Commercial underwriting: Caught between the law and an IoT device
Technology is helping insurers reduce homeowner risks, but will the same devices work in commercial properties?
On the heels of the announcement that Hippo Insurance is going public with a valuation of $5 billion, there is a lot of industry buzz around Internet of Things (IoT) devices. Hippo provides all its insureds an IoT starter kit, which comes with five sensors. They recommend installing these sensors at the front door and garage door to let you know whether or not they are open, on the floor near the water heater and washing machine, and in the ceiling of the kitchen to act as a smoke alarm.
The benefit to the homeowner and the insurer is that they provide immediate notification of the vast majority of burglaries, water leaks and fire risks that exist within homes. This advance warning allows Hippo to provide up to a 25% premium reduction versus traditional insurance policies. So what does that mean for commercial insurance?
Mitigating commercial risks
Commercial properties exhibit the same risk scenarios as homes but obviously from a much larger perspective. They are subject to burglary, fire and water damage. Unfortunately, instituting a risk prevention or mitigation plan for these commercial properties is not as straight-forward as it is for homeowners. This means that the commercial property market is years behind the personal lines insurance market in terms of leveraging technology to reduce risk. Multiple roadblocks exist for commercial underwriters regarding IoT devices.
First is the interplay between the various layers of coverage that exist for commercial properties. There is the primary property policy, an equipment breakdown (EB) policy, excess coverage, and then reinsurance. Water losses are a primary driver of claims, especially in a multi-story building that has a leak on an upper floor and “rains water” (pun intended) to multiple floors below.
IoT devices have emerged as an excellent loss prevention/risk control mechanism for exactly these types of events. So why have they not been adopted? The various players at the table haven’t figured out how to appropriately divide the cost and the risk. Hippo Insurance gives their IoT devices to the consumer for free but as a condition of coverage. In commercial coverage, should the primary property carrier be the one to supply the devices? Should it be the EB carrier or the excess carrier? Should there be a “shared percentage” of cost amongst all three?
Second is the revised pricing model and underwriting. EB carriers have excellent data to show how well these devices work and how well they prevent losses. However, do they freely share that data with the primary property carriers? Do they make it a revenue stream? Data sharing is always a very sensitive subject in insurance. The primary property policy would like to have a 5-to-10 year property loss history to appropriately price the risk. However, with a new IoT device, there is only the “promise” of loss reduction or mitigation. Obviously, the policyholders will not want to wait several years to aggregate how well those devices have performed in the building before they see a premium reduction. The question then becomes, if we have a reduced premium, how do we appropriately “share” that with our EB partner, excess carrier and reinsurer?
Third is regulatory, and many would argue, that since it is a compliance issue, it’s actually the most important. Most states prohibit carriers from any “inducement to purchase coverage” as part of their anti-rebating legislation. Right now, IoT devices are not specifically excluded from that regulation, which means carriers are not going to take the risk. It’s apparent that IoT devices should fall into the category of loss control and risk prevention, but carriers need clarity, so they can submit the use of IoT devices as appropriate rating factors and have that “condition of coverage” included in the policy form.
Florida and California have some exceptions, so it will be interesting to see if those states can be early adopters. Otherwise, until the regulations are updated, the commercial property industry will either sit on the sidelines or figure out a creative way around the legislation. The other option is for the commercial property industry to simply take the financial burden on itself with the idea that it can likely recoup its investments over time.
Just like marketing a building as a “green building,” there are several advantages to marketing a building as a “protected building.” There is also the longer-term financial and client service impact; if a building doesn’t have a loss in 10 years or more, what does that mean from an occupancy retention and pricing perspective?
For these reasons, we see commercial underwriting being caught between a law and an IoT device. It will be interesting to follow the commercial developments going forward to see how and where their adoption increases significantly. At some point, these devices will likely be standard equipment during the design and construction phases of a building, but that is likely at least 5-10 years away.
Tim Christ is the vice president of Claimatic, a SaaS intelligent decisioning software that serves several P&C insurers. He is the author of two books on insurance, business and technology, a speaker at industry events, and a contributor to various insurance publications. Contact him at tchrist@claimatic.com.
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