Q: What does the IoT mean for insurers?
Sandquist: There are few aspects of our consumer and commercial world that won’t be affected by the IoT, and insurance is no exception. Some carriers will be threatened by it. Improved risk monitoring, accident prevention, early loss detection, and preventive maintenance will cause their revenue pools to contract. Carriers that are slow to integrate IoT data sources into their underwriting and pricing models risk adverse selection which could put pressure on their margins. As products are transformed into “living services,” insurance could be bundled into those services, disrupting carriers’ traditional distribution models. On the positive side, the IoT is creating countless opportunities for insurers. It can allow leading insurers to improve their operational efficiency, assess risk and price their products with greater precision, and become better at identifying fraud. And that’s just looking at their traditional business. It also allows them to evolve from being simply payers of claims to valued partners that help their customers monitor, mitigate and avoid risk. For some, this will lead to transformed customer relationships and entirely new sources of customer value and revenue from hybrid product/services. It really does open up a new world of opportunity for the industry.
Q: Could you give an example of an impact to insurers’ risk pools?
Sandquist: Take equipment breakdown insurance. The US Department of Energy has forecast that the IoT’s ability to enhance predictive maintenance of assets could eliminate up to 70 percent of breakdowns. Insurers may not consider all of those breakdowns to be covered losses, due to various cause-of-loss exclusions, but a portion of them would be. That could result in a significant amount of revenue and loss costs all but disappearing from insurers’ income statements.
Q: Where specifically will the opportunities lie for insurers?
Sandquist: The IoT creates the potential for new products like usage-based auto insurance and insurance against the cyber-attacks that are becoming more common in an increasingly connected world. It will enable a host of innovative risk mitigation services related to the connected home, the connected car, connected health, connected worker, and the industrial IoT. These can help improve customer satisfaction by enabling insurers to reposition themselves as partners in preventing losses. Of course, the IoT can also reduce insurers’ loss and loss adjustment expenses. And finally, it has the potential to create additional opportunities for innovative new products such as context-relevant small-ticket insurance, for new customer interaction channels, and for more frequent and meaningful customer interactions.
Q: Is it as easy as that?
Sandquist: I didn’t say it would be easy. There are likely to be companies from other industries that may also be vying to help reduce risk for customers, and some of these competitors may be better positioned within the data value chain. To be successful, insurers will need to be more open to partnerships and better at collaborating with companies that have access to the IoT data. And they will need to become more customer-centric and innovative than most have managed in the past. They’ll need to improve their capabilities in a number of important areas, including big data, analytics, service design, personalization and the customer experience. From a technology perspective, this means implementing flexible core platforms that support underwriting and pricing based on data from the IoT. It also means operating in two speeds: Carriers must orchestrate their legacy evolution while at the same time managing disruptive innovation, changing their IT processes to roll out faster and more efficiently, and managing security threats quickly and proactively. From a culture perspective, they need to be more willing to try new things and learn quickly from them.
Q: How should insurers get started if they want to take advantage of the IoT?
Sandquist: It often starts with an analysis of customer needs and the definition of the customer value proposition—which could include both premium discounts and the design of new services that can leverage the vast amount of data being gathered through the IoT. Many carriers will need to collaborate with others in order to gain access to the IoT data through new ecosystem partnerships and vendor relationships. As the data from providing these services gives them greater insight into their customers’ risks, they can use it to improve their underwriting and pricing models and further tailor the products and coverages they provide. Also, in collaboration with their ecosystem partners, they can develop and launch entirely new products and services that use IoT data for context-relevant offerings.
Q: How significant an impact do you believe the IoT will have on the insurance industry?
Sandquist: Accenture’s 2015 Technology Vision for Insurance study found that 80 percent of insurance players believe the IoT will disrupt their traditional way of doing business. Our recent Distribution & Agency Management Survey found that 45 percent of insurance executives expect the IoT to be a driver of revenue growth for the industry. Interestingly, we saw a significant increase in investment in IoT-related connected insurance initiatives. While much of the early attention was directed at vehicle telematics, in the past 12 months there has been a two- to three-fold increase in the number of IoT-related products, services and pilots focused on homes and buildings, health and fitness, and other wearables. So this is certainly, and already, an area of increased focus for many insurers.