This article is the third in a series discussing insurtech and its impact on commercial and personal insurance programs and risk management analysis. We previously discussed (1) insurtech as technology-enabled innovations and disruptions in the insurance value chain and (2) what constitutes “big data” and its effect on the insurance industry and consumers. In this piece, we examine “the Internet of Things” (IoT) and its implications for insurance.
IoT refers to a network or system of internet-connected devices transmitting, collecting, and sharing data. IoT has been described as “the network of physical objects—things—that are embedded with sensors, software, and other technologies to connect and exchange data with other devices and systems over the Internet.” Internet of things, Wikipedia, https://en.wikipedia.org/wiki/Internet_of_things (last viewed May 25, 2021). IoT technologies are synonymous with products such as “smart homes,” connected vehicles, and wearable devices. The January 2019 McKinsey & Co. report “Digital Ecosystems for Insurers: Opportunities through the Internet of Things” reported that in 2015, each person had approximately three sharing devices, totaling 25 billion devices, and estimated that by 2025 that number will increase to six devices per person—totaling over 50 billion devices in use worldwide.
IoT and its various applications have significant insurance ramifications, as it allows the use of sensors to monitor an insured risk, transforming rough data into usable and easily processed information. Insurers can use this data to better assess risk and tailor their business approaches accordingly. IoT has and will continue to increase precision in assessing risks and pricing insurance policies. The use of IoT assists in loss mitigation and prevention through behavior modification. For example, auto sensors can provide warning signs for actions that could lead to accidents. Insurers even used sensors during Superstorm Sandy in 2012 to aid them in tracking the impact of the storm.
IoT applications can also give greater levels of granularity in risk modeling to improve underwriting and personalize insurance products and services. Insurers can use IoT to reduce costs and generate additional revenue by monetizing data insights from telematics of behaviors. In addition to providing greater customer interaction and cross-selling through telematics applications, the use of IoT to trigger maintenance will improve prevention mechanisms.
For example, auto insurers have introduced usage-based or demand-adjusted pricing achieved by monitoring through IoT sensors. IoT will improve safety standards, as ambulatory services will be dispatched immediately after an accident occurs. The use of sensors in driving analytics will even enable the recognition of fraud.
Another application of IoT is the wearable device, which has been called “the human body’s black box.” With the availability of wearable devices such as Fitbit® and Apple Watch®, health and life insurance companies can likewise track health data for insureds. Fitbit® reportedly sold over 60 million devices from 2007 to 2017, and today it is estimated that one in five internet users wears a device. Wearable devices could be used to supplement or even replace medical examinations used in the underwriting process, reducing insurers’ costs and improving data quality. (Of course, the availability of this information may raise privacy and security concerns, but that is a separate issue.) The point here is that insurers can collect and analyze more data more quickly than ever before through IoT, enabling them to better analyze risk more efficiently—a benefit for insurers and insureds alike.