The insurance industry is already undergoing profound changes due to the adoption and implementation of IoT (the Internet of Things), which basically refers to the interconnected devices that can interact and share data without any human intervention. Traditionally, the insurance industry has been plagued by two challenges – the ability to assess risks accurately, and insurance valuation and claim validation. And it seems, IoT is going to revolutionize both.
To assess risks, insurance companies had to depend on information given by the applicants, along with past experiences and analytics. So, there was a paucity of data to make accurate risk assessment. IoT is going to address this issue by empowering the insurance companies with huge volumes of data, which will give them better insights on the policyholders. Along with precise risks assessment, IoT in insurance will cut down costs and help insurance companies to manage their price policies more efficiently.
The second biggest challenge for insurance companies is related to the processes of insurance valuation and claim validation. These processes are carried out to determine the amount to be paid to the customers. A huge amount of data needs to be analysed, which is not only tedious but also time-consuming. Moreover, it is quite difficult for insurance companies to check for fraudulent claims. IoT can streamline and speed up the process of insurance valuation and claim validation by providing accurate data.
For example, a person to be insured can be given wearable devices that can track his or her health parameters over time. The data recorded by these devices can be used for claim validation in the event of an insurance claim by the person. Similarly, in the case of auto insurance, the car to be insured can be fitted with sensors and OBD (On-board diagnostics) systems to monitor the performance of the car and the driving habits of the driver such as average speed of driving, use of brakes, etc.
An accurate assessment of the driving habits of people will help the insurance company to price their products on an individual basis. The company can charge lower premiums to reward safe drivers. Moreover, in the event of an accident, it can be immediately validated by the insurer. With instant validation, customers will also receive their insured amounts in no time.
Progressive, the US car insurance company is already using a programme, called usage-based-insurance (UBI) telematics programme for this purpose. The programme allows the insurance company to monitor the driving habits of its customers and charge premiums accordingly. So far, the company has made about 1.7 trillion observations, which has helped them price their products on the basis of how their customers actually drive their cars.
Further, IoT in insurance can help the industry to change its role from an industry that pays for losses to an industry that prevents losses. For example, by leveraging AI and ML, drivers’ behavioural data, data on the position and performance of the vehicles, and traffic and weather data can be analysed to give valuable insights to drivers, in order to prevent accidents.
However, IoT is not going to be an unmixed blessing for the insurance industry. The industry is also going to face some unique challenges, especially in designing a profitable business model due to the increasing adoption of IoT. For example, when IoT will monitor our houses in real-time, the risks of theft or fire are going to reduce dramatically. In such a situation, the amount that customers will be willing to pay to get their houses insured will be much lesser than what they are paying now.
Further, some consumers may be reluctant to adopt IoT or may refuse to trust it, which could be another major challenge. Also, storing and protecting the huge volume of data collected by the interconnected devices could be a big issue for all industries using IoT, including the insurance industry.