According to TCS recent Global Trend Study on the IoT, which looks at the impact of IoT technologies across varied industries, IoT offers businesses including insurance — huge potential for revenue increase. These opportunities also come with significant challenges for organizations that transition to new business models.
The study also revealed that the insurance industry is lagging in comparison with others in terms of leveraging the IoT. Although, insurers have the IoT on their radar, the reality is that it presents huge challenges to traditional ways of doing business. Insurers are concerned about the implications, and the apprehension is understandable. However, this is not the time to be cautious!
In fact, insurance companies reluctance to more aggressively leverage the IoT has more to do with corporate culture and the business model implications than with any perceived technology limitations (a traditional reason for a conservative approach to leading-edge technologies). Thats because the IoT will deliver a dramatic impact on the insurance industry in terms of the products it sells, the business processes it has in place and the whole promise insurers sell. The promise insurers sell today is protection.
A gradual shift to prevention and preservation
The IoT will shift the insurance business proposition to prevention and preservation a big shift in the traditional business model. But despite the disruption, insurers that build new offerings and services based on the IoT stand to win big. Many insurance companies are investing in creating new offerings that leverage the IoT, or even partner with startups to do so.
In a set of articles published in early 2015, Hartford Steam Boiler, a unit of MunichRe, made public news about its investment in an IoT tech startup. John Hancock became the first traditional company this year to offer a life insurance product based on wearable technologies. Oscar is a new start-up company in the health insurance space that is looking to leverage emerging IoT technologies such as step trackers for lifestyle-based insurance. Lastly, telematics is no more a nice-to-have discussion among auto insurers. Almost each of the leading insurers has an offering in this space, and then there are new entrants such as Metromile, that are disrupting the space by using IoT technologies.
There is another reason to move fast. Insurance has always worked on the concept of a large pool of people or corporations or businesses that are exposed to a particular risk its all about economy of scale. Carriers group policy holders, assign risk factors and calculate premiums, based on a certain number of broad characteristics. The IoT, on the other hand, has data-gathering capabilities at a very granular level. Using the IoT, insurers can actually capture specific information about risk exposure or characteristics or behavior that influence the probability of risk. Insurance companies that leverage the IoT also have the capability to understand an insureds exact exposure, at a granular level — essentially reward customers in a segment of one.
For obvious reasons, the good risks, that is those with lower probability of risk, will gravitate towards IoT based products and offerings that are available in the market. This will leave the so called bad risks in the market opting for traditional offerings from insurers that do not adopt and start offering IoT-based products and services. These customers will also be the pool who will be shopping for the lowest-price insurance because their rates are likely to go up more frequently because of higher claims. Thus, those who dont offer IoT based new products will end up with a pool of high-risk insureds and at the same time continue to compete on price to acquire and retain their customers. This can have a detrimental impact on both their premium revenue as well as expense ratio.
Despite these challenges, its essential that insurance companies start taking advantage of the opportunities the IoT offers in terms of customer experience and improved operations. In the next blog in this series, we will outline how to get there.
The Internet of Things will shift this business model to prevention and preservation. This shift leads to a key question for insurers: How will it change your business and how are you planning to drive this change?