The widespread implications of the proliferation of data have been a key conversation in recent years.
But here at Capita we believe that there is an important part of the debate yet to be properly addressed: how can IoT (Internet of Things) revolutionise traditional business models? The UK IoT market is estimated to be worth c.£55bn by 2023 (1) and the future will inevitably see IoT enabling a radical change to traditional business models, one of which could be high-risk insurance markets.
The Internet of Things (IoT)
IoT can be defined as “the acquisition, transportation, analysis and monetization of data via connected devices”. The below example shows how it works in the agricultural sector.
Agriculture is considered to be a high-risk insurance market and IoT offers a transformative opportunity to make it less risky by enabling smarter, dynamic risk assessments. By utilising sensors to monitor the factors which are creating the high-risk conditions in these markets (e.g. weather monitors, soil monitors, water pressure trackers) and collecting the data from these, greater live-time insights into the risk of key assets can be provided.
By overlaying a risk model analytic platform over this data, the level of risk of these assets can be much more accurately determined. This data will have a huge impact on risk modelling for insurance companies and will improve the efficiency of determining risk premiums. Furthermore, it enables the application of predictive maintenance; for instance, if the data suggests that the soil moisture levels are dangerously low, farmers can act on this information proactively rather than reactively and take measures to raise the soil moisture.
Overall, this will lead to lower claims rates and in turn lower premiums. This approach doesn’t just work in agriculture, but in telemetrics and car insurance too.
The insurance market for young drivers is very high risk. As such, premiums are 2.4 times more expensive for drivers under 25 than for drivers between the age of 25-50 (2). This is a problem for both insurers and young drivers: many young people can’t afford to drive as insurance premiums are too high, and insurance company pay-out costs are high due to the large number of young drivers who are uninsured as a result.
In order to combat this, telematics boxes can be placed in cars. These are IoT devices which measure key driving metrics and send them back to insurers to allow them to more accurately calculate how risky the driver really is, and tailor their premiums accurately. It has also had the effect of leading to lower claims as young drivers have been incentivised to drive more carefully to earn monetary rewards. This has led to a decrease in average premiums by nearly 9% (2) and according to research by Insure Telematics Solutions, it has led to a reduction in the number of claims by 22% on average. Furthermore, this research has indicated that a total of more than £1.79bn could be saved each year by adopting black box technology, thus highlighting how IoT can revolutionise the traditional models for high risk insurance industries.
It is time for this technological revolution to be realised. The IoT technology is mature enough and connectivity is widespread. The question is how quickly can insurance companies take to this technology? Will the cost of IoT continue to fall to a point low enough to warrant widespread investment? And will data collection points become standardised and regulated to ensure it is safe from cybercrimes? These are the big questions which will determine how quickly IoT can become the operational paradigm for insurance companies. But one thing is for sure – IoT provides a huge opportunity to both insurers and high-risk agents to revolutionise their traditional operational models.
1. Gartner IoT forecast (from mini consulting project)
2. Consumer Intelligence: Car Insurance Price Index