Canadian Underwriter

Trojan Horse or Workhorse?

March 16, 2018   by Emily Atkins, Editor

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“Open the pod bay doors, Hal.”

“I’m sorry, Dave, I’m afraid I can’t do that.”

With this ominous exchange a nightmare begins. The artificially intelligent computer, HAL 9000, has malfunctioned and refuses to take orders from the crew of the spaceship Discovery One in the cult sci-fi film 2001: A Space Odyssey, ultimately trying to kill them. While certainly an effective antagonist for a movie plot, having a HAL 9000 scenario inside our own homes would be less than ideal.

Yet with the surge in popularity of smart home devices, alongside the growing influence of automated and intelligent processes being employed in industry and commerce, we need to ask if we are creating new risks by putting so much trust in automation. Could Alexa, the voice of Amazon’s Echo home automaton hub, and her ilk be a Trojan horse, just waiting to unleash an army of hackers, errors or malfunctions into our homes’ vital operating systems?

Or, do Apple’s Siri and the Google Assistant, which, along with Alexa are today’s most popular options, promise to be benign, helpful and ultimately cost-saving and productivity-boosting tools for users and the insurance industry alike?

Moving in

The advertising seems to working; the penetration of smart home devices is growing very quickly. In Canada right now, 13.9 percent of homes have adopted some form of smart automation. And, according to information from, that is projected to climb to 31.5 percent by 2022.

What are people buying? Statista’s numbers cover digitally connected and controlled devices within a house that can be remote controlled; sensors, actuators and cloud services that support automation in any way; control hubs to connect sensors and actuators with remote controls and to each other; and, business to consumer (B2C) hardware and software sales as well as subscription fees. In other words, we are looking at the full array of smart devices and services from security systems, to thermostats, to smartphones with Siri, Google or Alexa on them.

Breaking it down by usage, the market is segmented into security, lighting, entertainment, HVAC & energy management, and smart kitchen applications. So far, entertainment owns the market, and is expected to continue doing so until about 2025 thanks to high demand for home theatres, touchscreens, audio and video controls, and other entertainment controls, according to a late-2017 study by San Francisco-based Grand View Research. After that it is expected that smart appliances will drive kitchen applications into the lead.

The workhorse

If you’ve see the commercials, Alexa is capable of brightening even the coldest Canadian winter day by helping a dull young woman warm her house, order paper towels and play summertime music. And that’s just the tip of the iceberg.

Smart home apps are popping up every week. Now you can control your thermostat from wherever you happen to be using your smartphone. Lights, cameras and action can all be monitored and controlled remotely. Applications run from the slightly silly – feeding treats to your cat while watching from your desk at work – to the utilitarian – having your swimming pool kept clean and at the right temperature. Unexpected guests coming home with your from work? Send the robot vacuum for a spin to make sure the house is spotless. Your devices can keep you safe, locking and unlocking doors, warning of gas leaks, and knowing when smoke is from under-control cooking rather than a fire. Nothing seems far-fetched any more.

Keeping tabs to reduce the tab

With all this tech comes data, big data. And insurers are looking for ways to use it. Just as telematics devices implanted into cars deliver data about your driving in order to generate usage-based insurance rates, so too can household devices.

Water sensors, for example, are a simple and increasingly popular way for insurers to potentially reduce premiums. They relay information to the homeowner when water is where it shouldn’t be, allowing for an early intervention and thus reducing the risk of damage. Some insurers are offering free sensors, others a rebate for equipped homes.

Pete Karageorgos, director of consumer and industry relations (Ontario) at Insurance Bureau of Canada (IBC) points out this is not a new model. As with home security systems, which have triggered discounted premiums for years, the new generation of technology may end up benefitting homeowners. “If it allows for a more accurate price model to be developed, there may be a benefit to technology in a vehicle, in a home,” he says.

But, he cautions, “It’s a very competitive marketplace out there, so there is no uniform response. Some insurance companies are at the forefront of this and others are wait and see as technology develops and advances, improves itself. If there are people who want to move quickly, as quickly as technology is moving, they likely can find insurance companies that are aligned with that, too.”

AXA, for example, is one of the early adopters in the home automation game, having launched its first insurance plan for the connected home in 2015. The company is looking at the opportunity technology affords from a big-picture perspective. In addition to making connected home services available at a discount, the company is partnering with smart technology providers to develop new apps and ensure communication is possible among the various devices in a home.

“Data collected from across the connected-home user base will lead to development of algorithms able to identify risk independently via data collected from millions of sensors, from the homes of millions of users,” said Véronique Letellier, head of digital services and open innovation at AXA France in an article on the company’s website. “Sensors, IoT [Internet of Things] won’t be innovations for the sake of innovation, they’ll contribute to better, cheaper, more tailored home insurance.”

AXA also envisions a reduction in claims as the data created by the in-home devices allows the creation of artificial intelligence that will be able to predict when loss-causing events – like fires – may happen.

AXA is not alone, numerous others are getting their feet wet, researching and investing in home automation initiatives. Aviva invested in Cocoon, a security technology company; American Family Insurance invested in Ring, the smart doorbell app; and Hartford Steam and Boiler (HSB), which specializes in commercial and industrial cover has bought into industrial sensor manufacturer Helium, a mobile app platform start-up called Waygum, and predictive machine diagnostics company, Augury. There are many more examples.

Prevention and investigation

A hallmark of the new technologies is their growing sophistication and ability to network together to provide complete oversight and management of household operating systems. For example, smart HVAC systems can all be interlinked and controlled. Water heater, air conditioner, and furnace will all be talking to one another to ensure home comfort.

“The increasing complexity of these systems will have both benefits and deficiencies that can both cause and prevent losses,” says Robert Sparling, 30 Forensic Engineering’s principal, materials and product failure. “For example, a smart furnace may warn the homeowner that the fan motor is about to fail, so that a lack of heat event can be avoided, even when the home owner is on vacation.”

When it comes to losses, both property and personal injury, investigators and adjusters can also turn to technology for help. Security systems are known to be helpful in the investigations of slips, trips and falls, as well as determining the origin of fires in commercial properties. Home security systems, such as Nest cameras, can also be useful in the investigation of water damage in homes. Video footage can provide information as to the exact origin of a water release and its timing.

“More concrete visual data, rather than relying on only witness statements, allows insurers to more quickly assess the validity of a claim and shorten the time in determining whether a claim is worth of subrogation,” says Ben Desclouds, an associate, materials and product failure with 30 Forensic Engineering.

The Trojan horse

The appeal for the user is hard to deny, as is the potential bottom-line benefit for insurers. For the homeowner it looks like less work, less worry, and answers and solutions to problems as close as the range of your voice or a swipe of your phone. And you can even save money on your insurance premiums by having all this convenience. What’s not to like?

Lots, apparently. Several years ago industry analysts were all in favour, exhorting insurers to adopt and embrace the technologies. Brace new futures were envisioned where home property claims could be virtually eliminated. But then, as cyber attacks rose in severity and frequency, the brakes went on. Talk shifted to the perils of allowing smart devices to run our lives.

The risks are numerous. Hacking, power failures, loss of data, and poorly interfaced devices and systems leading to failures – the list is long and the consequences potentially scary and damaging.

Scenarios are not hard to imagine. Suppose the system turned the thermostat down on a frigid winter day and wouldn’t turn it back up. If the homeowner was not able to return immediately and override the system, frozen, burst pipes could be the result. Or the smart door lock that is supposed to secure itself again after a tradesman leaves gets confused and leaves the door open for anybody to enter.

Prolonged power failures bring their own risks that many Canadians are familiar with. But when a home is entirely controlled by digital systems, what happens when the electricity supply is off for days? Or if a vacationing homeowner cannot control their homes devices because their smartphone hasn’t had a charge for three days, or it fell in the ocean, or is simply lost, what happens then?

Smart automation users may also be opening themselves up to criminals. Devices can be hacked, home networks joined and tricked into giving away information such as when someone is at home. Arson, blackmail, theft and extortion are all possible, suggested Earlence Fernandes, a Ph.D. student, systems and security, at the University of Michigan in a 2016 research paper. He and his colleagues were able to hack systems to change door locking codes, trigger fire alarms and disable a home’s vacation mode to change lighting patterns. They also devised a Trojan app that was masked as a battery monitoring tool but really allowed access to other devices on the network.

It’s not just the home that may be imperiled. The Industrial Internet of Things (IIoT) is powering the new industrial revolution, leading to a high degree of automation penetrating into commercial operations. “There’s no doubt that it’s coming to manufacturers, and you’ve got machines talking to machines,” says Paul Hancock, Crawford’s vice-president, Global Technical Services (GTS) Canada.

He sees a reduction in the small, frequency claims and a jump in severe and complex losses in this space. “They’re going to be tied to infrastructure breakdown, they’re going to be tied to cyber breaches, and they’ll probably be broader than just one machine. It’s probably going to be a conglomerate of machines that are all syncing to each other or networking together. It could be more than one factory. If they’re on the same network it could be in more than one country.”

Adjusting new kinds of claims

Claims related to smart tech are already rolling in. The team at 30 Forensic Engineering investigated one where a swimming pool ended up collapsing on itself as a result of automation. “A freeze-protection system activated and prevented freezing as intended, but due to improper interlocking of this system with multiple other systems from other suppliers (e.g. the safety cover retracting system), it ultimately caused the pool to cave in on itself,” recounts Desclouds. “So in the end, the automatic activation of a failure prevention feature ended up causing a different type of loss.”

In another example, SaskPower, Saskatchewan’s electricity provider, had to scrap 105,000 smart meters in 2014 after more than six unexplained fires. After a review it was found that rain and contaminants had entered the units and caused the malfunction. The review also found, however, that the remote readers didn’t work properly from the outset and they created so many false overheating alarms that the company was unable to investigate them all. SaskPower said that malfunctions are “to be expected” and the company is embarking on another round of smart meter installations.

These losses raise the question of liability. Will manufacturers of the devices be held liable for failures of their product? 30 Forensic Engineering’s Sparling thinks so. “The producers of IoT devices like thermostats, smart furnaces, etc. will be open to liability where their devices do not identify problems before they happen,” he says.

He cites the example of a failing thermostat temperature sensor. If the thermostat then does not warn the homeowner, a lack of heat event could occur in a home. “Thus, there

will always be some circumstances where a smart device manufacturer could be found responsible for an event,” he concludes.

Pete Karageorgos looks at the failing smart door lock as another example. “If someone’s front door lock is unlocked and access is gained that allows for a theft to occur and they file a home insurance claim, how did an individual gain entry? It’s unclear. It’s uncertain,” he says. “It may require additional investigation by an adjuster, by an insurance company, into how that event occurred. Then, is there a component that goes back onto the manufacturer of that device? Does this become a product liability claim rather than a standard break-and-enter theft claim from the home?”

Losses involving smart technology will certainly will require a new skills from adjusters. At Crawford, Hancock says in addition to boosting training, they are preparing by looking for new people with highly technical skill sets. “We’re looking at hiring different people. And if we have to be looking at hiring different people, you’re going to specialists, you’re going to engineers, you’re going to lawyers, you’re going to people that have that technology background…you’re trying to find those skillsets to bring them in and teach them how to adjust claims,” he says.

A gift horse

Whether these new technologies turn out to be workhorses or Trojan horses will come down to the individual’s preference and tolerance for risk, says Karageorgos. Much will depend on the value placed on privacy and faith in new technology. For the early adopters there is lots to be gained and enjoyed in using smart automation technologies. But convenience will have to be balanced against the risks.

In the short term there are “a lot more questions than answers and a lot of this is still in its relative infancy,” Karageorgos concludes.

He is right, whether you look at it from the perspective of the homeowner, insurer or adjuster. As the technologies evolve and mature the risks and benefits will shift with them. Going back to the scenario from 2001: A Space Odyssey, for the moment there’s little more to be done than take HAL’s advice to “sit down, take a stress pill, and think things over.”