(Image credit: Dollar Photo Club.)
Let me state it plainly: the Internet of Things (IoT) will completely transform the insurance industry as we have known it. In fact it has already begun to do so—if only in relatively trivial ways so far. The real inflection point will occur when insurance carriers begin to analyze IoT data outputs to develop and sell personalized insurance products and price them individually and dynamically. This transformation is only just now being made possible by the convergence of several powerful forces: the rapid adoption of mobile technology, digitization, the ability to cost-effectively store, manage and analyze enormous volumes of data (unstructured as well as structured) and the emergence of prescriptive analytics.
People say that the IoT is over-hyped, and that’s understandable. Acronyms that have as much potentially broad and extensive impact as does IoT are destined to get a lot of “ink.” They are like Top 40 pop tunes—we’re all familiar with them, we hear them far too frequently and we quickly tire of them. And their original meaning of quickly becomes obfuscated as a consequence of widespread use without real comprehension.
But there is no disagreement among leading researchers that there will be tens of billions of devices—computers, smartphones, tablets, and sensors of many different kinds, including wearable devices—connected to and broadcasting readings across the Internet by 2020 (just five short years from now) and that this number will continue to grow at a rapid pace for the next several decades.
(Related: HSB CEO Greg Barats on the Insurer’s investment in the Internet of Things)
Usage-based insurance products, some of which actually utilize connected vehicle and driving data to determine premium, are examples of early applications of the IoT in insurance.
Commercial auto carriers are beginning to utilize telematics data from fleet management device networks for pricing and risk management. A few innovative life insurance programs have come to market based on information gathered from policyholders’ wearable devices. And there are the numerous drone experiments being piloted by property and casualty carriers for potential applications in property claims and catastrophe response management. But all of this still only represents the tip of an iceberg of impending transformation.
The Power of Prescriptive Analytics
True industry transformation will be made possible by the emergence of the forces described earlier, the most critical two of which are; the proliferation of mobile devices and sensors capable of being connected to the internet, and the ability to capture, store and process the enormous volume and frequency of data which will emanate from these devices. The science that will enable the industry to harness these two powerful forces is prescriptive analytics, the third and final phase of business analytics, referred to by Gartner as the “final frontier” of analytic capabilities.
Prescriptive analytics has the ability to automatically synthesize big data incorporating multiple disciplines of mathematical and computational science and business rules in order to make predictions and suggest decision options to take advantage of those predictions.
Prescriptive analytics extends well beyond predictive analytics by specifying both the actions necessary to achieve predicted outcomes and the interrelated effects of each such decision. Prescriptive analytics software ingests hybrid data—a combination of structured (numbers, categories) and unstructured (videos, images, sounds, texts) data and business rules to enable users to make these highly reliable predictions.
Resource and Talent Gap
However, the transformation will not occur without a wide array of challenges and likely several corporate fatalities. Not all carriers are adequately resourced to take advantage of these opportunities. The already serious data management and decision sciences talent gap will only continue to expand. The necessary organizational change management and expertise does not exist equally within all carriers and innovation cultures cannot be created overnight. Industry consolidation will resolve some but not all of these inadequacies.
(Related: Non-Carrier Portals and Tools Vie to Become Consumers’ Insurance/Protection Consultants)
In addition, insurers with need to more closely align themselves with and rely upon third-party information management providers who have the expertise and resources and cultures required to manage and leverage torrents of IoT data on their behalf. And finally, of course, is the very real competitive threat of disintermediation that carriers face from potential interlopers—companies that manufacture IoT devices as well as those that store, manage and transmit the data itself.
A Brighter Future for the Insurance Industry
However, insurers’ core competency is data and risk management. The IoT presents the industry with a opportunity to capitalize on and leverage these special skills in order to transform itself and secure its future—one in which insurance is not only relevant once again, but potentially far more valuable to society and all stakeholders than ever in its history. Indeed, the ability to enable customers to avoid or contain the very risks they are insuring against may ultimately prove to be of greater value than the insurance itself.
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Editor’s Note: Stephen Applebaum and Anthony O’Donnell will be co-chairing the executive Insurance IoT USA Conference, December 1-2, 2015, The Ritz-Carlton, Coconut Grove, Miami, FL.