The world is becoming more connected every day, and as the Internet of Things (IoT) continues to gain traction in a variety of industries, expect a lot more everyday objects to be linked to the Internet and to other “things”. IT and business executives are bullish on IoT’s potential to improve business processes, efficiency, analytical insight, and more.
Two examples of IoT already at work and expected to grow rapidly are connected cars and smart/connected cities, which illustrate opportunities as well as challenges for insurance companies and their customers.
With more cities around the world building smart, connected infrastructures—such efforts are underway in places like Barcelona, Hamburg, Copenhagen, Kansas City, Las Vegas, and Tokyo—insurers will be able to gather data about traffic flows, peak travel times, accident probability, and typical commute patterns.
Some of the key opportunities of connected cars and the use of IoT devices to connect a city’s assets include reduction of risk by increasing driver and auto awareness of road conditions and communication of locations of repair crews, malfunctioning signals/equipment and accidents, said Tom Benton, vice president of research and consulting at Novarica, a consulting firm with a focus on the insurance industry.
In fact, the potential impact extends to reconsidering roadmaps altogether.
“As more connected devices come to play, new traffic patterns may emerge as AI [artificial intelligence] redirects vehicles to less traveled roads to lessen congestion and commute times,” said Danny Vicente, global financial services portfolio manager at Cisco.
The rubber meets the road
Insurers are already experimenting with a variety of IoT programs. Companies that have implemented programs for IoT use by consumers include Travelers with various smart home devices and John Hancock in partnership with Vitality for wearables. With regards to connected cars specifically, Benton said, Progressive, Liberty Mutual and others are working with automobile telematics.
“The typical approach is to provide discounts in exchange for access to consumer data, and in the case of auto telematics to provide discounts based on driving behavior,” Benton said. “Some insurers are considering using IoT data for underwriting and for improved analytics for claims.” Future ways to use IoT data could include rates based on real-time driving behavior.
Currently, insurers are collecting automobile telematics, smart home device data, and limited wearables data, Benton said. “Few analyses of costs have been made public,” he said.Future ways to use IoT data could include rates based on real-time driving behavior.“Some commercial insurers are working with device manufacturers and analytics providers to obtain data ready for use in analysis and rating, and expect to provide savings through risk and fraud reduction, along with providing customers with data for improving efficiency of their operations,” he said.
Mariel Devesa, head of innovation at Farmers Insurance
Increased connectivity “is bound to provide more data and potentially new ways to price risk,” said Mariel Devesa, head of innovation at Farmers Insurance. “This data could be used to simplify and streamline the insurance experience for consumers, as well as bring increased sophistication in correlating risk with individual consumer behaviors.”
Aside from gathering data about driving habits — speed, acceleration rates, deceleration rates, fuel efficiencies — and traffic patterns, insurers could also use sensor data to help identify best practices that drivers can do, potentially for a better rate, according to Jessica Groopman, principal analyst in the automation and robotics practice at market intelligence firm Tractica. For example, sensors could notify the policy issuer when drivers get tires changed or change engine oil.
There’s a host of other vehicle and driving-related data insurers could potentially collect based on advances in sensors, Groopman said. For instance, in-car sensors such as camera analytics of drivers and emotion recognition sensors could detect fatigue and stress of drivers.
Then there’s the potential “to include other sensor data from other domains, namely in-home,” Groopman said. “If home and car insurance are covered by the same provider, will in-home sensor data or biometric data be used to model driver risk? To gain buy-in, insurance providers may reduce costs of insurance products, as sensitive sensor data offers novel and highly individualized inputs for risk modeling.”
Privacy concerns: opting inWhat is most critical is for insurance providers is to communicate with consumers. Groopman said privacy concerns fall away if insurance companies capitalize on partnership, education, and consent.
Typically, a consumer must opt in to share their data in order for an insurer to use it, Devesa said.
“At Farmers, we’ve launched Signal, our user-based insurance application in Arizona,” she said. “Through this app, we bring transparency to consumers by equipping them with knowledge of their driving patterns, [which] enables them to take steps to become less distracted drivers.”
In addition to obtaining important driving behavior data, Farmers returns some of that data back to drivers to help them become smarter, safer drivers.
“While auto manufacturers continue to add more and more sensors — thus capturing more and more data — to vehicles, the most useful data points to insurers today continue to be focused on information related to mileage, braking, acceleration, time of day, and phone use,” Devesa said. “In the near term, the focus will continue to be leveraging data to help make drivers safer and to improve their experience.”
Risk mitigation under the hoodFor the concept of connected cars to work well, insurers and cities will need to have the right infrastructure components in place. For insurers, this includes deploying data collection and analytics applications to define risk patterns and associated mitigation of risk.
“Insurers are able to leverage big data tools, such as Hadoop, MongoDB and other frameworks for large amounts of data, along with data lakes and analytics tools to gather, store and analyze IoT device data,” Benson said. “However, many are looking to service providers who will provide data ready for use with their existing analytics and core system capabilities via infrastructure and big data management by the provider.”
Cities need to implement seamless, secure indoor and outdoor connectivity, wired and wireless, and often with ruggedized networking gear, Vicente said. They will also need to have connected devices such as sensors, access points, traffic lights, and surveillance cameras to proactively and retroactively manage traffic and transit conditions, environmental factors, public safety, and other facets of the connected city.
“Among the challenges are the expense of developing the network and computer infrastructure required for these systems, protecting data and privacy of the information being collected, and transitioning property and auto owners to the standards needed for connecting to the ecosystem,” Benton said.
Insurers will be mostly affected by a shift in risk profiles and claims expense levels for connected cars and smart homes and properties, Benton said. While risk might be reduced, replacement costs will include the expense of the devices.
There will be other challenges for insurers. “The connected ecosystem presents a very different customer/user experience and it will take some time to migrate technology,” Benton said. “Systems will need to account for assets that are not yet connected and their effect on the overall ecosystem. As with other scenarios involving customer data, customers will have security and privacy concerns, and missteps in use of data can have strong effects on acceptance of technology.”
Indeed, ensuring data security and privacy will be a major issue for insurers to address.
“As more things connect, more vulnerabilities come into play,” Vicente said. That includes breaches into street lights, traffic lights, buses and other vehicles. Public entities in cities are becoming highly targeted for cyber attacks, he notes, so security measures for preventing, detecting, isolating and protecting against future attack will all be extremely important.
Security of IoT devices “has been brought into the spotlight in recent months, with some public cases of attacks initiated through consumer smart home devices, most of which are not designed with security in mind,” Benton said.
Ultimately, insurers will likely need to work with device manufacturers to emphasize the need for security, along with ensuring any data obtained and stored on the insurer’s network is kept secure and private to the standards set by the insurer for other types of customer data, Benton said.
Data and privacy “is of utmost importance to Farmers and is handled with utmost care,” Devesa said. “We understand the data is confidential and, thus, maintain safeguards to protect our customers.”
With any change comes potentially increased risk, Devesa said, as well as opportunity.
That’s life in the digital business era.