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5 Challenges for IoT in the insurance industry
By Norman Black, Principal Industry Consultant, SAS
For a conservative industry with a reputation of being slow to change, the insurance sector has seen significant disruption and innovation over the last five years. Insurers have been making major investments in digital initiatives as they seek to innovate customer and distribution relationships. Alongside this, a pioneering insurtech sector has emerged to exploit the digital opportunity – sometimes complementing, sometimes competing with the traditional sector. But the most dramatic changes relate to the Internet of Things (IoT).
IoT has started to radically disrupt the traditional insurance business model and modernize processes, especially in risk assessment. For insurance, "things" in the IoT include devices like wearables, sensors in household appliances and connected vehicles that use telematics.
Insurance executives face a major dilemma with the emergence of IoT.
In every insurance sector, IoT promises to substantially reduce losses and transform the relationship with policyholders. For example, recent automobile insurance commoditization has placed downward pressure on premiums. And IoT allows insurers to provide value-added services, such as driver feedback, that can lead to a closer, more proactive relationship with policyholders while generating new revenues.
These advantages apply across the organization. For actuaries and underwriting, IoT provides rich new data to more accurately assess and price risk. From a claims perspective, IoT can power automated loss notification based on sensor data. For marketing executives, IoT brings opportunities for unprecedented insights into customer behavior.
Significant progress has been made in bringing these new apps to fruition. But IoT adoption in insurance as a percentage of total business remains in the early stages – it has not progressed at the rates many industry commentators anticipated. Widespread adoption will come about when the industry overcomes the following five challenges:
1. Disruption to existing insurance business models
Insurance executives face a major dilemma with the emergence of IoT. The benefits for insurers center on risk mitigation and lower claims. But the competitive nature of the insurance industry means that fewer losses will lead to lower premiums over time. Insurers will look to replace shrinking revenue. While the abllity to create new, revenue-generating services from IoT is largely unproven, the potential of IoT-based insurance services should help drive its adoption.
To complicate matters, insurers will encounter new competitors who are already focused on the IoT opportunity. Those include auto manufacturers, home security companies and digital companies like Google and Amazon.
Finally, IoT promises to provide discounts for individuals who are safe drivers or exhibit healthy lifestyles. But unless IoT can change behavior across an entire population, individuals or businesses found to be a bad risk could be more heavily penalized than in traditional insurance models. This may result in action by governmental and regulatory bodies – and could cause a backlash among the general public, hindering the growth of insurance products linked to IoT.
2. Data management
The insurance industry has always been data-centric. In the past, insurance companies relied on historical data from policy administration solutions, claims management applications and billing systems. Newer, bigger data sets from IoT sources add a new dimension. The challenge is to process this explosion of data in a timely manner to make the right business decisions. Unfortunately, many insurance companies struggle to process and analyze even traditional data.
Addressing the challenges arising from big data volumes generated by IoT requires an enterprise data management strategy. This is important in merging the new IoT-sourced data with traditional data like customer and policy records. This data management strategy should provide unified solutions, tools, methodologies and workflows for managing IoT data as a core asset.
3. Data ownership
Data created and made available through IoT enables insurers to better understand risk. But data ownership remains a challenge for many insurers.
The big question is, “Does the data belong to the insurance company or the customer?” Customers may argue they have rights over their personal data and need access to historical data on their claims history to switch insurers at renewal. This will be an interesting discussion point for insurance companies and regulators alike – particularly in light of laws like the EU General Data Protection Regulation.
The insurance industry was one of the first business sectors to be regulated – and it continues to be closely scrutinized by public authorities worldwide. Many insurance authorities will struggle with how to regulate the data created by sensors.
While regulations already cover data privacy, the more invasive nature of IoT data can present many new challenges. Indeed the mobility of IoT data may even lead to issues on the regulation of cross-border data; for example, when a driver travels to another country.
5. Data security and fraud
As IoT becomes more widespread it will attract more potential for cyberattacks and fraud. The vast quantity of data that will flow between the connected vehicle, connected home and the insurance company is vulnerable to interception. The new IoT-based products that insurers introduce are also likely to lead to new types of application and claims fraud. Insurers will need to invest more heavily in IoT data security and fraud protection.
While realizing the full potential of IoT for insurance will not be without challenges, its early exploitation is already producing positive results. IoT undoubtedly makes losses easier to predict and prevent. Smart home devices, wearables and driverless cars will usher in a shift toward a new type of customer relationship where insurance becomes less reactive and more preventative. The winners will be organizations that overcome today’s obstacles to embrace change and capitalize on uncertainty.