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The Intersection of IoT and Ecosystems

Traditional, end-to-end business models are breaking down in every industry, including insurance. In the digital era, it is increasingly difficult for any single firm to deliver the seamless experience that customers expect. More insurers are leveraging digital ecosystems to reinvent their products and services, providing better risk management, reduced claim cost and new sources of revenue.

However, rooted in legacy systems and siloed business structures, most insurers even lack the foundations to successfully execute insurance ecosystems. Insurance organizations will likely struggle in moving from traditional insurance offerings to tailored, ecosystem-driven customer experiences.

Nonetheless, insurers should have a plan for incorporating ecosystems into their business models. It’s time for all insurers to become insurtechs.

As opposed to the traditional business model, where insurers create and distribute end-to-end products and services, an ecosystem model is characterized by unified/digital platforms that incorporate third-party products and services and collaborate with segment-focused distribution partners. Carriers must either bundle value from others with their products (e.g., providing IoT-based real-time risk mitigation services) or provide value to a bundle that someone else is creating (e.g., insuring the performance delivered by an IoT service provider).

Based on research from the IoT Insurance Observatory — a think tank focused on North America and Europe with almost 60 members, including many of the largest insurance and reinsurance groups and prestigious tech players like ValueMomentum — the adoption of IoT requires a robust set of capabilities, as represented in the following figure. 

Source: IoT Insurance Observatory

See also: The New IoT Wave: Small Commercial

Any insurance IoT program is a multi-year journey that requires overcoming functional silos, coordinating the different stakeholders and developing a collective intelligence. Insurers can achieve four kinds of goals:

  1. Improving core insurance activities (assessing, managing and transferring risks) by using IoT products and services for continuous underwriting, claims management and risk reduction. This goal was investigated in depth in our previous article, “Chloe and Insurance: A Love Affair.” 
  2. Providing positive externalities to society, a topic more and more relevant due to the current focus on ESG investments (environment, social and governance);
  3. Generating knowledge about policyholders and their risks. This knowledge has allowed carriers to insure current risks in a different way, enable up- and cross-selling actions and insure new risks;
  4. Improving customer experience by interacting with them more intimately and frequently, moving beyond the traditional risk transfer. Many players are selling additional services for a monthly fee; others have found new ways to sell insurance coverages thanks to IoT.

Partnerships are a key differentiator. Some insurers have recently announced bold initiatives to use an ecosystem to expand their reach. One such insurer is Nationwide, which recently disclosed its partnership portal, where it exposes its services and protection products – including auto usage-based insurance (UBI) and connected homeowner insurance – to partners. 

With more than half of insurers delivering on their core systems modernization projects in recent years, it’s time insurers leverage data coming from their core systems to grow their business. By integrating IoT devices data to the core system data and leveraging this data fusion, insurers will have the opportunity to build a more holistic view and understanding of their customers and their risks. Insurers will be able to build a sort of digital twin of the customer, then tailor their services and offerings and improve the customer experience. Insurers will also overcome business lines silos, enabling upselling and cross-selling. 

Many senior insurance executives acknowledge that the world will be more and more connected, but, even with ecosystems as a topic on the agenda, IoT has not been exploited in business processes in a meaningful way. To lead an IoT-based business transformation, a clear vision and a structured and well-communicated plan are necessary. 

Technology is one of the key enablers of this transformation. However, insurers will have to carefully investigate, determine, prioritize and experiment with a range of IoT business use cases to develop an IoT-based business model. Many insurers are exploring a range of scenarios beyond connected cars, including connected homes, health and lives, infrastructure, factories and transportation. A comprehensive approach to help insurers build out the required capabilities for IoT is below. This insurtech approach takes insurers from business model definition to vendor partner strategy, to platform implementation and finally to IoT insights across the insurance value chain.

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A main challenge for insurers is building the technology architecture to aggregate, normalize and analyze data to make it available for the IoT platform. A big question for many is: How do I get started? An effective way to develop your architecture is by leveraging frameworks.

The framework below breaks down the broad portfolio of technology components, services and capabilities. The components are arranged in three layers – Edge, Fog and Cloud computing – addressing where data should be stored and processed for speed, cost and effectiveness, depending on the type of data and purpose of the data. 

The collection of managed and platform services shown in the framework, across Edge and Cloud computing layers, connects, monitors and controls IoT assets and the processes that generate data for insights and analytics. These services work together across multiple layers that include the IoT ecosystem — such as sensors, devices and industrial sensors — and connect to the computing infrastructure at Edge, Fog or Cloud, persistently or intermittently. 

Data collected by the IoT ecosystem is then processed and analyzed at the Cloud layer, along with enterprise data sets such as on customers, policies, claims and billing. All of this data forms the inputs to the digital twin, which can then be turned into actionable outcomes using the latest computing techniques. 

For insurers that are currently investing in IoT, and for many more that are considering doing so, this framework can help guide your approach and provide a strong architectural foundation.

See also: Global Trend Map No. 7: Internet of Things

As new waves of technology or sudden social shifts bring disruptions or opportunities to the industry — similar to telematics or digitalization — insurers must capture opportunities rapidly. Insurers that can reinvent themselves by leveraging data, including from the IoT, and form ecosystems will win.  

After all, the digital economy is a “made for me” economy, and the digital twins allow insurers to tailor insurance experiences. Customers will reward organizations that understand their needs and provide them personalized value. 

There are already examples of successful insurers – in different business lines and different geographies – that have effectively integrated IoT. Their stories mastering usage of IoT is an achievable target without investing hundreds of millions of dollars, but instead by leveraging the right partnerships.

Despite COVID, Tech Investment Continues

Insurers will continue to experiment with emerging technology in 2021, despite the challenges of 2020. When the COVID-19 pandemic hit, many insurers paused their 2020 innovation plans, emphasizing digital workflows and cost control at the expense of emerging technology pilots. Heading into 2021, technology priorities for many insurers, especially those in the property/casualty space, are similar to those of 2019.

The U.S. is still in the midst of the pandemic, and some insurers are anticipating lower premium revenues for the coming year. In spite of this, insurers are investing in technologies like artificial intelligence and big data, though some are narrowing the scope of their innovation efforts for the coming year.  

Understanding Emerging Technology Today

Insurers typically take a few main approaches to emerging technologies. Early adopters experiment with the technology, typically via a limited pilot. If the technology creates value, it’s moved into wider production. Insurers that have taken a “wait-and-see” approach may launch pilots of their own.

Novarica’s insights on insurers’ plans for emerging technology are drawn from our annual Research Council study, where CIOs from more than 100 insurers indicate their plans for new technologies in the coming year.

No insurer can test-drive every leading-edge technology at once, and every insurer’s priority is a result of its overall strategy and immediate pressures. Still, at a high level, several industry-wide trends are apparent:

There is big growth in RPA; chatbots continue to expand. More than half of all insurers have now deployed robotic process automation (RPA), compared with less than a quarter in 2018. Chatbots are less widely deployed but on a similar trajectory: from one in 10 in 2018 to one in four today.

AI and big data continue to receive significant investment. These technologies take time to mature, but it’s clear insurers believe in the value they can provide. More than one in five insurers have current or planned pilot programs in these areas for 2021.

Half of insurers have low-/no-code capabilities or pilots. These types of platforms are relatively new but have achieved substantial penetration in a short time. Early signs indicate they could become a durable tool for facilitating better collaboration between IT and business experts.

Despite continued tech investment, 2021 might be a more difficult year for innovation. Insurers’ technology priorities have generally reverted to the mean — more so for property/casualty than for life/annuity insurers — and technology budgets for 2021 are within historical norms. Still, some insurers are paring down pilot activity in less proven technologies, like wearables, to maintain their focus on areas like AI and big data. Technologies with substantial up-front costs, like telematics, may be harder to kick off in 2021. 

See also: Technology and the Agent of the Future

How Emerging Technology Grows

Emerging technologies have widely varying rates of experimentation, deployment and growth within the insurance sector. Their growth rates boil down to a few key related factors:

  • How easily the technology is understood.
  • How readily it can be deployed and integrated with existing processes.
  • How clearly the value it creates can be measured and communicated.

At one end of the spectrum are technologies like RPA and chatbots. These technologies create clear value, are readily added to existing processes and are relatively easy to deploy. As a result, insurers have adopted them rapidly.

Artificial intelligence and big data technologies require longer learning periods; sometimes, they require business processes to be completely reengineered. The technologies create value for insurers but have grown more slowly because they take time to understand and integrate.

Drones, the Internet of Things (IoT) and telematics can create new kinds of insurance products or collect new kinds of information. These can also create value, but their growth remains slow because developing these technologies may require orchestration across several functional areas, and they can be costly to ramp up.

On the far end of the spectrum are technologies like augmented and virtual reality, blockchain, smart assistants and wearables. Most of these technologies don’t yet have established use cases that demonstrate clear value, so it remains to be seen whether they will be adopted more widely.

Using Emerging Technology

One key insight from Novarica’s study is that technologies that integrate readily to existing processes can grow more rapidly than technologies that require new workflows to fully use. This observation comes with a few caveats for both insurers and technology vendors.

Insurers sometimes fall into the trap of “repaving the cowpath” — they adopt new technologies but integrate them into their existing (inefficient) business processes. Doing so means they can’t get maximum value from their investment. Ironically, it’s usually the shortcomings of legacy technology that have made these processes cumbersome in the first place.

It’s easy to understand the value that technology creates when it integrates with an existing process and can be measured with the same key performance indicators (KPIs). It’s much harder to create a new process enabled by new capabilities, train employees to execute it and demonstrate that the new way is better than the old way. Yet getting the most out of emerging technologies often requires rethinking how business might be done.

See also: 2021’s Key Technology Trends

For their part, vendors should focus on the value their products create and the problems they solve, aligning them to insurer needs. It’s not enough to use a new technology for its own sake, and using new tools sub-optimally may make them seem less effective. Vendors should coach their insurer clients through best practices and help them understand how their tools can ease, change or make obsolete existing processes.

At its core, insurance is a simple industry focused on connecting those exposed to risk to capital that can defray potential losses. At the center of that value chain are insurers, that continue to explore new technologies to better understand their risks, sell more and operate more efficiently. Even in uncertain times, insurers are innovating.

4 Initiatives That Unlock IoT’s Value

The insurance industry excels at tactics. If one is an underwriter, a claims person or contact center manager, and a problem is detected, it’s all hands on deck to solve that problem. What tactics could wrestle that problem to the ground? That’s generally the direction the industry is most comfortable with because we are a pragmatic group by nature. IoT can easily fall into that scenario: if a commercial building is tall, let’s get a drone out there to inspect the roof. If a homeowner has a water damage claim, a water sensor is going to prevent a recurrence.

To be clear, the tactical use of technology is essential. If technology doesn’t solve a problem, then it’s just a shiny object, and no insurer has time for that – or the money to dedicate to it. However, particularly in terms of IoT, some may believe that it is a one-sided coin: a tactical tool to solve a specific problem. But that view short-changes the true value of IoT. It really is a two-sided coin.

The two sides of the coin emerge when IoT devices and sensors are connected with other initiatives. SMA finds four specific initiatives that change the business outcomes and value of IoT adoption:

  • Data Initiatives. Sensors and connected devices generate unfathomable amounts of data. And almost all insurers are seeking new data sources to improve decision making, processes and risk management. It is critical that insurers include IoT data sources when initiating and advancing data-related projects. Ingesting and operationalizing IoT data is easier when these sources are planned for at the outset.
  • AI Initiatives. In terms of IoT, AI represents a “chicken or egg” scenario. Is the tactical value of IoT the most important thing? Or is AI necessary to bring out the value? The tactical value of IoT is good. But using machine learning (ML), computer vision and natural language processing (NLP), to mention but a few of the AI family, generates new insights from the data and takes things to a whole new level. In fact, without AI, IoT is just a tactical tool. When assessing an incumbent or insurtech IoT provider, one of the important things to ask is whether they have data skills and AI embedded in the technology. Time to business value is critical.
  • Customer Experience Initiatives. There are a number of things to consider when undertaking a customer experience initiative. IoT should be one of those things. For example, Siri, Alexa and Google Voice are present in many homes. With development and planning, these devices can be a service point to make policyholder experiences easier. Leading fleet telematics technologies provide fleet owners and managers with information to assist with driver development, making it easier to conduct business. There are numerous other IoT uses related to customer experience, and taking an outside-in view can reveal many opportunities.
  • Parametric Product Development. In a quest to reduce claims expenses and facilitate the coverage for perils such as drought and pandemic, once difficult or impossible to insure, insurers are turning to parametric insurance. While not a primary line of coverage, parametric insurance can provide a source of indemnity to quickly assist a policyholder with immediate expenses. Sensors are frequently key in executing a parametric product because they define the attachment point for the coverage. Insurers can expand product offerings in new competitive ways by considering how sensors can define the occurrence.  

See also: Crucial Technologies for P&C During COVID

So IoT is a two-sided coin – tactical and strategic. Both sides need to be understood and developed. Personal lines insurers are further down the road in terms of adopting IoT, but in 2021 commercial lines insurers are adopting and spending.

A recent SMA report, IoT: Connecting P&C Insurers to New Business Opportunities, provides personal and commercial survey data around what insurers are doing, furnishes examples and includes an in-depth view of business value.

Crucial Technologies for P&C During COVID

Technologies like machine learning, the Internet of Things (IoT), robotic process automation (RPA) and natural language processing (NLP) were already hot topics in P&C insurance before the world was turned upside down in 2020 due to the pandemic. These and many other “transformational” technologies have great potential for insurers in the rethinking and optimization of distribution, underwriting, claims and many other parts of the business. So, it is important to ask the question – how have the initiatives that leverage these technologies changed due to the pandemic?

Are personal and commercial lines carriers still moving forward with projects in 2021? Do executives still have the same expectations about the potential of these technologies to transform their business?

We answer these questions in detail for 13 specific technologies in two new SMA research reports, one covering personal lines and the other covering commercial lines.

However, I won’t leave you hanging in this blog, wondering about the answers to those questions. The short answer is yes – P&C insurers generally plan to move forward in 2021 with projects that leverage various technologies that have the power to deliver significant results and competitive advantage. The technologies we follow closely and have profiled in our reports have been organized into three strategic planning horizons: short-term, near-term and long-term.

For both personal and commercial lines, technologies in the AI family play heavily in the short-term category. Machine learning, NLP, RPA, computer vision and new user interaction technologies all rank high in terms of their potential to transform and in the level of activity underway or planned by insurers. Technologies that fall into the near-term or long-term horizons include wearables, blockchain, voice, AR/VR (augmented reality/virtual reality), 5G and autonomous vehicles. All have potential in insurance and will likely be incorporated into projects by innovators over the next couple of years but will not make it into broad, mainstream application until midway to late in the decade.

Our research on transformational technologies, when viewed in concert with our SMA Market Pulse surveys, shows that in some cases proofs of concept (POCs) and new projects have been put on hold in 2020, but all indications point to full steam ahead in 2021. Major projects already underway are continuing, and insurers state that they do not want to lose momentum for foundational projects like core systems. Projects that include transformational technologies needed to address digital gaps that were exposed during the pandemic have been raised in priority.   

See also: AI in a Post-Pandemic Future

In many ways, the pandemic is accelerating digital transformation across all industries, including insurance. Transformational technologies will play an outsized role in that transformation and look to be important components of insurers’ plans for 2021 and beyond.

Winning With Smart IoT in P&C

Insurance companies long for a way to attract and interact with customers, rather than just hitting customers’ bank accounts every quarter for a premium payment or re-upping a contract at the end of the year. What if I told you that insurers could attract customers with smart home devices that generate interaction seven to 10 times A DAY — and that customers would initiate those interactions? What if that level of involvement in customers’ lives led to a Net Promoter Score (NPS) above 50 for the insurers? 

Those numbers are in fact possible, both with homeowners and with small businesses, through an approach that incorporates IoT to help people avoid P&C risks while fitting easily into their home and work lives.

We know because we’ve seen these sorts of numbers at Notion, which we began with a Kickstarter campaign and grew through insurance partnerships with Hippo, Nationwide and others before being acquired by Comcast this year. 

While Notion partners with insurers to provide homeowners and owners of small businesses technology to monitor for water leaks, fire, theft and more, there are a variety of ways to win with smart IoT in the property/casualty world. 

In our experience, there are two keys to winning strategies: customer-centric technology and a comprehensive economic case for investment.

First, the technology should deliver benefits, such as “peace of mind,” that customers value highly even though the benefits would be hard to quantify. In our case, customers interact so frequently with the Notion app because they’re checking their system to see if the front door opened around the time their child was supposed to be getting back from school, that it is a comfortable temperature across their home, etc. Those benefits don’t show up in losses averted or claims reduced but can do an awful lot to increase installation rates, to bolster loyalty toward an insurer, to boost NPS and to create opportunities for cross-selling other services.

Every company that has led with a “prevent water damage” message has seen very little interest among consumers. Even if insurers provide water sensors for free, the installation rate can be low if that is the only use case. But technology and messages related to broader home coverage and security resonate with consumers.

Let’s walk through Notion as an example of the trajectory that the “smart home” (and “smart” small business) can take. Auto telematics long required a device to be professionally installed and focused just on discounted premiums for good drivers, and had a slow uptake, so we took a different approach: We’ve focused on a do-it-yourself (DIY) approach and on making that more-than-economic argument for insurers.

We built an affordable system where consumers can monitor their home or small business from anywhere and easily grow to fit their needs. The Notion sensors monitor for water leaks, temperature changes, opening doors and windows, and sounding smoke and carbon monoxide monitors. All the information is collected wirelessly and is made available to the user through an app on their smartphone.

Most homes and small businesses can have key areas covered with just five sensors — total price for a five-sensor Notion Starter Kit is $199. 

Which leads us to the second key to winning strategies: a reasonable economic case for the IoT investment. Many technologies and programs aren’t there yet. For instance, a water shutoff valve that requires a professional installation may not pay for itself for 10 years — the initial cost is a high barrier. 

So, we started from scratch and came up with a program design that produces full ROI in just under two years — the kind of ROI that any business can appreciate. Just looking at water damage, there are about $10 million in claims each year per 50,000 homeowners policies. By investing in an $85 smart monitoring kit and program for customers, insurers can practically cut their water claims in half.

The ROI looks even better when you consider the other benefits to insurers outside water claim reduction: customer acquisition, customer loyalty, data insights and the potential for selling other services.

The large returns our insurer partners generate by preventing claims allows them to offer a kit at a discount plus offer discounts of roughly 3% to 15% on premiums to help drive adoption. Our partners say discounts could grow substantially as they gather data on losses prevented. (The high end of the discounts goes to those who fully outfit a house or small business, who have professional monitoring and whose setups can be verified by the insurer to make sure they’re actually being used.) 

While the discounts alone aren’t enough to generate full adoption even of free sensors, a curated flow of customer communication with a “what’s in it for me” message drives installation way up. (The same was true in telematics: Once messaging switched from discounts to security issues such as driving behavior, adoption finally picked up.)

While regulators were initially careful about what could be given away and what bundles should be allowed, they have become more comfortable with the IoT and understand that we’re all working together to benefit consumers. 

They have thus cleared a path for far greater adoption of the IoT, at a time when all trends were already pointing in that direction. According to Statista, the number of homes in the U.S. using smart security systems will nearly triple from 12.8 million in 2017 to 36.7 million by 2023 — meaning that more than a quarter of U.S. homes will have them. Revenue from smart home devices is expected to grow 17% annually for the foreseeable future. 

The trend is very much toward DIY: 47% of security system owners report self-installing their system in 2019, an increase from 27% in 2014, according to Park Associates.

The pandemic seems to even be accelerating the trends, both toward the use of IoT (because people are spending more time in their homes) and toward DIY (because people have more time, without their daily commutes, because people want to keep strangers’ potential infections out of their homes and because videos and chat capabilities on smartphones make “telemaintenance” easier). 

A platform like Notion can become the hub for all kinds of services that can be bundled with hardware or sold separately to make the lives of homeowners easier — for example, connecting a homeowner with a plumber when they have a water leak. With Notion, we have taken this one step further and created a direct integration in our app with HomeAdvisor. Once a leak has been detected, the homeowner can connect to HomeAdvisor’s network of certified professionals with one click. 

But that kind of service is just the beginning. In the same way that Tesla bundles insurance with its cars, I can imagine lots of maintenance-related services that could fit nicely into an IoT-based “protect my property” platform. When I say good night to my Google Home, it may remind me to do certain things around the house; why couldn’t insurers help inform homeowners and small business owners? 

Now there are winning structures for insurers to leverage IoT smart devices to connect and provide value to their customers — a win for customers and for P&C insurers.

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