The Internet of Things (IoT) has become an integral part of our daily lives, revolutionizing various industries worldwide. The insurance sector is no exception, as IoT offers opportunities to create innovative products, enhance risk assessment, and improve customer experiences. However, it also presents challenges that insurers must navigate. In this article, we explore how IoT is reshaping the insurance landscape.
The three key enablers for kickstarting IoT:
Also, Insurance is inherently a data-centric business. The core of insurance practice is the rating mechanism. Consequently, innovations such as IoT, which increases data availability can be used as a source of efficiency for insurance companies. Within the insurance sector, there are six areas where the Internet of Things (IoT) will have a significant impact on the insurance sector to prepare insurance executives for the near future.
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Millennials and Gen Z are forming a new target market for insurers, who can elevate their services with a humanized digital experience (DX).
Now, let us look at the impact of IoT on the insurance industry:
IoT enhances risk assessment in auto insurance by providing detailed insights into customer behavior. Instead of relying solely on traditional factors like age and mileage, insurers can now analyze real-time data such as driving speed, route choices, and mobile phone usage. This enables more accurate premium calculations and a deeper understanding of risk, benefiting both insurers and policyholders.
Claims processing is one of the most important operations in the insurance value chain, impacting both customer satisfaction and insurance company profitability. The Coalition Against Insurance Fraud reports that fraudulent claims cost approximately $80 billion per year. On the customer satisfaction side, IoT can help insurance customers expect quick responses.
More data about customers results in better risk assessment. As a result, insurance companies no longer need to divide people into risk categories to hedge their operational risks. For this reason, special customer insurance policies known as pay-as-you-go (PAYG) policies are being added. PAYG premiums are calculated depending on the use of the insured items. For example, the more often you park your car, the less you pay for its insurance.
The interconnectedness of smart devices and their rapid proliferation are eliminating some risks that have been insured for centuries due to the risk-averse nature of humans. This phenomenon could potentially threaten the future of the traditional insurance sector.
It is true that the rapid increase in the number of connected smart devices is reducing some of the risks we used to face. But it also introduces a systematic risk that can be insured against. The more people depend on smart devices, the more vulnerable they are to cyberattacks. Insuring against cyber risk would be the future of the insurance sector.
A massive flow of data implies more information about customers’ personal lives. Consequently, the risk of data leaks, hacker attacks, and simply being persuaded to share data with insurance companies increases.
Let us look at the opportunities in IoT for insurers:
Offer new and more frequent customer interaction
Provide greater customer interaction and cross selling eg via telematics app
Develop new service and business models
Modernize data insights eg telematics via driving behavior and patterns
Review Price models
Introduce usage-based or demand-adjusted pricing (monitoring via IoT sensors)
Increase efficiency & Optimize resources
Trigger automatic maintenance and therefore prevention mechanism
Improve safety and pursue active prevention
Extend safety standards eg via immediate dispatch of an ambulance after an accident
Leverage analytics to curb fraud
Use sensor-driven decision analytics that enable the recognition of fraud
The following are the challenges faced while adopting IoT for insurers:
While IoT presents significant opportunities for insurers, it is crucial for them to view IoT-based services as a long-term investment. Insurers must explore use cases, embrace data-driven pricing models, and establish themselves as valuable partners to IoT service providers. By doing so, they can harness the full potential of IoT while addressing the challenges it brings.
In the rapidly evolving landscape of insurance, embracing IoT is not just an option; it's a necessity. The insurance industry must adapt to the changing times, leveraging IoT to offer more personalized, efficient, and secure services to customers in a data-driven world.