The Internet of Things (IoT) represents a seminal moment in the history of the insurance industry. As connected sensors and devices proliferate across the economy, they are generating unprecedented data providing insurers with an opportunity to radically rethink risk evaluation, customer engagement, and business offerings.
Industry practitioners expecting a mere incremental evolution gravely underestimate IoT’s revolutionary impact. While efficiency gains will squeeze margins on some legacy products, wholly new data-enabled business models focused on risk prevention over claims payouts offer blue ocean growth prospects to replace outdated revenue streams. Companies proactively harnessing real-time telemetry today will dominate the next generation of insurance.
The Explosive Growth of Insurance IoT Adoption
While still early stage, adoption of internet connected sensors and data collection devices is rapidly gaining steam across insurance lines:
- Auto Insurance – Usage based insurance (UBI) tracking mileage, safety metrics via telematics has risen over 200% between 2018 and 2022 according to surveys of 70+ US auto insurers by Willis Towers Watson, with further exponential gains forecast in coming years.
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Life & Health Insurance – 34% of life insurance applicants currently utilize connected health devices according to the 2021 Insurance Barometer Study by Life Happens and LIMRA, while health insurers are increasingly basing premiums on policyholder fitness tracker data from partners like John Hancock Vitality and Humana Teamed Up with Garmin.
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Home & Commercial Insurance – 5G-enabled real-time risk monitoring and prevention services are forecast to grow over 400% by 2026 per analysis by MarketsandMarkets, as leading carriers like Hippo build connected-home telemetry and analytics into core insurance offerings.
Sustained high demand from early adopters will continue driving exponential IoT adoption curves across verticals. Gartner forecasts 14.2 billion total enterprise and automotive connected IoT devices in use by 2022 while McKinsey estimates IoT has a total economic impact approaching $12 trillion over the next decade – including $1.5+ trillion specifically within insurance.
Insurers not actively strategizing around IoT integration today risk missing this disruptive leap and ceding market control to more forward-thinking competitors in the coming years.
Key Benefits Driving Insurance Industry Adoption
Beyond representing the future, the IoT offers concrete value driving adoption today:
1. Substantially Enhanced Risk Modeling
IoT reveals behavior of insured assets and individuals at an unprecedented level compared to traditional demographic data sets (as visualized in Figure 1 below). Location tracking provides miles driven metrics superior to historic odometer checks for auto carriers. Apps can verify health club check-ins compared to policyholder self-reporting.
McKinsey has found IoT data reduces loss ratio by 30–40 percent due to enhanced risk segmentation while also achieving 15 percent savings in administrative costs. However, to realize the full "Outside View" potential, insurers must integrate and analyze IoT streams together with existing internal data across channels rather than in a siloed manner.
2. Tailored Premiums and Real-Time Policy Adjustments
By aligning premium pricing directly with individual behavior of unique assets like vehicles or smart factories, insurers can transition away from reliance on broad demographic aggregates that fail to distinguish between a teenage speed racer and a grandmother driving once weekly to church.
Usage based coverage spans:
- Auto insurance cents per mile or hour used
- Equipment failure policies based on live production monitoring
- Real-time home coverage increases during events like floods
Pay as you go models mean those using assets and policies less subsidize no longer those using them more frequently as with traditional premium structures. With IoT connectivity, such adjustments can be made dynamically in real-time rather than relying on intermittent reporting.
3. Proactive Loss Prevention Interventions
Perhaps most disruptive of all, IoT allows insurers to leverage data to avoid losses before they even occur – transforming insurance from reactive claims payouts to proactive risk consulting relationships. This places insurers in a privileged position to provide value-added services improving consumer and corporate policyholder safety, asset integrity, and operational resilience – not just financial compensation after incidents.
- Predictive maintenance – IoT pattern detection helps insureds prevent asset failure
- Physical risk monitoring – Alert systems trigger human, automated responses
- Behavior modification incentives – Promoting fitness, safe driving
In a world of continuously connected telemetry across the economy, insurers have an opportunity to grow into broader risk management partners to customers rather than remain relegated to occasional claims checks.
4. Advanced Automation and Fraud Reduction
By automatically documenting insured events as they occur through digital telemetry and triggering automated responses via smart contracts, costs throughout the insurance value chain plunge. McKinsey estimates$140 billion can be reduced from current expense ratios via IoT-enabled automation.
Submitting claims becomes plug and play via APIs rather than manual paper forms. Automated fraud checks also reduce overpayment outlays by estimated 15 percent. Especially when incorporating external data, inaccurate claims drastically decline: networked sensors can independently validate facts around accidents, weather damage, deliveries, and so on – limiting manipulated narratives.
Overcoming Key Challenges
As with any transformation, obstacles exist. Proactive mitigation of these barriers paves the way for long term success:
1. Cybersecurity and Privacy
While enabling superior transparency into policyholder behavior, IoT also represents mass collection of sensitive personal information – locations visited, conversations had, purchases made, media consumed and more. The consequences of data breaches or misuse range from PR crises to skyrocketing cyber insurance premiums.
Architecting analytics environments according to leading data protection frameworks like NIST CSF or ISO 27001 are critical first steps. Equally important is ensuring culture and policies align across partner ecosystems to jointly uphold ethical usage – easier said than done but foundational to trust. The calls for insurance IoT regulation grow stronger each passing cyberattack headline.
2. Legacy Modernization Growing Pains
Transitioning from established data models, risk engines, and product configurations designed around annual snapshots introduces unavoidable complexity. Fresh IoT capabilities straddling telecom and software stacks compound talent shortage gaps for many insurers.
Rather than boiling the ocean, carriers should strategically identify one or two high impact IoT applications according to current capabilities – whether enhanced pricing algorithms or data-driven customer engagements. Analytics sandboxes isolated from production let teams build skills before reconstructing core systems like underwriting from the ground up.
3. Long Term Margin Concerns
In the long run, the preventative insight IoT offers will squeeze risk pools and margins on legacy insurance products. Premiums must ultimately align with actual exposure math – forcing those failing to innovate towards new business models and bankruptcy, per Swiss Re sigma studies.
However, rather than resist this creative destruction of outdated industries, forward-thinking insurers recognize IoT‘s disruptive forces opens up white space opportunities to lead risk management innovation and provide unprecedented cross-sector value. A pivot must occur, but net opportunities dwarf threats for those executing early.
IoT-Driven Insurance in Action
While insurance IoT holds long term transformative potential, carriers today are focused on building capabilities and value delivery in targeted segments:
Auto Insurance
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Progressive’s usage based Snapshot program calculates driver premiums from real vehicle telematics – processing over 1 billion miles of driving data daily. Over 20 billion miles have been logged since 2008 launch.
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IoT auto insurance provider Metromile charges policyholders per mile driven. The firm has achieved a 275% revenue CAGR since 2017 off its flexible model and ability to serve gig economy and low mileage drivers.
Life & Health Insurance
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John Hancock life insurance provides up to 15% discounts for sharing fitness tracker metrics through its Vitality Wellness program – adding 3 years average longevity over 10 years per internal studies.
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Oscar Health leverages natural language AI chatbot Mario to parse health history conversations, recommend physicians, track symptoms, and close care gaps – generating 20% member engagement within 2 months.
Home & Commercial
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ViewSonic Canvas pairs IoT sensors with wearables, computer vision AI, and analytics to provide employers with predictive insights on workspace safety, operational efficiency, and equipment intelligence – reducing insurance claims over 40% during pilots.
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Maersk Shipping utilizes IoT cargo tracking and geo-fencing to optimize marine insurance underwriting and pricing while ensuring near real-time delivery coverage across supply chains spanning over $475 billion in goods annually.
While fragmented, these emerging IoT use cases provide templates for evolution across lines and point towards the wider data-driven transformation on the horizon.
The Outlook for Insurance IoT Through 2025
Industry practitioners in 2015 began from a standpoint that IoT represented limited impact offering only incremental gains on legacy processes and metrics over a prolonged timeline, per Deloitte interviews. The explosion in data generation volume and analytics horsepower since has quickly outdated these conservative assumptions.
We stand now at IoT lifting insurance out of a reactive, transactional claims industry into an ecosystem of integrated risk consulting and mitigation – with leading carriers actively strategizing around prevention-centric business models offering materially differentiated value to customers and ecosystems.
Key Markers Ahead
Within the next 3 years, top tier personal and commercial insurance carriers will:
- Achieve over 50% auto insurance share reliant on behavior metrics over demographics
- Utilize real-time policy adjustments as norms for majority of businesses
- Incentivize risk prevention behavior changes for millions of customers
- Operationalize data-driven fraud prediction reducing loss ratios over 10% vs historic benchmarks
- Provide dynamic risk monitoring services across public infrastructure and supply chains
- Increasingly integrate emerging data sources like drones, self-driving vehicle systems, satellite imagery
- Grapple with IoT-specific regulations around privacy, connectivity, data usage in the wake of 5G adoption
And within the next decade, leaders will leverage insights to fundamentally transform insurance into broad risk management partnerships – while laggards slowly perish clinging to antiquated coverage payment transaction models.
The bridging strategy for surviving during this disruptive interim involves carefully expanding IoT capabilities today for the specific purpose of building next generation analytics engines, policy configuration platforms, engagement channels, and ecosystem integration capabilities that allow delivering step-change prevention value unlocking new margins in the future.
Rather than a threat to insurers, IoT and the real-time interconnected economy enables unprecedented risk visibility, customer intimacy, and network resilience. Executives proactively embracing this shift will future proof their firms for long term prosperity. Those who delay risk the fate of taxi medallions displaced by ride sharing – missing their window to lead amidst irreversible and accelerating disruption.
InsureTech Group provides strategic guidance, implementation support, and vendor sourcing tailored to insurance carriers pursuing IoT and other digital transformation initiatives. Reach out for a consultation around custom analytics, cybersecurity, and legacy modernization roadmaps.