Only hours after leaving for vacation, a homeowner saw an unexpected message flash across her smartphone: "Interior temperature high, smoke detected…contacting fire department." It made for a brief vacation, but the notification may have saved a house. In this hypothetical scenario, sensors installed in a connected home recorded an oven's malfunction and a rapid change in temperature before transmitting the information to authorities who could help.
In the real world, connected residences stream reports about security, temperature, air quality, moisture, noise and other conditions, opening a new window for insurers into a trove of data. In North America, where an estimated 6% of homes have been connected, the trend toward joining the "Internet of Things" is expected to grow to a market penetration of 28% by 2019, according to the market research firm Berg Insight. Widespread adoption of smartphones and tablets is making the idea of remote monitoring of home conditions an easy and appealing prospect for consumers anticipating a better, and perhaps safer, quality of life.
Among insurers, opportunities for insights from connected devices will likely be enormous, even though using those devices introduces several challenges. Millions of devices sending continuous streams of information may soon lead to unscalable mountains of data. Questions remain about how best to structure that data and how to calibrate information provided by different technology providers. Policyholders also raised issues of privacy and the illicit sharing of information, and insurers surely will be tasked to show that home devices are secure and accurate in their transmissions.
Home-automation companies have issued their own assurances of privacy to consumers—and insurers will almost certainly have to face the security question with fresh eyes. To this end, insurers should consider the example set in the auto telematics sphere and begin their programs by offering discounts to policyholders for adopting some of the less intrusive smart technologies in their homes. Consumers may be more willing to share data from sensors placed on their water system than from a computer router that indicates which resident is home and online. For an insurer's first approach in this field, simpler may be safer.
But once consumer concerns have been satisfied, or at least responsibly addressed, the potential for usage-based rating plans becomes clearer. For a start, home devices allow insurers to monitor potential causes of loss or even prevent damages from water, smoke, or heat before they can occur. This principle applies especially to secondary or seasonal residences, where an owner may not have access to perform timely in-person inspections. In a fully connected home, it's expected that sensors will monitor use of water and electricity, detect motion, and signal the presence of smoke, carbon monoxide or carbon dioxide.
To derive useful insights, insurers must meet the challenge of capturing sufficient amounts of exposure data (in terms of home years) to complete an analysis. With the current connected-home penetration of 6%, an insurer with 1% market share that partners with a smart-home technology provider with 1% market share could expect a total of about 15 claims per year from homes with connected devices. That's almost certainly not enough data to yield actionable insurance insights. To ensure a competitive advantage in pricing and underwriting, insurers should think creatively about how to obtain the greatest amount of data in the shortest time. Partnerships outside—and even within—the insurance industry may become key to reaching fresh insights.
While data may be paramount for establishing rates, insurers shouldn't lose sight of what's most important in the eyes of policyholders. Consumers are installing home devices to enrich their quality of life, from improving home security to saving energy. Those are values that extend far beyond the realm of insurance. Some may be motivated by the prospect of reducing home energy costs, while others simply like the idea of operating lights and appliances by remote control. But both groups appear to sense the promise of the "Internet of Things" and may be on the way to embracing this new and potentially fruitful chapter in the insurer-policyholder relationship.
Joe Wodark is product manager for connected-home research at Verisk Insurance Solutions, a Verisk Analytics (Nasdaq:VRSK) business.
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