Insurance has always operated in world of relative invisibility. Once the policy is written, the person or property it covers goes back out into the world (a world full of risks) and is never heard from again, until it’s time to renew — or file a claim. Insurers can make some inferences about the kind of risk that person or car or home is encountering, but observe it directly? Mostly not.
That eternal verity of the industry is changing today, thanks to the Internet of Things (IoT), the emerging world of devices, vehicles, buildings, and even people embedded with sensors, actuators, software, and network connectivity that enable these physical objects to collect and exchange data.
IoT has inspired a lot of gee-whiz speculation about self-stocking refrigerators and pill bottles that tattle to your doctor when you don’t take your medicine. But in the larger scheme of things, IoT is about eliminating the walls between operational technology and information technology, allowing unstructured, machine-generated data to be analyzed for insights that will drive adaptation and improvements.
And for the insurance industry, IoT is a way to finally break through the invisibility that has always cloaked real-time risk and to evolve from the current passive risk transfer value proposition. The technology is not fully developed, but we are already beginning to see early examples of pay-as-you-go insurance, pricing that more accurately reflects individual risk patterns, and changes the nature of the relationship with customers.
These changes should ultimately appear in almost every form of commercial and individual insurance. But for the moment, they are most advanced in telematics — a fusion of telecommunications and informatics as they apply to vehicles — and auto insurance. By using sensors installed in a car, insurers can gain insight into how much the car is driven and how it is driven.
That means insurers can make offerings more customer-centric, tailoring them to individual cases and creating new products to meet specific needs. They can price coverage more accurately. And most significantly, they can begin to use incentives to steer users toward safer behavior.
Currently, there are more than 150 pilots globally employing telematics in car insurance, and the number of usage-based car insurance contracts is estimated to be around 20 million. The leader pioneer in the field is the US insurance company Progressive, which has worked with telematics since 1998 and currently has 1.5 million subscribers. Progressive offers a pay-how-you-drive product, with pricing adjusted to reflect data on mileage, time of driving, and harsh braking events. The product is tailored to price-conscious drivers; the insurer grants a driving-style-dependent discount averaging 15 percent and rising to a maximum of 30 percent.
Similar pilots have emerged in health and life insurance. Wearables monitor the health- relevant behavior of the insured person, and in the case of health-beneficial behavior the insurance companies grant discounts. These models require insurers to overcome customers’ data privacy concerns.
IoT is also expected to impact commercial insurance, with a greater emphasis on risk prevention than on pricing models. We see potential especially in agricultural insurance, building insurance, and insurance for small and medium businesses.
Significantly, IoT technology can be a tool to “humanize” insurers, shifting them from a transaction-based, product-led model to one where they work on prevention and provide advice, coaching, and rapid assistance. In this way, IoT enables what we call “active solutions” that insurers could bring to customers, both surfacing and engineering products that bind function with customer experience in an integrated whole, and which then evolve in lockstep with changing customer needs. To customers, these solutions enable answers to their problems, sometimes before they become aware of them, and they adapt dynamically as customer needs adapt. Finally, these products are sourced flexibly from an ecosystem of partners attuned to customer needs (read more about the ways in which financial services – including insurers – will need to adapt to meet ongoing disruption and innovation, in The Customer Value Gap: Re-Calculating the Route¸ our 2018 Oliver Wyman State of the Financial Services Industry Report).
In the eyes of customers, the transition from “insurer as payer” to “insurer as adviser and protector” is a fundamental change in positioning. The IoT thus gives insurers the opportunity to unlock new revenue streams, reduce claims, reinforce customer relationships, and improve their images.