The IoT Hurdle for Insurance
INTRODUCTION & BACKGROUND
As IoT continues to shift the insurance industry dynamics, the magnitude and directionality of changes being induced is only becoming clearer with time. From USAA being awarded a patent on their observational data-recording device for homes back in 2012, to usage-based insurance (UBI) products acquiring 6% of the global auto-insurance market, much has been seen of the impact that IoT applications have had on insurance but little of how assimilating the data facilitated by these applications will impact this industry. This week’s ‘In Focus’ explores the latter with a conceptual outlook.
The system of risk assessment, presently being used by insurers, is static, wherein any assimilation of new information is sparse and sporadic. This not only leads to information gaps in risk profiling but also bases the revision of actuarial tables on limited data-points that can create unwanted biases. It also makes comprehensive reexamination scant and dispersed. However, IoT-enabled devices provide an army of self-deployed sensors that interact with the insured entity and provide real time data that can be fed into algorithms and other conceptual frameworks to determine the actual amount of risk. This would allow for creating comprehensive and dynamic risk-profiles that factor, not only the real time information but also use patterns gleaned from the archival data to conduct predictive analysis.
THE SEA CHANGE
The framework of traditional insurance providers has, historically been aligned with product lines or practices. This is being challenged on several fronts: for one, insurance providers are having to realign their offerings to customers. Secondly the conventional framework, resting on products, is under attack by the “unbundling” of their services catalyzed by digital technologies. The technological hurdle will and, in fact, is already being circumvented through a variety of interventions, including fleet-footed inroads in deploying cloud applications. There have been welcome signs that the insurance behemoths are warming up to changes in the technological landscape as evidenced by their aggressive investment in tech startups, which have notched up $1.78 billion in funding since 2010. In 2014 alone, the investment increased over 4.5 times. Some of the hot areas that have attracted financing include price-comparison, as well as lending and wealth management (robo-advisory).
Most of the insurance giants have been clinging on to legacy applications that are highly customized silos of data and allow for poor integration with other applications. Managing the inundating amount of data that is (by any reasonable estimate) expected to be encountered by way of IoT enabled devices, would eventually require new data standards that would inevitably be universal in their approach. This could, potentially spur internal data-standardization across the insurance industry, which would allow for smoother data-transfer across players in different industry verticals and reap a myriad of benefits, including normalization of actuarial data, faster turnaround, etc. As this stream of data-flow is expected to accelerate the revision of risk-assessment standards in the insurance industry, changes in pricing would be effectuated. If one were to follow the impact of such shifts on the current trajectory of actuarial tables, it may be anticipated that any movements would be gradually adjusted through an iterative process.
In the re-insurance industry, IoT enabled data flows can allow for expanding their selective-risk onboarding practice (particularly in developing markets, with limited data) to make their risk coverage more comprehensive. As advanced data analytics provides far more accurate risk assessment, the engagement of insurance providers with risk-packaging and risk-backing entities is sure to change. The whole exercise is sure to affect the bottom-line of all stakeholders and, in the process, create new ones.
Although speculative, but impending changes in the risk assessment dynamics of insurance solutions could also result in newer ways to repackage or trade insured risk. Owing to regulatory barriers, this is unlikely to undermine the market of large reinsurers, it could, however, create new ones in its wake. As a notional proposition, consider how dynamic risk data could allow packaged insurance products to be traded on a stock floor, like equities. They could even be repackaged into complex financial instruments, such as insurance-backed securities.
OF DELUGE & DAM
The dynamic stream of data from IoT enabled devices could just as well turn into a “deluge” if insurance companies are not adequately prepared to stem the tide. In order to assimilate this data flow, the insurance industry would have to integrate digital technologies, effectively creating “dams” with robust capabilities for big-data analytics capable of sustaining this uninterrupted flow and filtering relevant insights. Secondly, and perhaps more fundamentally, this would also require a fresh conceptual approach to consolidating the dynamic risk element into insurance processes, taking stock of the new data-stream. This will be a sea change, broadly entailing these challenges:-
1.Finding viable entry points for data-flows from sensors deployed in the world.
2.Determining relevance of data points and feasibility of assimilation. Identifying what can be integrated — where and how. Creating robust tech systems for onboarding data flows.
3.Adapting to new data-standards enforced by IoT, both internally and across the industry.
4.Creating new differentiating capabilities using IoT data
CREATING DIFFERENTIATION IN A SEA-CHANGE
Insurance is becoming increasingly commoditized due to the lowered entry-barriers and the enforcement of cross-industry standards across functional areas, particularly in front-end operations such as sales and client servicing. This is making it increasingly difficult for incumbents, with legacy systems, to differentiate themselves from new entrants that have enviable expertise in these functional areas. There has been talk of how transforming front-end operations into unique customer experiences could, potentially allow incumbents to ride the digital wave, but it seems unlikely that such measures would suffice.
In this regard, the barrage of IoT intrusion can provide vital opportunities for incumbents to reclaim their turf in the headwind of this commoditization, through strategic differentiation. The dynamic data-stream from IoT-enabled devices can be leveraged to provide differentiating advantage in two broad ways:-
A. Existing Solutions: Several insurance solutions, in want of a regular stream of data, could allow for more accurate risk profiling and, hence deeper penetration if a regular stream of data, such as that facilitated by IoT-enabled devices could be leveraged. As an example, consider insurance cover provided to persons emerging from critically illnesses, entitled to living benefits. This is one such product where data is relatively scarce and where, in the face of information lags, a stream of dynamic data could provide an additional basis for risk assessment.
B. New Solutions: The ubiquity and proliferation of the capability to provide generic insurance solutions is prompting incumbents to rethink their core strength. Although disruptions in middle-office (policy and products) operations are unlikely to percolate through the insurance ecosystem overnight, it certainly presents an opportunity that incumbents are better placed to tap into. This makes the case for established providers to explore and diversify their practices to include newer and more sophisticated products that would be hard-to-replicate and provide crucial advantage in the evolving market landscape.
As IoT is poised to accelerate the trend initiated by the digital unbundling of services, insurance providers might come to be reduced to infrastructure providers in quite the same way that banks are being speculated to be reduced to providers of compliance, capital holding and transactional processing at the hands of fintech. It is, therefore, imperative for them to identify their core competencies and dedicate their resources to differentiating themselves by strengthening these hard-to-replicate core capabilities, rather than focusing on commoditized capacities. As industry boundaries are increasingly dissipating, IoT is poised to create unprecedented opportunities in insurance.
Although clarity over new solutions that transpire in this way and the market functionalities that are covered by insurance will only come with time, it remains to be seen if a Moven and Simple of the insurance industry will emerge from within or the tech deluge.