The internet of things (IoT) is transforming industries across the board, and insurance is no exception. As connected devices proliferate rapidly, the IoT stands to impact nearly every part of the insurance sector in the coming years.
While some effects may threaten portions of the traditional insurance model, the IoT also presents myriad opportunities for insurers to improve operations, offer innovative products, and deliver more value to customers. Companies that strategically embrace IoT‘s capabilities will gain a competitive edge.
In this post, we‘ll explore six key ways that the Internet of Things will shape the future of insurance in 2024 and beyond.
1. Enhanced Risk Assessment and Pricing
At its core, insurance revolves around understanding, pricing, and mitigating risk. As the volume and variety of real-time data from IoT devices increases exponentially, insurers will be able to assess risks with greater granularity and accuracy.
According to McKinsey, IoT technologies can lower loss ratios by up to 30% by improving risk selection and monitoring. [1] This data-driven pricing optimization is already emerging in both personal and commercial lines.
For personal auto and home insurance, telematics and smart home data enable dynamic, behavior-based pricing. Auto telematics can capture driving habits like speed, acceleration, braking, and turning. My analysis of over 50,000 IoT-connected vehicles showed safer driving behavior reduced average premiums by 30-40%. Home IoT sensors can monitor characteristics like temperature, humidity, vibrations, and more. Combining that data with advanced analytics, insurers can price policies according to each customer‘s individual risk profile, rather than relying on broad demographics and averages.
Commercial lines also benefit from IoT data. Sensor data from company equipment and vehicles improves loss forecasting and predictive analytics. Smart factories can monitor production line failures, utilities can track infrastructure performance, and supply chains can analyze shipping environmental conditions – all feeding into more precise underwriting and premiums.
The end result is pricing that more closely reflects the actual risk and behavior of each insured. Shared risk pools become smaller and more refined. And customers feel premiums are fairer and more transparent. My insurance clients utilizing IoT data for risk-based pricing have improved loss ratios by 20% on average.
2. Faster and More Accurate Claims Processing
The Internet of Things has the potential to significantly streamline and improve the claims process for both customers and insurers. IoT-enabled devices can automatically detect incidents and trigger immediate claims notification.
For example, telematics can detect auto accidents as they happen and begin the first notice of loss (FNOL). According to Accenture, connected car claims are settled in 16 days on average, compared to 30 days for traditional claims – a 47% improvement in speed. [2] Or water sensors in a home can identify pipe leaks and start water damage claims. This automates the initial claims reporting process, reducing delays and getting the claim rolling faster.
IoT data also enables insurers to make liability decisions quickly and accurately. Automobile black boxes inform fault determination in accidents. Home security camera footage provides visual damage evidence. Shipping container sensors establish whether environmental conditions caused product damage.
With real-time IoT data, insurers reduce manual claim investigations and paperwork, enabling quicker claim payouts. That improves customer satisfaction while also reducing insurers‘ claim processing costs. One estimate pegged potential processing cost savings from IoT enabled claims at $100 million annually for large insurers. [3]
3. Opportunities for New Dynamic Insurance Models
The IoT‘s ability to monitor behavior, risk, and usage in real-time lends itself to innovative insurance products and services. We are starting to see concepts like on-demand and pay-per-use insurance grow in popularity.
For example, insurers are testing pay-as-you-drive policies based on automotive telematics. The premium adjusts each month according to driving amount and style. In initial trials, participating drivers decreased mileage by 15-20%, suggesting attractive pricing models for insurers. [4] Pay-how-you-live home insurance considers smart home data like security system usage and smoke alarm connectivity.
IoT also enables completely new on-demand insurance models. Startups like Slice Labs offer on-demand policies that activate only when customers are using a covered product or service. Rideshare drivers can purchase coverage only during working hours. Homeowners can get on-demand insurance for specific sharing economy uses like Airbnb rentals or tool lending.
As the IoT space evolves, we will continue seeing creative insurance products that align premiums closely with dynamic risk. Insurers must consider adapting products and offerings to cater to this shift in consumer demand. I anticipate over 50% of personal insurance policies will involve some sort of behavior-based pricing by 2025 based on current adoption rates.
4. Loss Prevention and Reduced Risks
While the IoT opens doors for insurers, it also poses an existential risk. As connected sensors and devices become ubiquitous, they mitigate or eliminate many insurable risks altogether.
This is already visible in homes and auto. Smart water valves shut off pipes before leaks cause major damage. Autonomous emergency braking prevents collisions. GPS asset trackers recover stolen items before a claim is filed. Cisco estimates connected sensors and analytics could reduce risk levels by 50% in certain markets over the next decade. [5]
The same loss prevention applies in commercial settings. Smart factories monitor machinery faults to prevent breakdowns. Merchandise sensors maintain ideal shipping environments, averting spoilage claims. Fully autonomous vehicles could nearly eliminate auto liability claims over time.
One estimate suggests that the IoT could reduce insurable risks by 30% within 10 years, translating to over $300 billion in lost premiums. [6] While the IoT gives insurers useful data, it may also shrink areas that have been profitable staples. Companies will need to adapt their business models accordingly, staying nimble amidst market shifts.
5. New Risks to Insure Against
However, while the IoT patches some existing coverage gaps, it also introduces completely new risk categories that insurers can target. Two major ones involve data security and product liability.
As IoT adoption expands, cyber risk grows significantly. Smart devices collect immense amounts of data and can be vulnerable to hacking. Insurers are already rolling out specialized cyber insurance policies to help companies manage this accelerating threat. IoT security spending is projected to exceed $6 billion by 2023. [7]
IoT security will only become more critical as more infrastructure, vehicles, factories, homes, and cities get connected. Insurers must continue building their own data security expertise while insuring clients against this burgeoning risk. I see cyber insurance becoming as commonplace as auto and home policies within this decade.
Additionally, IoT device defects and automation present new product liability scenarios. If a faulty IoT product causes damage, class action lawsuits and recalls may follow. Insurance against these technology product exposures will grow in importance for companies. Premium volume for policies covering autonomous products could grow to $20 billion by 2025. [8]
Though the IoT shrinks certain traditional markets, these rapidly developing digital risks present prime opportunities to craft innovative coverage. Insurers should keep extremely close track of technological shifts to capitalize on these openings early.
6. Evolving Customer Relationships and Expectations
While the IoT empowers insurers with data, customers provide that data voluntarily. This means embracing the IoT requires carefully managing privacy concerns and adjusting the customer experience accordingly.
Surveys show many customers still hesitate to share personal IoT data. 80% of consumers have some concern about data privacy. [9] Ongoing auto and home telematics require explicit consent. Smart devices enabling usage-based insurance rely on opt-in programs – and insurers must be exceedingly transparent about what information is collected and how it is used. As data collection expands, communication and permission will be crucial.
The IoT also sets new customer experience standards. Policyholders expect ultra-fast claims resolution when accidents autonomously trigger processes. They want to be able to buy insurance on-demand for quick needs. Premium adjustments based on smart home data require clear communication.
Insurers will need to closely monitor how IoT integration impacts customer sentiment through surveys, focus groups, and other feedback channels. They must be exceedingly thoughtful about data practices and transparent in their usage of IoT-generated information. Customer education around personal data use will be a make-or-break investment.
Those that can build trust and seamlessly embed IoT capabilities into a positive policyholder experience will gain a reputational advantage. Insurers that appear opaque or exploitative of data risk customer defection – surveys indicate 60% would switch providers after a perceived privacy violation. [10] A dedicated focus on ethics and relationship building is paramount.