IoT, the Internet of Things, is one of the overarching trends that regularly pops up in discussions on disruptive new technologies, new business models and technology driven trends such as Machine-to-Machine communication and big data.
Of course, the Insurance Industry is also affected by this theme. Some say IoT is a big threat for Insurers as it enables new entrants to disruptively enter the market; others claim it is a great opportunity as it opens new business models.
In my opinion it is a great opportunity that if not handled well, can turn into a big threat. Fact is, IoT and big data will transform the way insurance companies operate, and as always, some will benefit and some will lose.
IoT has the potential to act as a catalyst for disruptive change. This is an interesting fact considering the way new technology opens up new markets. The common thinking was always that disruptive innovation often enters into a business space not by competing directly with established organizations, but by either peeling away low profit sectors or opening another dimension of customer demand.
Complete Market Disruptions?
Recently this “law” of not competing with established organizations seems to have changed into a “head on” game. Take for instance the way Uber and AirBnB have changed the market with a full front attack on the established businesses.
Now take the insurance market, not only an established market but also a market with low customer satisfaction. A market prone to a disruptive new entrant to start a revolution.
In this case the “disruptive” new entrant could easily be not a Silicon Valley start-up, but one of the other well established names like Google or BMW. These companies are leveraging the concept of connected cars and self driving cars so why not “self insure” them as well?
Under the presumption that IoT by now is a well known term let’s take a closer look at how it will affect Insurance.
IoT and Reduced Costs
To start with the positive side:
Connected devices will generate massive amounts of data that can be leveraged for more insights and combined with other sources even generate predictive insights.
The automotive industry, to use that example again, is making big strides with in-vehicle sensors. Not only are cars able to brake without human interaction (brake assist systems) before a car hits a stationary object like a wall or a lamppost, but cars nowadays are more and more able to also project the course of non stationary objects like cyclists or other cars.
It goes without saying that these technologies will greatly diminish the risk of human errors thus diminishing risk and the associated claims.
Other examples of sensors are home automation systems that can prevent fire, theft, air pollution etc. When connected, these systems can form a constant set of always-on security surveillance appliances that not only prevent negative risks, but also predict these risks and cope with them before impact.
Sensors can generate value through data and insights enabling better knowledge of the customer and thus new sales opportunities.
These opportunities can be made even more powerful by dynamic pricing and pay-as-you-go principles. New bundling of services are a real opportunity when sensor technology is leveraged for new insights.
Self insurance in a sharing economy:
Concepts like pay-as-you-go rentals, shared vehicles and houses, etc. are rapidly becoming popular and are changing the concept of ownership. These sharing platforms are one of the first areas where self insurance can start due to the nature of changed ownership status and the economy of scale these platforms can bring. This will have its consequences for traditional insurance models based on one-to-one ownership structures, but will also create new opportunities when Insurers will be able to grab their share of the changed environment.
IoT: Security and Privacy Risks
These positive opportunities also have a flip side.
One of the very real “new” risks that all these connected devices pose is the risk of being hacked.
Security in this rapidly evolving and very complex field is a big issue. Only recently we saw this when hackers were able to “override” the intelligence in a certain self-driving car leading to taking over the handling of the car. This may seem like a scene from a science fiction series, but is now a reality. The potential cascading effect can make this into an even more impactful event. This observation leads to another threat and that is the threat to data privacy.
The threat of data privacy: Not so long ago a large Dutch bank announced their desire to use account and payments data as a source for insights to be sold to third parties. A huge row ensued due to which the bank had to withdraw their plans.
Undermining relevance of Insurance: In this article it was argued that a positive trend for IoT is diminishing risk and associated claims. The almost cynical flip side of this trend is that it also undermines the relevance of the Insurance company and industry itself.Diminishing risks will lead to less risks being insured leading to less premiums for insurers.
This negative impact will most likely outweigh the positive effects of better knowledge of the client. Also the new sharing platforms can become a new set of customers that need a total new approach.
Earlier we touched on the new entrants that could disrupt the insurance industry. In my view there are two trends that substantiate the upcoming disruption of the industry.
One is the manufacturers of all kinds of products and appliances that make their products more connected and intelligent thus diminishing risks leading to lower premiums or even taking over the insurance function altogether.
Second the new startups (or established brands outside the insurance industry) that based on their superior technological knowledge are able to come with new concepts, thereby attacking the established order.
In my following articles we will elaborate on these trends.
To summarize, Insurers are up for radical change based on the IoT trend combined with earlier trends like Big Data usage, sharing economy and manufacturers starting to act as Insurers for their own products. Enough reasons for Insurers to critically re-asses their assumptions of the future and start implementing new products and procedures.
And as time is running out, as Yoda says; ‘Try not. Do or do not, there is no try."