoke and carbon monoxide detector which we believe is good for our customers and good for American Family. In addition to receiving the device at no cost, custom¬ers receive a discount on their homeowners insurance upon validated installa¬tion of the device,” he reveals. Gunder explains the only data American Family receives from the device is if it is installed and working. When it receives such data, American Family can contact the customer to take corrective action. By taking this step, American Family is able to help its customers take the relevant precautions to keep family and home safe and secure.
On several fronts, the use of connected devices to improve consumers’ quality of life is generally accepted. There is tacit acknowledgement that some devices passively share data with companies in order to make the customer experience more useful, enjoyable or simple. On the other hand, one simply needs to note the success of health-related devices such as Fitbit or Jawbone to understand that consumers are happy to self-improve and even gameify the monitoring experience (see Fitbit’s badge-driven fitness goals for example).
Where there is a significant financial advantage to being monitored, such as in the case of teen drivers in the UK in particular where insurance premiums can be punitively high without it, it is increasingly welcomed. However that is not to say that all monitoring situations are automatically well accepted.
In the domain of the professional driver or workplace monitoring, there is a degree of natural resistance to surveillance. Insurers believe this is a hurdle that can be overcome.
David Bassi – Head of Innovation and Risk Consulting, Casualty, AIG explains: “When we think about workers handling material every day, we know which motions are dangerous. Workers generally have an idea but may not recognize that which is safe or unsafe. The opportunities in real-time monitoring sensors and devices will allow for workers’ managers to understand and respond in real-time.”
But Bassi understands that benefits need to be communicated clearly: “I’ve been doing my own unscientific research into professional driver’s reaction to the instal¬lation of cameras and asking them [drivers] about the experience. They universally stated that they were really resistant when it was put in. But now, they can see the benefits even beyond those intended. For example, they are protected when a passenger threat is recorded for it can provide data to prove they were not at fault. It comes down in a way that is non-punitive and enthuses the workforce.”
Bassi notes that trust is vital: “Workers’ trust in management is vitally important. If there is general distrust it is difficult to get things done. Everyone has to understand why it might be good for them. Explain to people and then they can see why.”
New worlds, new risks
Could a world governed by the Internet of Things ultimately see a removal altogether of risk? In embracing it, is the insurance industry not simply embracing its own demise?
“There is broad industry research that indicates loss control techniques are improv¬ing the safety of customers. Technology now permits vehicles to provide trans¬portation with fewer losses. That trend is unambiguous and known. The question then becomes: What is the nature of the customer/insurer relationship if losses are fewer? The answer is that there will be new risks that creative insurers will cover,” Gunder advises.
Gunder is reluctant to go into specifics about new risk strategies going forwards, however it is clear from recent news reports that the Internet of Things and connected devices are both removing some risks and revealing others.
One such example, is the recent report surrounding Jeep Cherokee3 where an installed telematics system was capable of being hacked remotely and control was wrested away from the driver. While malicious remote control of vehicles might be deemed an unrealistic risk, today the ability to access the vast amounts of data that now flows between vehicle, smart phone and the owners’ other devices (i.e. laptop) is clearly vulnerable to interception. It may well be that a future common risk covered by motor insurers is in fact one of personal data.
It may be possible in the future that the insurance policy ceases to be financial mitigation in the event of a problem and more a set of support services that elimi¬nate the possibility of that problem occurring in the first place.
AIG’s Bassi notes: “It does seem that there are new risks regularly. In the past it was an arms race in risk assessment and quantifying. Now, it’s about how do we create risk ecosystems that span elimination of adverse events through mitigation of harm post event, so that in the end the insurance policy becomes a kind of warranty. The insurance policy becomes an access point to services.”
It is undeniable that we are about to see, if it hasn’t started already, a fundamental shift in the way insurers assess, manage and compensate risk. The order of the day is very much that prevention is just as important as the cure. Claims will not be eradicated, not by a long chalk. But from now on, insurance will also be about service.
“It’s increasingly the case that people realize it’s not just price that is a comparison point when deciding on insurance, it’s about ease-of-use and simplicity in dealing with the company. Customers are looking at the entire experience, talking to other people who have used our products and services, and we have to deliver every time. These are the decisions that have worked their way into making a purchase,” Sivley states.
Discovering that insurance is more than ever about a service proposition will not be enough, according to some commentators. American Family’s Gunder notes: “I think the whole industry is going to have to come to the realization that customer expectations are set outside the insurance industry. The delight one has with their experience at Amazon or with a favorite Apple product sets the expectations they have for an insurer.”
The growing reliance on data to provide these services is also going to be a balanc¬ing act. Insurers will have to walk the tightrope carefully to maintain their carefully won trust. Customers are well aware that they share data with the companies they choose to interact with. When this involves something as benign as DVD preferences, the customer is naturally relaxed about it. However increasingly the data shared by devices is deeply personal: “In many facets of people’s lives, things that were private have become public. In using the Internet of Things personal privacy will have a trade-off and people have to see that the benefits outweigh the drawbacks,” AIG’s Bassi states.
“Ultimately it will change the organization because service is becoming so much more of the value proposition. How do you create a common point of contact for the service rather than approaching everything from an underwriting perspective? I’d like to see an increased emphasis on preventing injuries and damage rather than dealing with the consequences of those events,” he concludes.
Clearly it is unrealistic to expect that the Internet of Things will see a complete removal of risk. As has been seen above, risk will undoubtedly shift towards the virtual world from the physical. Connected devices will make this possible by reducing much of the current physical peril that comes largely as a result of human error. Home monitoring devices such as Nest and the undoubtedly imminent arrival of the driverless car will see a shift towards new customer behaviors. Insurance is set to become less a protection against the past and more a warranty for the future.