IoT: the tech foundation of a revolution in insurance

From a technological perspective, IoT (internet of things) could be amongst the most significant developments in an increasingly digital insurance industry. Ushering in a more transparent, accurate and accountable way of doing business, the ability for insurers to measure the activities of its policyholders to grant cheaper premiums, anticipate operational problems before they become costly and improve the overall level of service received by customers is bringing a truly 21st-century touch to centuries-old processes. To help us understand the transformative effect that IoT has had on the modern insurance industry and where it might lead the future of insurtech, Sean Ringsted, Chief Digital Officer at global insurance provider Chubb, spoke with InsurTech Digital on the topic.

A transformation for insurance

Having worked for Chubb for nearly 25 years, Ringsted is well-placed to comment on how IoT is affecting contemporary insurance operations: “This technology will be truly revolutionary for how the industry assesses and prices risk,” he says. “It’s early stages in the industry, but Chubb is leading the way with using IoT technology as part of its underwriting and risk mitigation toolbox.” Perhaps the most noticeable shift, he indicates, will be a more sustainable approach based on an ethos of ‘predict and prevent’ as opposed to ‘repair and replace’. With a network of sensors set up around an insured space capable of measuring quantifiable environmental data, insurers can gain real-time updates on changes in temperature, humidity, water pressure and more. Therefore, small faults which have the potential to develop into larger issues can be quickly dealt with in a timely and cost-effective manner. Ringsted provides this example:

“While a homeowner is away on vacation, a smart device in their home alerts Chubb to a water valve leak. Even before the homeowner knows there has been a flood, Chubb is already responding. In the commercial world, we have also seen the value of averting loss and early detection in properties such as a hospital or an unattended college campus.” This subsequently has the knock-on effect of raising the qualitative value of insurance itself, as the service becomes less focused on paying out claims and more engaged in preventing loss in the first instance. Despite stating that insurance is only beginning to embark in this direction, Ringsted’s vision of an industry revolutionised by IoT may be closer at hand than we think: McKinsey notes in its article ‘Digital ecosystems for insurers: Opportunities through the Internet of Things’ that IoT devices in every facet of modern life are accelerating exponentially in number, “In 2010, people owned 12.5bn networked devices; it is estimated that by 2025 that number will have climbed to more than 50 billion.” As IoT continues to shape how practically every sector generates data, it is safe to imagine that insurance will naturally evolve swiftly with it.

Specific use cases for IoT

The customisable nature of IoT makes it a technology well-suited for tailoring to specific needs and challenges, a core asset in the insurance sector, which needs to address different priorities depending on the client. “Chubb is working with a broad set of IoT solutions to meet the needs of several industry segments, including financial services, education, real estate, transportation, life-science, hospitals, construction and manufacturing,” says Ringsted. Water damage prevention, in particular, has been of particular interest to the company, which estimates a small crack in a 1/8“ pipe could leak 250 gallons of water in a single day. With the number of homeowners claiming for water damage in excess of USD$1mn annually tripling over the last five years (average settlement costs are approximately $89,000), Ringsted highlights this as an example where IoT technology comes into its own. “We believe that water is a significant peril and, much in the same way that smoke alarms and sprinklers in buildings are used to detect and manage smoke or fire, sensors should be used to manage the water peril in buildings – water is the new fire!”

In addition to providing better protection for property, IoT can be used to help shore-up employee safety monitoring, fraud prevention and even to promote a healthier lifestyle via wearables. Of the latter, Ringsted adds, “I think this is an area rich with potential for customers and insurers to develop a win-win proposition to help manage the risk posed to individuals, whether health, fitness or safety. Life insurers, including Chubb, are starting to use wearables to track fitness and encourage or even incentivise healthy lifestyles.” As society continues to mould itself around collected data, which provides us with a more accurate picture of risk and customer behaviour, insurance companies will be able to offer improved products and services as a result. Additional examples of this can be observed from unicorn insurtechs like Metromile, wherein customers pay cheap monthly premiums in exchange for adding a small charge (several cents) for each mile travelled, thereby allowing infrequent travellers to save money easily whilst still providing more peripatetic policyholders with competitive rates. Deloitte encapsulates this in ‘Opting in: Using IoT connectivity to drive differentiation’ by saying “IoT is fundamentally a technology architecture stitching together existing technologies in a specific way so that new benefits can be achieved.”

Meeting customer expectations

“Rising customer expectations in an increasingly digital world are challenging the insurance industry to up its game,” Ringsted says. “As Chubb develops these solutions for our customers, we will also need to be mindful of the operational factors that are required to be successful, such as IT security, data privacy, easy installation and no false alarms.” On this latter point, Deloitte adds that “while most stakeholders might see attractive possibilities in the opportunity for behaviour monitoring across the insurance ecosystem, inevitable hurdles stand in the way of wholesale adoption.” 

In other words: how enthusiastically customers react to the new products, services and capabilities offered by IoT-augmented insurance will be determined by how the traditionally conservative industry chooses to implement changes. Whilst the benefits of wearables or environmentally-integrated sensors are obvious, their general acceptance is far from a foregone conclusion. As such, Ringsted highlights that demonstrating the utility of IoT with timely examples will be important for conversion. “On a college campus, our sensors detected a water leak in a third-floor laundry room in an on-campus apartment. Campus staff and Chubb risk engineers were alerted to problems before they occurred. These are especially important now while the campus remains unoccupied [because of COVID-19].” 

Indeed, the pandemic has provided insurtech in general with a golden opportunity to prove itself, both as a technologically advanced and very necessary solution to modern problems. “In recent months, we have seen that the use of IoT in buildings has proven to be a valuable virtual watchdog. While they were originally intended to serve as back-up to onsite facility staff, sensors have suddenly become the first line of defence,” he adds.

IoT’s place in an ongoing strategy

Although it’s a cliche to call data ‘the new oil’ at the very least it is highly transformative. This is especially true for insurance, an industry built on the availability of information. “IoT sensors provide a new dataset that underwriters didn’t have before,” Ringsted says. “As opposed to looking back and aggregating 10 to 20 years of loss history, IoT provides underwriters with real-time exposure information and insights into risks.” Finding ways to mitigate risk is the insurer’s stock-in-trade and IoT enables them to do it more creatively and effectively. One such example Ringsted offers is Chubb’s fraud prevention measures in Latin America: cargo transported across the continent is equipped with RFID (radio-frequency identification) tags upon arrival at a distribution centre and then accurately tracked throughout its journey. These tags provide transparency so that, should the cargo be stolen or illicitly substituted, it can be recovered with greater ease. “Another example is the underwriting of commercial property,” he continues. “Today, Chubb does not explicitly price for meaningful risks like interior water damage, partially due to the lack of available risk data. IoT is changing that.” Ultimately, however, for Ringsted, IoT’s place in insurance will be determined by its effect on the customer journey. If the quantitative benefits brought to companies by IoT can be effectively applied to achieve qualitatively better outcomes, the importance of the technology for the next generation of insurtech seems beyond question.