The insurance industry is not known for being fast-paced, revolutionary, or innovative in any way. Why would we be? Insurance products and services have changed very little, if at all. We have mastered our skills as a passive risk taker over centuries. Now we are facing the biggest disruption the industry has ever seen — the Internet of Things, or IoT.
How can this type of technology be disruptive?
To answer this, we must first go back and understand how the insurance industry works. Insurance was created to cover the risk of financial loss. Consider any form of insurance — Life insurance covers a loss of income, health insurance covers treatment costs, and auto insurance covers the cost of accidental damage. In order to calculate the probability of this financial loss, actuaries — the mathematicians of insurance — look into the past to predict the future. They study historic claims data, take into account many risk factors, and build models around what they have learned.
Let’s use the example of life insurance. Life insurance is significant because a single policy can run for many decades. For 40-odd years, the risk follows a mathematical model which is based on information provided by a young policy holder who expects a payout when she or he retires. This is truly a long time to predict. In the example of auto insurance, previous data from a similar age group and location as the policy holder, along with a history of accidents in the area, are used to calculate risk.
Why does this matter so much? Think about it this way; approximately 80% of costs borne by insurance organizations are claims disbursements. If the impact of claims is reduced by 1 to 2%, this can translate to millions of dollars saved.
What we are highlighting here is that for centuries, evaluating risk required looking into the past. In the case of health insurance, a younger, healthier policy holder will be offered a lower premium because previous data indicates that this individual is less likely to file a claim.
Let’s focus on the auto sector for a moment. Very little has changed in the past few decades. The layout of roads, the shape of cars, even traffic rules are relatively the same. Yes, safety features have improved, but the risk model still has decades of solid data to follow.
What if we introduce a new and unpredictable risk factor, such as autonomous vehicles?
There is no historical data for autonomous vehicles. Autonomous vehicles behave differently — there are never-seen-before accidents occurring, leading to new claims requests. This poses an equally unique opportunity and challenge to the insurance industry: how can our actuaries provide risk models without historic data to build around?
We return to our aforementioned disruptor — IoT. This technology can offer real-time data that the industry has never accessed before. IoT can calculate the individual risk of the driver and use accurate behavioral data to determine the real risk at hand, allowing insurers to take new risks into consideration and charge fair premiums. Consider the COVID-19 work-from-home situation, where cars sit parked in garages for most of the week. Customers are being charged the same premiums, but if IoT data is used in programs like usage-based insurance, the insurer would know that the car is being used less often, significantly reducing the risk of a claim. Therefore, a lower premium can be charged, which the customer would no doubt appreciate in these challenging times.
Without a doubt, the insurance industry is shifting from being a passive risk taker to becoming an active risk manager. The industry has begun to offer customers valuable information that it has acquired through this real-time data analysis. Insurers now trade discounted premiums for actively reducing the risk. Insurers educate their customers on the importance of sleep and a healthy diet. All the unique data required to manage risk is collected through IoT devices, such as smartwatches. When customers follow this life-changing advice, their individual risk of financial loss is reduced. Fewer claims are filed.
And we know fewer claims means insurers save millions in disbursement money.
Although we have barely scratched the surface of the potential of IoT in insurance, we cannot deny that IoT is the biggest disruptor the industry has ever seen. The availability of real-time, individualized sensor data is doing more than change the risk model; it is transforming our actuaries into data scientists.
The potential for IoT and its new business models is vast within the insurance industry.
Who knows where it will take us next?
You can also check out our other free virtual innovation events by clicking here.