The internet of things is moving the broker's cheese
Connected devices are poised to shake up the industry. Here's what brokers can do to stay ahead of disruption.
“Who Moved My Cheese” by Spencer Johnson is an apt description of what’s happening to the broker community today. You are under attack on all fronts. Carriers are developing direct-to-consumer communication mechanisms, private equity has seen the profit margins for broker companies and has aggressively moved in to acquire and expand, there is increasing pressure on brokers to heavily invest in their technological transformation initiatives to maintain relevance, and now the internet of things (IoT) devices have arrived that threaten to disrupt the fundamental insurance business model, and with it, broker commissions. This creates a firestorm for all those who have enjoyed a high renewal rate/lifestyle business for, in some cases, decades.
A very well-publicized example, Hippo Insurance provides to its insureds a smart home kit containing five sensors, which go on front and back doors, one on the ceiling in the kitchen, one near the washing machine, and one near the water heater. In exchange for using these devices, Hippo provides a premium discount of up to 25%. Using these devices is a condition of coverage and is reflected in the policy form.
When you understand that IoT devices have the fundamental opportunity to provide extremely effective risk management/mitigation strategies at scale, which could ultimately reduce insurance premiums by anywhere from 15-40%, there is a definite motivation to at least learn all you can about this threat so you can prepare for if and when it becomes necessary to do so. With the anti-rebating legislation that exists, there is still uncertainty around the go-to-market strategy for these IoT devices, at least for commercial insurance. However, with 60% of insurance companies that have piloted or are considering pilots of IoT programs and 15% of carriers have launched IoT-based solutions, this is something that brokers must pay attention to.
If you consider that both personal and commercial properties could reduce theft, water loss and fire risk by several orders of magnitude with the use of these devices, it changes the landscape for how insureds choose to insure that risk. If the premium is significantly reduced in the commercial arena, how do we then determine how to divide up the pie between the primary policy, the equipment breakdown policy, the excess policy, and the reinsurance they all purchase? If you get a high rate of adoption of IoT devices, does that mean that any property owner that refuses to participate becomes a “high risk” and is pushed into the excess and surplus marketplace and finds their premium to be adjusted accordingly?
One universal truth across every professional services business is that if your client finds out that you could have offered them better coverage, better service or lower price, but you didn’t (and the reason you didn’t seldom matter), then you lose that client. This is a very dangerous tightrope for brokers who are simply trying to keep the IoT device discussion away from their clients. If those conversations happen around you anyway, then it’s a lose-lose. It’s always better to at least be at the table to be part of the strategic planning on how your income will be affected at next year’s renewal as opposed to learning about it through a change of broker letter.
Understand, as well, that it is not simply your business that is affected. When you consider the insurance business model, with more perfect information available in real-time, that can have a dramatic effect on the underwriting practice for the broker. Not to mention if the company takes a corporate stance related to a particular risk profile and simply chooses to not insure it. This type of detail allows much more precise underwriting decisions to be made regarding sublimits, deductibles and exclusions.
If the risks are better defined and controlled at the underwriting stage, what does this mean for claims? If fraud has been effectively minimized and you have again, near-perfect loss information available immediately, it has a dramatic effect on the claims department as well. If claims cycle time is dramatically decreased, this means they are paying out claims much faster, and this directly impacts the float/investment management strategy of the carrier.
Finding the cheese
So what should a broker do? One option would be to partner with these IoT device companies and create a revenue stream. Software companies are highly profitable, generally 80% gross margins. If you can effectively replace their need for a sales and marketing department, you can negotiate a 20-30% recurring revenue stream that exists forever. Brokers should understand that if they can effectively play as intermediaries for this technology exchange, the customer lifetime value is significantly increased. Changing technology platforms in large organizations rarely happens. Look at how poorly many ERP systems or other core systems have functioned, but the pain to move away from them is too great, so the company chooses to manage around the pain instead of replacing it.
Consider that the “depth of your hook” with the technology might be set even deeper than the hook of your personal relationship with ownership. If not this option, what will you do to ensure the continuity of your business for the next 20+ years? If you choose not to embrace a partnership with these IoT device companies, at least consider that you must become the expert advisor on how the devices play into risk mitigation, loss frequency/severity, premium adjustment, policy conditions and more. As long as you have a policyholder committed and actively willing to invest in loss prevention/mitigation, you will find a happy medium between professional service fees and premium commissions.
Tim Christ, MBA, is a vice president at 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 frequent contributor to various insurance publications. Contact him at tchrist@claimatic.com.
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