How will the Internet of Things offer insurers added value?
Hélène Stanway, digital leader at XL Catlin (now part of AXA XL) explores the potential of the Internet of Things for insurers and how underwriting and claims could see some of the biggest impacts.
The Internet of Things (IoT) is transforming the way we live and work. And we believe it can change the way risk is managed and underwritten. Last year, the number of connected “things” surpassed the number of human beings on the planet. Many of us live in homes with smart devices that monitor our energy consumption or operate our lighting or wear devices that track our health.
IoT is transformative for business processes too, and is being used to great effect across all sectors. Not only is IoT streamlining many processes for companies, it can also be used as a risk management and loss prevention tool.
Sensors in warehouses can track the movement of goods – and alert risk managers in the event of tampering or theft. Interconnected devices are being used in manufacturing to assess conditions and automatically trigger maintenance procedures. In the construction industry, sensors embedded in concrete during the pouring process can produce data about the integrity of the concrete as it hardens; and those sensors can become a permanent part of the structure, alerting the operator of the building in case of any issues that threaten its stability.
As with any technology change, there are also new risks to be considered and IoT, of course, changes the risk profile of some companies. We have probably all heard the example of the Las Vegas casino hacked via the interconnected thermostat in a giant fish tank. Hackers exploited vulnerability in the thermostat to access data on high-value clientele of the casino. This incident illustrates perfectly the need for risk managers to have a 360-degree view of the IoT risks within their organisations, and also the need for risk mitigation and transfer to be part of the discussion on the use of IoT – upfront.
The management and transfer of risks associated with IoT requires a shift in mindset from all of us involved in the management and transfer of risks. We are talking about the difference between a physical asset and an asset that is both digital and physical.
Some clients already use IoT across all areas of their business. Those clients – rightly – expect their insurance coverage to reflect the changed quality of their risk. Insurers must devise new coverages to address these changing risks, and also examine how traditional products could respond differently.
The convergence of data produced by interconnected systems can greatly increase precision in underwriting risk. And because underwriters have access to data that is “real time” and do not have to rely so heavily on historic claims data, there should also be greater precision in the pricing of that risk.
IoT has the potential to lead to significant changes in the way that risk is underwritten. The mass of real-time data that IoT can provide us with will give everyone involved in the management and transfer of risk a better handle on the exposures.
Take for example, the use of sensors in the transportation of perishable goods. Sensors can be used to gauge the temperature at which goods are stored during transport. Any deviation in that temperature that could be deemed to adversely affect the quality of the goods could be used as a pre-agreed indemnity trigger.
This could, we believe, start a discussion that would bring insurance – sometimes still viewed as a grudge purchase – to the table at the very beginning of the process. For example, sensors can give valuable data about the quality of a heat, humidity or light-sensitive foodstuff – data that is relevant to the price that the vendor can command for their product. Traditional insurance products may not be able to respond to the client’s loss if changes in conditions have altered that quality of their product during transit. But IoT gives insurers the opportunity to design coverage that addresses those risks – in conjunction with the adoption of the technology within the client’s business.
Insurers also must consider how we can adapt the claims process to better reflect the changed risk profile of clients that use IoT. For example, for a logistics company that uses sensors and has a high volume of low severity claims, the insurance industry should examine ways to manage those claims more efficiently. If interconnected devices automatically can recognise and “report” a claim, why, clients may ask, can those claims not be paid automatically – rather than requiring the client to fill in forms and undergo a sometimes lengthy process to get their claims paid.
The convergence of real-time data that the IoT can provide us with has the potential to transform both the underwriting and the claims process – to the benefit of insurance buyers.
Looking to the future
Earlier this year, we announced a partnership with Denver-based supply-chain data platform Parsyl Inc. Parsyl uses a combination of sensing hardware and large-scale data mining to give both shipping companies and their insurers insights into the context and quality conditions of sensitive products as they move through the supply chain.
The predictive analytics that Parsyl uses give marine cargo insurers a sophisticated view of risk dynamics, and the data is constantly becoming more valuable; it gets smarter with every shipment. Marine cargo insurance is one of the sectors of our industry ripe for innovation.
Using data that is predictive, contextual – and robust – can allow insurers to rethink the way we help manage risks for clients and handle their claims. The IoT provides all of us involved in the management and transfer of risk an exciting opportunity to innovate. Let’s seize it.
This article first appeared in National Underwriter and on InsurTech Rising 365 >>