How IoT is Shaking Up Insurance Rules

Understory is just one example of how big data and the Internet of things (IoT) will revolutionize insurance. The weather analytics company uses a network of ground-based sensors to detect weather conditions below the clouds where satellites can’t see. The data it gathers from these local devices complements satellite and radar observations to pinpoint the impact of weather events with unprecedented precision. For example, in a hailstorm, Understory’s sensors can identify which areas have been hit by the largest hailstones, which carry the greatest potential for damage. Armed with this information, insurers can dispatch their adjusters to the areas that demand the most immediate attention and require quick repairs to prevent further damage. Savings from efficiency and fraud avoidance average 15% to 30% per storm.

Few industries are set to be more transformed by technology than insurance. The foundation of the insurance industry is measuring risk, but until recently that has largely been done at a high level, with large amounts of data synthesized to extract broad trends and applied to broad groups of policyholders.

That’s all about to change. Insurance will increasingly move toward markets in which premiums and benefits will be calculated based upon observed behaviors rather than probabilistic formulas. Intelligent devices and predictive analytics will drive this transformation.

Consider Progressive Snapshot, an on-board driver monitoring system introduced by Progressive Insurance in 2011. Customers who consent to participate in the program have a small tracking device installed in the engine of their vehicles that monitors variables like speed, acceleration and braking pressure. Drivers who adhere to the rules of the road are rewarded with discounts. Progressive benefits from attracting more safety-conscious customers. The company has handed out over $600 million in discounts, and spawned many imitators.

You can imagine how this same idea could be applied to different scenarios. For example, connected fitness trackers can provide insurance companies with real-time data about the exercise habits of their insureds, enabling them to customize policies to certain lifestyles. UnitedHealthcare offers participants in some of its employer-sponsored wellness programs up to $1,500 in annual savings for allowing the company to peek at their activity measured by a Fitbit. In the future, connected scales and blood pressure monitors may reward policyholders for weight control.

The next frontier may be sensors that you swallow. The U.S. FDA recently approved an ingestible tracker that monitors patients’ compliance with their medication regimen. While no insurer is yet monitoring customers at this level, it seems only a matter of time until someone takes the plunge.

IoT will also uncover new innovations in property insurance. Smart sensors can already report on the presence of smoke, heat and carbon monoxide. Insurers who tap into these information streams can apply predictive analytics to look for signs of a fire risk. They can do the same for expensive insured machinery, giving premium discounts to companies that allow them to tap in to machine generated sensor data. For example, sensors embedded in truck tires could warn of a drop in pressure or extreme tread wear, enabling the insurer to immediately warn the driver to take preventive measures.

Realizing the promise of these technologies presents significant technical challenges, starting with building the infrastructure to monitor a vastly greater amount of data than insurers handle today. The Internet of things has given birth to new kinds of network architectures – Cisco calls it “fog computing” – to accommodate this need by processing data at different points in the network so that the cloud doesn’t become a choke point. Insurance companies that are interested in the potential of connected devices should already be planning architectural changes to accommodate the coming data flood.

There are also privacy issues to consider. Collecting data about policyholders at such a personal level will place new demands upon security operations to protect data in transit and at rest. There will also be legal and regulatory issues to resolve that we can barely imagine at this point.

But choosing not to participate in the IoT revolution may not be an option. Technology is already rewriting the rules of insurance, and companies that don’t get on board may quickly be left behind.

IoT & Insurance in a Glance
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of savings from prevention of storms

$600 million in discounts to connected drivers

$1,500 in annual savings for connected patients

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