What is this Thing?

When it comes to the “next big thing” in technology, it’s fair to ask whether it is merely a futuristic vision or imminent reality. In the case of the Internet of Things (IoT), the answer is both.

There are already plentiful examples of the IoT in action. In a recent report, The Internet of Things and Property/Casualty Insurance: Can an Old Industry Learn New Tricks?, research firm Celent defines it as the integration of three components: physical objects with networked sensors, transmission of information to data stores and analytic engines that examine the data and provide a feedback loop.

Industries ranging from agriculture to automotive to appliance manufacturing have installed devices that continuously monitor the functioning of equipment and send data to a source for analysis and action.

In insurance, there is potential for IoT in streamlining the claims handling process and improving customer satisfaction, according to Dale Avis, vice president, information technology and chief information officer for Crawford & Company (Canada) Inc.

“There are a number of benefits to be realized by the evolution of IoT in claims handling,” Avis notes. “Built-in sensors or devices will have the capability to provide automated loss notification or identify a potentially hazardous situation. The primary benefit of IoT in claims handling is increased insured satisfaction through the ability to transmit claims status between the insurer and the insured almost instantaneously.”

The p&c industry insures a lot of “things.” Gartner estimates that the IoT will include 26 billion units installed by 2020, and by that time, IoT product and service suppliers will generate revenue exceeding $300 billion globally. According to Cisco research, over 50 billion devices will be connected to the Internet by 2020. Whatever the number, all of those devices will be generating various forms of data – numerical, text, audio, video.

Closer to home, spending on IoT is set to take off in Canada in 2015, according to a recent forecast by International Data Corporation (IDC). It projects that investments in this area will reach $6.5 billion by 2018, particularly in the “fastest-growing sectors” of consumer, manufacturing and insurance.

“The Internet of Things will change the way all of us operate in the world,” notes Patti Kernaghan, president and CEO of Kernaghan Adjusters. “Data analytics will help bring the industry forward into that world. The issue is how we manage the data, that we accept the conclusions that the analytics will point us towards, and that we’re prepared to take action.”

Dipping Toes into IoT Waters

According to the consulting firm Strategy Meets Action, many insurers are already dipping their toes into IoT waters. In a recent study of emerging technologies, it found that 20 per cent of insurers surveyed were currently piloting, testing or deploying IoT projects. That number rose to 50 per cent over a three-year future timeframe.

In an increasingly gadget oriented society where personal and commercial lines consumers demand mobility, remote access and interaction between devices, the connectivity push will only continue. This trend will be compounded by the relatively new capacity to monitor virtually anything – checking a person’s heartbeat or temperature with wearable technology, unlocking doors with mobile devices, tracking (or controlling) car movement with sensors, remotely monitoring complex building systems for heating, ventilation and air conditioning (HVAC), security, smoke detection/fire.

“Telematics, mobile and wearables – all provide ways to capture even more real time data about the customer and perils,” note Mukul Ahuja, a senior manager with Monitor Deloitte focusing on the property and casualty insurance sector. “Especially in auto insurance, where UBI (usage based insurance) has long been a dream, these technologies have helped not only accurately determine risk but also reduce claims by improving safety. More connected homes and cars allow for capture of personalized driving patterns, track our movement patterns and so on to determine risk more accurately.”

The space-age predictions of the connected home, driverless car, smart cities, self-monitoring commercial building or machinery suddenly don’t seem that far off. The IoT opens up a world of opportunities, and a potentially disruptive environment, for the insurance industry.

One of the key questions – will any of this help loss adjusters or insurance companies in the claims management process? There are some key areas, such as vehicle telematics, connected homes and smart commercial buildings, that could yield improvements in data accuracy, investigation and loss control.

Vehicle Telematics Tangible Example

A tangible example of IoT in the insurance world is vehicle telematics. According to Towers Watson, the pace of adoption of usage-based insurance (UBI) telematics has accelerated exponentially in Canada in the last year. A recent survey from the consulting company showed that 56 per cent of Canadians expressed a “strong interest” in buying a UBI policy, mainly for premium discounts.

Currently, there are 11 insurers with approved usage-based auto insurance plans approved by the Financial Services Commission of Ontario (FSCO). These range from established players, such as Desjardins (Ajusto), The Co-operators (en-route) and Intact Financial (my Driving Discount) to new entrants like UK-based Ingenie. Other provinces, such as Quebec, also have UBI programs in place, while jurisdictions like Alberta are still establishing criteria for implementation.

A recent report from business intelligence firm visiongain estimates that over $60 billion of auto insurance premiums globally will be generated by the UBI market by 2020. It noted that the number of UBI policyholders worldwide jumped from 12.2 million in 2014 to 21.7 million in 2015.

Vehicle sensor devices have vast potential in providing services other than just insurance discounts, according to some sources. So far, the claims component has remained largely untapped.

“One of the key areas we are seeing movement is the desire for telematics providers to integrate with the claims process, to provide that loss data right from FNOL in a real-time fashion,” says Alex Watson, manager, insurance consulting practice, Deloitte. “It is evolving from just using that data to better price and underwrite risk to providing that quality of information and better understanding of the loss from the onset, versus the traditional way of gathering witness statements, taking information from the claimant.”

Watson notes that while traditional claims gathering techniques will still be relevant, telematics data will increase in importance.

Claims Gathering Techniques

“Telematics providers are able to geo-locate to an exact longitude and latitude of where the loss occurred, potentially identify the impact of the accident on the vehicle, the speed, and so on,” he observes. “Whereas a lot of the information in the past has been second-hand based on the claimant’s perceptions or witness statements. Gathering that (telematics) data and increasing that quality upfront will help facilitate the speed to close on particular losses.”

There are, however, stumbling blocks in integrating vehicle data into the claims handling process. One concern is that most of the insurance companies using telematics have outsourced their usage-based insurance programs to third party vendors. Insurers generally don’t own or control the data, except as noted by contract or agreement. Without direct or real-time access to data, claims or loss management will be limited.

The second obstacle is the relatively slow pace of regulatory change around the use of telematics data. For example, FSCO does not currently permit the use of this information for claims-related activity.

“From a FSCO perspective, let’s only look at discounts for now,” said Bruce Green, senior manager of rates and classifications for FSCO, at a 2014 telematics conference in Toronto. “That means no mid-term re-rating; not using it for non-renewal or varying the term of a policy; and not using it for claim-related purposes at this time.”

Even with these challenges, it’s clear that connectivity, sensors and data analytics are coming fast to the world of cars. Autonomous vehicles represent the next generation of automotive IoT technology set to impact the insurance industry. With automakers from Ford to Toyota to Volvo (not to mention tech giant Google) experimenting with and testing driverless cars, many project that this innovation could be a reality within the next five or ten years.

A report released in September 2015 by marketing and research company Navigant suggests that annual sales of autonomous-capable vehicles could reach 85 million by 2035. The industry consensus is that more comprehensive self-driving features will be brought to market by 2020, the study’s executive summary said, adding that such features will enable more complex automated driving, but still require some supervision by a competent driver. Either way, there will be implications for insurers.

“Autonomous and semi-autonomous cars will fundamentally alter the nature of driving and the insurance industry’s business model,” David Powell, Lloyd’s Market Association’s (LMA) non-marine manager, told an audience of Lloyd’s underwriters and claim experts in London, UK in July 2015. “These vehicles mean fewer collisions, which will take place at lower speeds. Removing the driver removes eight-out-of-ten of the most common causes of vehicle accidents.”

The Connected Home

The “connected home” has also seen a spate of recent activity, with some suggesting this is an area ripe with opportunity for personal property insurers. According to an Accenture report, The Connected Home – New Opportunities for Property & Casualty Insurers, the global connected home market is expected to reach $235 billion by 2016.

“For insurers, the IoT can provide value in the form of new insurance models and products-based on deeper insight into the customer’s needs-and a higher level of customer satisfaction derived from dynamic risk monitoring and improved claims handling,” Accenture stated in the study.

In June 2014, American Family Insurance and Microsoft launched a “business accelerator” for tech startup firms focused on home automation. American Family Insurance, the eighth largest homeowners’ insurer in the U.S., will provide industry experience, consumer insights and homeowner knowledge to companies focused on building safer and smarter homes, according to a press release.

Lat year, Google also purchased Nest Labs, a maker of “smart” thermostats and smoke alarms, for a reported $3.2 billion. Analysts noted that the acquisition, the second biggest by Google since buying Motorola Mobility, marked the Internet firm’s foray into the next generation of smart home devices, including sensors and networks for remotely controlled appliances, door locks and other everyday objects.

Lost in the shuffle of the iPhone 6 release and the wearable technology of the iWatch, Apple also unveiled HomeKit, its iOS-based protocol for hooking up connected gadgets in the home. Other software companies have jumped on board, including August Smart Lock, an electronic lock that provides keyless entry into the home through Apple mobile devices.

What does this mean for personal property insurers? The information coming from the next generation of Internet-connected devices will provide a slew of data to insurance companies. Is the home well maintained? Is it secure? Is there a consistent temperature level? Are there moisture detection devices in basements and around washing machines and dishwashers? Are there advanced smoke and carbon dioxide detectors?

As an example, Accenture suggests that “the insurer- either in partnership with a security provider, or on its own initiative-can offer a data recorder that can be installed in the home to track temperature, humidity, wind speed and mechanical vibrations as they affect the house. At least one insurer has already filed a patent for such a home sensor system.”

Relevance to Claims Handling

The trick will be how to make this data relevant to the actual claims handling, as well as rating and underwriting, process for the insurance industry. “The application of new data to claims processes and the integration of raw data into core policy and claims systems are key areas for attention,” Accenture noted in its study. “In some cases, business and/or operating model changes may be needed to support the new inflows of data.”

Claim reduction is a huge potential payoff for IoT for homeowner insurers, according to Accenture. “As the use of in-home systems and devices becomes more widespread, insurers should set optimal targets for reductions in the number and size of losses,” the consulting firm noted in the report. “One possibility is to explore how to leverage current commercial lines loss mitigation programs as connected home data makes it more practical and efficient to offer lower-premium (and lower- exposure) homeowner products.”

Others concur that loss mitigation could be a key outcome in the emergence of IoT. “Overall, I would expect that the impact of IoT will lead to a reduction in the frequency, as well as severity, of claims,” Avis remarks. “Advancements in technology will facilitate an overall safer environment, as well as a faster reaction when a loss occurs.”

The potential of IoT in loss mitigation may be even greater in commercial lines for property, machinery and equipment. Many larger buildings already have sophisticated operational systems in place that monitor HVAC, security, fire/smoke detection, sprinkler systems. In most cases, that data is already being collected and examined, at least by the owners or building management companies.

Loss prevention and risk management represent areas of potential advantage for commercial clients. “By definition, you have hard-headed business people who may be risk managers or have a financial interest in lowering risk costs,” says Donald Light, an insurance analyst and author of the Celent report. “The IoT value proposition for buildings, operations, general liability, security – these are all areas that companies are very receptive to in terms of improved loss control.”

Smart Commercial Buildings

“The advent of smart commercial buildings will eliminate the need for building managers to total a stated insurable value by listing everything on its premises,” notes Paul Bermingham, executive director of claims at Xchanging Claims Services in an October 2014 article in the publication Risk & Insurance.

“Instead, property premiums can be automatically tallied by connecting the insurance company to the building’s central smart hub, which houses all of the data such as air quality and temperature,” Bermingham observed. “Access to security systems, sprinklers, and disaster recovery plans in one location provides a much crisper insurance profile than just relying on raw building and cost data.”

Beyond cars and buildings, there are specific aspects of the IoT that are relevant to loss adjusters and claims management practices. A key area of exploration is the use of drones, according to Avis. He notes that Crawford & Company (Canada) Inc. is currently in the process of testing a prototype and evaluating methods of implementing drone technology into its claims handling practices.

“Drone technology is (an) example of real life application of the IoT,” Avis remarks. “These aerial devices serve as the eyes of an adjuster, enabling them to remotely access and capture images and photographs of a loss site that may be difficult or unsafe to enter. The bird’s-eye view captures vital footage, enabling a claims professional to properly survey and assess the extent of damage. Through remote access capabilities, this information can be fed to a separate location enabling the claims professional to prepare an initial report and a scope of loss, and to survey damages and submit them directly to the insurer.”

Drones, Geo-Tracking and Fraud

Geo-tracking of adjuster personnel – identifying a person’s current, physical location by obtaining GPS data from their smartphones or other GPS-enabled devices – is another key feature of the IoT that could yield big gains in the claims adjusting process, according to Avis.

“Through the use of such technology, the strategic and efficient deployment of catastrophic response teams can be enhanced,” he notes. “From the perspective of an IA firm, this technology would provide us with the ability to isolate branch locations, and the physical locations of adjusters to identify those who are in closest proximity of a loss site. This feature will be of particular importance during the occurrence of catastrophic events, assisting in the deployment of the best suited and closest situated adjusters in a fast and efficient manner.”

And then there is fraud detection. “There is considerable buzz around the development of technology that can effectively run internet and social media searches on parties and feed potential red flags to insurers or claims professionals,” Avis comments. “This information can be vital in assessing the potential for opportunistic fraud, and assists in the investigative component of the claim’s cycle.”

While these aspects represent the upside potential of IoT, there are risks associated with the emerging technology. One of the main challenges is the sensitivity of information and security of data across multiple devices and networks. A Hewlett-Packard study released in July 2014 found that “70 per cent of the most commonly used IoT devices contain serious vulnerabilities.”

The survey did a scan of ten of the most popular IoT devices, such as televisions, webcams, thermostats, remote power outlets, sprinklers, door locks, home alarms, scales and garage openers. On average, 25 vulnerabilities were found by researchers in HP’s study of the top ten most popular IoT devices – with a total of 250 security concerns discovered.

“The fact is that any devices can fail, and any networked process can be hacked,” Light comments. “These risks are probably more acute on the commercial side because the systems, sensors and data they already have were not designed to be secure. They were not designed to be shared. Today, we live in a different world.”

Despite the security risks, many see the evolution of IoT within the p&c insurance environment as a slow but steady process. The real questions are how long it will take for sensor-equipped devices to be widely installed in homes, cars and businesses and whether the ensuing data will be useful for underwriting, pricing and claims/loss control.

“The Internet of Things (IoT) is an ever-evolving phenomenon,” Avis concludes. “The developments that have been made on this front will serve to benefit the insurance industry as a whole by increasing the interconnectivity and flow of communication between policyholders, carriers, brokers and claims professionals.”