The Internet of Things

The Internet of Things: What is this thing?

January 2015    |    By Craig Harris

The Internet of Things is a bridge between the old economy of bricks, mortar and physical objects and the new economy of mobile devices, data networks and analytic engines. It’s estimated that billions of “things” will be linked to the Internet within the next five years through sensors located in cars, homes and businesses. How will this connectivity and data affect insurance companies, brokers – and consumers?

The frenetic pace of technological change often begs the question of the “next big thing” in IT – is it merely a futuristic vision or imminent reality? In the case of the Internet of Things (IoT), the answer is both.

There are already plentiful examples of the IoT in action, defined in a recent report by research firm Celent as the integration of three components: physical objects with networked sensors, transmission of information to data stores and analytic engines that examine the data and provide a feedback loop. Industries ranging from agriculture to automotive to appliance manufacturing have installed devices that continuously monitor the functioning of equipment and send data to a source for analysis and action.

However, the insurance industry tends to rely on actuarial data and static information gathered at the policy application stage for risk profiling, underwriting, pricing and claims management. When it comes to the IoT and capitalizing on the real-time data created by sensors and networks, there is a sense that insurers are still in the infancy of evolution.

“Only a small minority of insurers are investing the resources to do the appropriate due diligence on IoT with respect to the underwriting,” says Kevin Kalinich, global practice leader, network risk/cyber insurance for Aon Risk Solutions. “The majority of insurers base their rates on actuarial data. But you will never have 20 years of actuarial data with IoT because it changes dramatically and in real time.”

The p&c industry insures a lot of “things.” Gartner estimates that the IoT will include 26 billion units installed by 2020, and by that time, IoT product and service suppliers will generate revenue exceeding $300 billion. According to Cisco research, over 50 billion devices will be connected to the Internet by 2020. Whatever the number, all of those devices will be generating various forms of data – numerical, text, audio, video. One of the key questions – will any of this help insurers in underwriting or pricing risk?

“For insurance, the parts of the puzzle are just slowly falling into place,” says Donald Light, an insurance analyst and author of the Celent study, The Internet of Things and Property/Casualty Insurance: Can an Old Industry Learn New Tricks? “There have to be sensors, there has to be a network, it has to be secure. Ten years ago, nobody would have dreamed of this. Now, people are talking about the collection and analysis of this data,” he adds.

In an increasingly gadget oriented society where personal and commercial lines consumers demand mobility, remote access and interaction between devices, the connectivity push will only continue. This trend will be compounded by the relatively new capacity to monitor virtually anything – checking a person’s heartbeat or temperature with wearable technology, unlocking doors with mobile devices, tracking (or controlling) car movement with sensors, remotely monitoring complex building systems for heating, ventilation and air conditioning (HVAC), security, smoke detection/fire.

“One opportunity is how insurance is going to leverage data for more precise, customized, one-to-one underwriting,” notes Denise Garth, a partner and chief digital officer for technology research firm Strategy Meets Action (SMA). “The bigger issue is how insurers can figure out how to get in the game of IoT.”

The space-age predictions of the connected home, driverless car, smart cities, self-monitoring commercial building or machinery suddenly don’t seem that far off. The IoT opens up a world of opportunities, and a potentially disruptive environment, for the insurance industry.

“If insurers can access this big data information, they would really be able to understand products and pricing around it,” observes Michael Petersen, managing director and national leader, communications, media & technology for Marsh Canada. “I think we all understand there is a great opportunity here – if you get it right, there can be a huge payoff.”

A tangible example of IoT in the insurance world is vehicle telematics. According to Towers Watson, the pace of adoption of usage-based insurance (UBI) telematics has accelerated exponentially in Canada in the last year. A survey from the consulting company released in April showed that 56 per cent of Canadians expressed a “strong interest” in buying a UBI policy.

“The IoT example that is the furthest along in the insurance industry is telematics in vehicles, in both personal auto and commercial fleets,” notes Light, who in his report divides ‘things’ into four categories – living, moving, stationary and transmitting. “In fact, there is some evidence that commercial vehicles may be better candidates for telematics adoption.”

Vehicle sensor devices have vast potential in providing services other than just insurance, according to some sources. “Telematics will expand beyond . . . just car insurance,” noted Randy Carroll, [at the time of interview] chief executive officer of the Insurance Brokers Association of Ontario (IBAO). “A telematics device that is used for insurance purposes could also be used as an anti-fraud measure or theft deterrent, a roadside assist device or vehicle maintenance diagnostic tool. Vehicle tracking, vehicle recovery and accident reporting could all be enhanced if the proper telematics device is used.”

Garth asserts that telematics and UBI are only scratching the surface of what this technology can do, in terms of business assumptions and revenue models. “Interestingly, UBI is no longer limited to vehicles, but is now being considered for home, medical, and life insurance products,” according to a research brief Garth authored for SMA called The Internet of Things: Creating a Connected World.

“Sensors like telematics are all about the connected car, the connected home, and the connected life. UBI is the precursor to a broader impact of sensors and the Internet of Things that will allow us to connect the dots between the data for new customer products, services, outcomes and experiences,” the study noted.

The “connected home” has also seen a spate of recent activity, with some suggesting this is an area ripe with opportunity for personal property insurers.

In June 2014, American Family Insurance and Microsoft launched a “business accelerator” for tech startup firms focused on home automation. American Family Insurance, the eighth largest homeowners’ insurer in the U.S., will provide industry experience, consumer insights and homeowner knowledge to companies focused on building safer and smarter homes, according to a release.

In January 2014, Google purchased Nest Labs, a maker of “smart” thermostats and smoke alarms, for a reported $3.2 billion. Analysts noted that the acquisition, the second biggest by Google since buying Motorola Mobility, marked the Internet firm’s foray into the next generation of smart home devices, including sensors and networks for remotely controlled appliances, door locks and other everyday objects.

Lost in the shuffle of the recent iPhone 6 release and the wearable technology of the iWatch, Apple also unveiled HomeKit, its iOS-based protocol for hooking up connected gadgets in the home. Other software companies have jumped on board, including August Smart Lock, an electronic lock that provides keyless entry into the home through Apple mobile devices.

What does this mean for personal property insurers? Light notes that the information coming from the next generation of Internet-connected devices will provide a slew of data to insurance companies. Is the home well maintained? Is it secure? Is there a consistent temperature level? Are there moisture detection devices in basements and around washing machines and dishwashers? Are there advanced smoke and carbon dioxide detectors?

“The real question is when insurance companies will have enough confidence in their analysis of the data generated for underwriting and pricing,” Light says. “I think IoT will slowly revolutionize how risks are priced and underwritten for property insurance.”

“The implications are quite interesting when it comes to information and monitoring and what that could mean for loss and risk,” Petersen notes. “For example, something like a sewer backup system could be set up to notify someone on a mobile device, but who is going to be notified? Who will ensure it is turned on and functioning properly?”

“There may be a benefit, but that data has to be useable; it has to be collected back and used by the insurance company to tailor products that fit consumer needs,” he adds.

The potential of IoT may be even greater in a commercial lines for property, machinery and equipment. Many larger buildings already have sophisticated operational systems in place that monitor HVAC, security, fire/smoke detection, sprinkler systems. In most cases, that data is already being collected and examined, at least by the owners or building management companies. Light explains there is no technical reason that information could not be made available, “either directly or in meta form,” to insurers.

“Insurance companies don’t necessarily want to hire an HVAC expert to parse the data for all the clients they insure,“ Light notes ”However, if you have data aggregators outside of the insurance industry, they could, in effect, create safety scores or loss control scores that provide valuable data. This could factor into pricing, risk analysis and underwriting.”

The examples of industries and commercial sectors that the IoT could apply to are virtually endless. Kalinich cites the case of mining in Canada and the real possibility of using robotics and driverless trucks on remote sites in northern regions.

“This is already being discussed in the industry,” Kalinich notes. “I think where the IoT will really change things is in the industrial Internet. Huge machinery, huge operations will benefit from this.”

Loss prevention and risk management represent additional areas of potential advantage for commercial clients. “By definition, you have hard-headed business people who may be risk managers or have a financial interest in lowering risk costs,” Light says. “The IoT value proposition for buildings, operations, general liability, security – these are all areas that companies are very receptive to in terms of improved loss control.”

The prime opportunity for insurers in IoT is in information not objects, according to several sources. And that data must be tied to risks, hazards or exposures.

“The big money is less in the devices and more in the acquisition and processing of data,” says Light. “The devices in most cases are pretty cheap already. However, putting the data in the proper form for obtaining insight is where the real value is going to be. You have to be measuring things that have a pretty clear relationship to loss or hazard,” he adds.

One of the key questions is how far along insurance companies are in incorporating IoT and big data into their underwriting, rating, risk analysis and claims management/loss prevention systems.

“Insurance companies will have to wake up; they cannot focus only on actuarial data,” Kalinich says. “There has to be a combination of actuarial experts with technology, privacy and legal experts to understand these risks. The impact of this is going to be felt everywhere – in engineering, design, architecture, commercial devices.”

“It costs an insurance company an awful lot of money to get it wrong,” Petersen says. “You can spend a lot of money on the software and hardware, but the data could be useless or doesn’t help the product.”

Garth notes that much of the data coming from the IoT is from other industries –automotive, manufacturing, industrial. It is also hitting insurers with the velocity, volume and variability of big data.

“I think insurers are very much beginning to understand the importance of big data from the Internet of Things,” Garth says. “But frankly, there is still a lot of work to do in terms of their systems, common data models and definitions internally. They still have to achieve a level of data mastery,” she adds.

“Mastering” the big data emanating from the IoT is not only an opportunity and challenge for insurers, but also for brokers.

“Brokers embracing data will see a positive return on their investment,” notes Carroll. “The more brokers know about their customer, the easier it will be to meet the ever changing expectations of today’s consumer. The challenge is understanding what data can do and the risk is not keeping up.”

To get the data in the first place, insurers and brokers will need to encourage the use of interconnected devices in the homes, cars and businesses of customers for insurance purposes. Much like earlier experiments with vehicle telematics, there is a need to establish a comfort level with clients, as well as addressing potential issues of invasiveness and privacy.

“Insurance companies will want to know this information, not just about commercial but personal clients,” notes Kalinich. “IoT can tell who has a carbon monoxide detector in their homes, but it can also track what kind of food is in your refrigerator. These can be positives, but they can also be invasive.”

“People need incentives,” Light notes. ”You have those who are gadget oriented and get excited about new connected devices. Others are going to say, ‘I am paying X dollars per year for my insurance, and I could get 20% discount if I install some of these devices.’ That might be worth it for some people to be early adopters,” he adds.

The quid pro quo for discounts is data. And some brokers are concerned about who owns that data and how it will be used in the new world of IoT.

“You have to balance premium discounts with the fact that the company owns your data, your profile,” says Kat Macaulay, a digital communications specialist with Rogers Insurance. “What will happen with that data? Could it be sold? That is what consumers need to be aware of when we have this data gathering. Who owns the data, and will my privacy be protected?”

Garth suggests that the IoT may usher in a new era of data ownership and stewardship guided by consumers. “There is a view that a lot of this data is going to be owned and managed in a digital environment by the customer, and the customer will authorize access and use of that data,” she says. “They will expect something in return, whether it is a discount or service.”

That represents a dramatically different equation for insurers in the status quo of data collection. “We are going to have to rethink the purchasing of all these data sources from third party providers that have aggregated lots of information,“ Garth says. “We may actually have to consider how we will have to get real-time data from our customers, not just at the policy application stage.”

Another major obstacle for the widespread adoption of IoT in insurance is the security issue of sharing information across multiple devices and networks. A Hewlett-Packard study released in July found that “70 per cent of the most commonly used IoT devices contain serious vulnerabilities.”

The survey did a scan of ten of the most popular IoT devices, such as televisions, webcams, thermostats, remote power outlets, sprinklers, door locks, home alarms, scales and garage openers. On average, 25 vulnerabilities were found by researchers in HP’s study of the top ten most popular IoT devices – with a total of 250 security concerns discovered.

“There is a great quote about three simple laws – ‘law one, everything on the Internet can be hacked. Law two, everything is being connected to the Internet. Law three, everything else follows from the first two laws,’” Petersen says. “The interconnectivity that is going to take place presents a very interesting situation. It’s the whole: ‘do you know who your fridge is talking to?’”

“The fact is that any devices can fail, and any networked process can be hacked,” Light comments. “These risks are probably more acute on the commercial side because the systems, sensors and data they already have were not designed to be secure. They were not designed to be shared. Today, we live in a different world.”

For Garth, the greater risk may be that insurers are missing the boat on IoT or merely using the big data from interconnected devices to tweak existing insurance products.

“If, in fact, the devices can be attached to things in the home, car, business, we can begin to create new services and product offerings that actually provide real value,” Garth observes. “They can help you reduce your risk and potentially even eliminate your risk. Those services can become a driver of the relationship for insurance, so the product becomes more of an add-on. I think it is an opportunity to re-imagine the product and the business model for insurance.”

The potential threat from other industries or sectors that have widely embraced IoT is whether these companies will be competitors or collaborators with insurers.

“In this new world, businesses are going to begin to offer solutions that have the IoT connected and services tied to that,” Garth says. “I think it opens up an opportunity for other entities to manage the customer relationship, the customer loyalty, the customer experience. Insurance may be just a piece of the bigger picture, a spoke on a hub.”

Garth notes that surveys done by SMA show insurance companies are dipping their toes into the IoT waters. In a recent study of emerging technologies, the firm found that 20 per cent of insurers surveyed were currently piloting, testing or deploying IoT projects. That number rose to 50 per cent over a three-year future timeframe.

“I put the tipping point at 30 per cent,” Garth notes. “I think there are a lot of insurers doing stuff quietly. But when you have one-third of the market doing something, it becomes very significant.” (Major p&c insurers in Canada contacted for this article did not comment at press time).

Others argue the evolution of IoT within the p&c insurance environment will be a slower process. How long it takes for sensor-equipped devices to be widely installed in homes, cars and businesses and whether the ensuing data will be useful for underwriting, pricing and claims/loss control are unanswered questions.

“I think the analysis of data for pricing and risk outside of telematics in vehicles is really at an early stage,” Light says. “It is kind of like, ‘oh, we can get this data, what do we think this could mean in terms of losses?’ There are some experiments and early initiatives going on at some insurance companies,” he adds.

“The reality is there are a lot of things that will have to happen before this takes place,” Petersen says. “It has to involve new economy firms working with old economy firms. The insurance industry doesn’t have the money to do it itself; they may be able to buy access to big data to understand the information. They can then decide if they can use it for things like finding the better customers and building better risk profiles.”

“I believe we are at the infancy of this, but you can’t just throw up your hands and say, ‘we don’t have all the answers, so there is nothing we can do,’” Kalinich concludes. “You have to think about it. The insurance industry will have to figure out the implications.”

Further reading

Accenture Insurance Blog (tag: Internet of Things)
Insurance & Technology - Insurance, Innovation & the Internet of Things
Property Casualty 360 - The Internet of Things: What the heck is a thing?
SMA Blog - The Internet of Things: Creating a Connected World

Please note a version of this trends paper has previously been published in an industry publication.

ADVANTAGE Monthly trends papers

This paper is part of an open online library of ADVANTAGE Monthly trends papers, published by the CIP Society for the benefit of its members and of the p&c insurance industry. The trends papers provide a detailed analysis of emerging trends and issues, include context and impact, and commentary from experts in the field.

The CIP Society represents more than 18,000 graduates of the Insurance Institute’s Fellowship (FCIP) and Chartered Insurance Professional (CIP) programs. As the professionals’ division of the Insurance Institute of Canada, the Society’s mission is to advance the education, experience, ethics and excellence of our members. The Society provides a number of programs that promote the CIP and FCIP designations, continuous professional development, professional ethics, mentoring, national leaderships awards, and research on the issues impacting the p&c insurance industry in Canada.