The result has been personalized policies including usage-based, pay-as-you-drive and pay-how-you-drive—and now, telematics is penetrating the home insurance market.

Some insurers already have entered this arena, decreasing premiums for so-called "smart homes." At the end of 2013, State Farm and ADT partnered to provide the home security company's home-monitoring technology, ADT Pulse, to State Farm policyholders. Signing up for the service provides discounted installation, lower monthly service fees and more competitive insurance premiums.

"Houses are getting smarter every day," says Rebecca Galovich, assistant vice president of reinsurance underwriting at Hartford Steam Boiler (HSB), "and tech is becoming more interconnected. That enables homeowners to have control over the environment of their homes, adjusting thermostats from outside of the home and controlling security systems."

HSB, a division of Munich Re, partnered with EnergySavvy to provide energy-use monitoring technology. HSB HomeWorks combines home equipment breakdown coverage with online tools at myhomeworks.com. Tools include home inventory catalogues, specific maintenance tips, energy calculators and home management tips.

Smart home technology is typically found in higher-end homes (with replacement values above $300,000) in which many of the electrical systems are interconnected.

The next generation of smart homes will serve a specific need: As the population ages, technology will allow more baby boomers to continue to live in their homes rather than moving to assisted-care facilities. "We are seeing a lot of medical devices being installed," Galovich says, that better connect providers to patients.

Robert Large, VP of product development for Pacific Specialty Insurance, forsees a reduction in losses with smart homes. "Your policyholder is becoming a better risk manager," he says. If an earthquake occurs, an evacuated smart-home owner can shut off gas lines remotely.

Going further, the United Services Automobile Association (USAA) has a patent for a data device that records conditions that "have led to damage or destruction of the building," or to "forecast the possibility of future damage or destruction."

The patent says data including temperature, wind speed and humidity will be recorded. It stipulates that decisions regarding insurance claims, underwriting, reinsurance and alerts may be made based on data analysis.

Although Hunter supports telematics usage, he is suspicious about its use. "Why is a home's temperature a measure of risk? Will rates go up if a person keeps the heat low in winter and high in summer to save money? If so, that factor is not measuring risk but would be a way to, once again, raise prices on the poor," he says.

"Full transparency on everything a device measures and how that information is used should be required by regulators before allowing use of these devices," Hunter continues. "People should demand the same prior to agreeing to have the devices put into their cars or homes."

HSB's myhomeworks.com collects all information the homeowner adds in the registration process. "We capture information about the house such as age and type of roof as well as data used to calculate energy efficiency score. The data we collect is available to our client companies and may be helpful in identifying trends impacting underwriting profitability," Galovich says.

Insurance companies are subject to specific state privacy laws regarding what information can be collected and its use.

Intensified Competition Ahead

Home insurance and property insurance will become more competitive in the coming years, Large says. What's driving this trend are large auto carriers who also write home insurance: If they write two policies with the same customer, their retention rates remain high.

And the homeowners' market is profitable—even more so than auto, according to Aon Benfield Analytics' annual review of homeowners' rate changes. The report states that homeowners' insurance cumulative growth over the last three years has been 15%, compared to 6.5% for auto.

Large identifies two reasons why: low catastrophes last year and an increase in customer shopping. "You will see some of the big national brands that are primarily auto companies start to focus on homeowners because their customers are starting to switch carriers," he says.

Price reductions will not happen in the homeowners market this year, Large predicts. Homeowner insurers have had to steadily increase rates to maintain profitability, but rates increases are held in check by customer retention.

Agents and brokers who want to enter the homeowners' market should build upon an existing sophisticated auto insurance market, Large says. And for independent agents, those markets don't have to be tied to the same carrier: "A lot of customers feel like they have to package home and auto with the same company—but their company is their agent."

Renters' Insurance: More than Condos

More and more Americans are forgoing home ownership, and therefore, more customers requiring renters' insurance are those who rent houses—as opposed to renting apartments or condos. These clients have larger amounts of personal property and greater liability, says Renee Scott, product manager for American Modern in Cincinnati.

"We have seen lease agreements that specifically state requirements for how much liability insurance someone has to carry to rent the home," she notes. Liability for home renters is typically in the $100,000 to $200,000 range.

Rental homes are found in areas where there are a lot of foreclosures, specifically around Las Vegas, major metropolitan areas and in some parts of California. When these homes foreclose, investment companies and large LLCs can purchase up to hundreds of them and rent them out. The investment companies use these lease agreements to mitigate their commercial liability deductibles.