The steady advance of the internet of things (IoT) presents a huge number of opportunities for insurers – as well as threats, according to a digest published by Efma*.
The rise in connected homes, connected cars and the use of health and fitness tracking technology will change the nature of insurable risk and insurers need to prepare to remain relevant and benefit from the IoT phenomenon, said the digest, which provides a compilation of some of the latest research and analysis about IoT.
With IoT, insurers have the chance “to create a new, more profitable business model that leverages data to create a more personalized offering and, in turn, facilitates better customer relationships,” said Vincent Bastid, Efma CEO, in a statement in the report, which is titled “The internet of things: Disrupting insurance models.”
Bastid emphasized, however, that success won’t come easy. “It’s likely that premiums will reduce quite significantly and there are significant implications in terms of data management, privacy and security,” he said.
“Laden down with traditional processes and archaic systems, traditional insurers will have to think outside of the box in order to avoid being disintermediated or attacked in their market by newcomers or incumbent players who manage to capitalize on the potential of IoT first,” cautioned the Efma Digest.
The speed of the growth of IoT shows no signs of abating. Analyst firm Gartner predicts that 20.8 billion “things” will be connected to the internet by 2020, which equates to approximately six devices for every person on the globe (according to a Munich Re report, titled “The Internet of Things and Life/Living Benefits Insurance.”)
“By 2035, it is expected that there will be one trillion connected things, with 100 million supporting apps,” said the Efma report, quoting “The Insurance Implications of the Internet of Things,” published by the Professional Liability Underwriting Society (PLUS).
With such numbers in mind, the report said, it is understandable why many companies are looking to IoT as a potential new profit stream, investing billions to develop new systems, Efma said.
New Source of Revenue
Connected insurance is one of the fastest growing sectors of the personal lines business, added the report, which quoted Accenture, saying that over the past 12 months, insurers throughout the world have launched a multitude of connected products and services interlinked via IoT.
“Our research shows that 45 percent of insurers believe this trend will be a major driver of revenue in the next three years,” said Jean-Francois Gasc, managing director of Accenture’s strategy for insurance in Europe, Africa and Latin America, in a recent blog post.
“Nearly half of the more than 300 property and casualty, as well as multiline, insurers we canvassed already have connected telematics solutions on the market or in development,” Gasc continued. “Over a third of the more than 100 life insurers we interviewed offer their customers connected solutions using wearables, or plan to do so.”
The Efma report showcases some innovative and collaborative approaches that insurers are using to rise to the IoT challenge. “Some, such as BNP Paribas Cardif, Europ Assistance Group, and Desjardins Assurances Générales, are using telematics to provide a proactive approach to home, health and vehicle insurance,” according to a press release issued by Efma with the report.
“Others have developed intelligent virtual assistants – such as USAA, which provides intuitive responses to customers’ requests, and Crédit Agricole Assurances – Pacifica, which has harnessed geolocation and tracking technologies to enable customers to request assistance in the event of a vehicle accident or breakdown,” Efma continued.
Other companies, such as Allianz France, are using drones “to quickly and safely assess the damage to large structures.”
Challenges and Threats
The Efma Digest said there is no question that the “IoT will disrupt the insurance industry, creating a series of threats and presenting a number of challenges that insurers will have to work hard to overcome.”
The biggest threat is that of disintermediation. “Retail giants, such as Google, Amazon and Rakuten, have already made advances into insurance or are expected to do so,” said Efma and Capgemini’s 2016 “World Insurance Report.”
“Of all the possible threats, insurers view Google to be the most significant (40.8 percent), followed by self-insurance by product manufacturers and Amazon,” said the “World Insurance Report.”
“These companies have unparalleled expertise in catering to customer preferences, building up their brand value, and analyzing vast amounts of data, making them potentially formidable players, especially in the customer-facing end of the insurance business.”
Efma quoted an Oliver Wyman report, which explained that “companies like Google, Apple, Facebook and Amazon are able to collect increasingly refined data,” generate new relevant data and “ultimately extract the intelligence required to feed their business models in real time.” (The Oliver Wyman report is titled “The Internet of Things: Disrupting Traditional Business Models.”)
“Players like Google will very soon be able to calculate the cost of risk precisely,” said the report. “…In this scenario, insurers would lose control of pricing and be relegated to the low-value-added role of risk holder.”
The Efma report listed some of the additional threats resulting from the IoT phenomenon including:
Reduced premiums. “Advances in safety techniques will impact accident frequency, reducing losses and, thus, premiums,” said Efma, quoting a report published by A.T. Kearney (which is titled “The Internet of Things: Opportunity for Insurers.”)
Losing control of data. Efma quoted the Munich Re report, which asked the question: “Who owns the data?” Is it the device that emits the data, the service provider that transmits the data, or the company that uses the data to improve customer service?
“Determining who owns the data will go a long way in determining who is responsible for data security and privacy issues,” said Munich Re. “In addition, as more and more devices become connected, the likelihood of a company using this data becoming a target of a cyber attack also rises.”
Privacy and security. To transform their business to leverage IoT, “insurers must ensure that data privacy and security needs are met in terms of protection of data, and issues dealing with errors and device failures,” said the Efma Digest, quoting a whitepaper from Tata. “As the IoT gets personal, insurers need to have access to all information on customers to calibrate and arrive at the personalized cover and cost,” said the whitepaper, emphasizing, however that privacy and security of the data will be critical to get customers to share data.
“Internet-based connectedness offered by smart devices across connected homes, auto and health increases the potential of a cyber attack,” which can inflict property damage and physical injury on the consumer and outweighs any benefits provided in terms of risk prevention, continued the Tata whitepaper. (The paper is titled “Re-Imagining Insurance in the Connected Era of Internet of Things.”)
A New Value Proposition
“Insurers must thoroughly rethink their value proposition to take account of the unprecedented disruption of the industry that IoT will cause,” the Efma report said.
“The value proposition, which covers not only products and services but also the customer experience, must be fundamentally changed to migrate to more personalized, on-demand service while improving the core business of the insurer,” Efma continued.
The report published by A.T. Kearney suggested that insurers’ long-term success will be their ability to differentiate themselves in an increasingly commoditized market – and the IoT is one way to achieve that differentiation.
A.T. Kearney suggested adopting a mindset of continuous renewal because the less predictable business environment will favor players that can execute strategies quickly and flexibly. The business environment will change, while the innovation journey will take years, the A.T. Kearney report suggested.
“It is crucial that insurers develop strategic plans to address technological disruptors such as IoT and their related risks and opportunities,” said the Efma report, quoting A.T. Kearney. “The winning plans will define an overall path for each asset (car, home and self), allowing for differentiated approaches, the ability to be informed and adjust direction, and flexible investment and resource planning to navigate a new and evolving landscape.”
* The entire Efma Digest is available only to members of Paris-based Efma. Established in 1971 by banks and insurance companies to facilitate networking between decision-makers, Efma has a membership of more than 3,300 brands in 130 countries.