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Spotlight on IoT: Risks and Rewards of Connected Homes

Connected residences now stream reports about security, temperature, air quality and more, presenting the opportunity for more precise underwriting and efficient communication. Is your agency ready to respond to the Internet of Things?
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It’s a beach house used by renters as much as the owner’s family, so it seems prudent to save money on the heating bill and keep the thermostat set low. But when a cold front hits the coast and temperatures plummet, ice arrives as an unexpected guest—and the house’s pipes burst.

A water sensor detects the moisture, and news of the flooded interior flashes across the owner’s smartphone—a notification that may save the house. In this hypothetical scenario, sensors installed in a connected home record the appearance of sudden moisture and then transmit the information to someone who can take action.

In the real world, connected residences now stream reports about security, temperature, air quality, moisture, noise and other conditions—opening a new window for insurers to access a treasure trove of data. In North America, where an estimated 6% of homes have been connected, the trend called the Internet of Things (IoT) is expected to grow to a market penetration of 28% by 2020, according to the market research firm Berg Insight. Widespread adoption of smartphones and tablets is making the remote monitoring of home conditions an appealing prospect for consumers anticipating a better—and perhaps safer—quality of life.

For agents, understanding that some policyholders regularly connect with a smart home application on mobile devices can present a new opportunity for engagement that strengthens the relationship between insurer and customer. This could be an avenue for agents to advertise newly available discounts, coverages, or even a home repair concierge service.

Among insurers, opportunities for insights from connected devices could be enormous for underwriting and pricing—despite some potential challenges. Millions of devices sending continuous streams of information may soon lead to unscalable mountains of data. Questions remain about how to structure that data and how to calibrate information that technology providers offer. Policyholders also question privacy and the illicit sharing of information, and insurers may likely be tasked to show that home devices are secure and accurate in their transmissions.

Home automation companies have issued their own assurances of privacy to consumers—and insurers will almost certainly have to face the security question with fresh eyes. To this end, insurers should consider the example the auto telematics sphere has set and begin their programs by offering discounts to policyholders for adopting some of the less intrusive smart technologies in their homes. Consumers may be more willing to share data from sensors placed on their water system than from a computer router that indicates which residents are home and online. For an insurer’s first venture in this field, simpler may be a better approach.

But once consumer concerns have been satisfied—or at least responsibly addressed—the potential for usage-based rating plans becomes clearer. For the first time, insurers have the opportunity to measure what risk factors exist within the home. To start, home devices can enable insurers to monitor potential causes of loss or even prevent damages from water or fire before they can occur. This principle applies especially to secondary or seasonal residences, where an owner may not have access to perform timely in-person inspections. In a fully connected home, it’s expected that sensors can monitor use of water and electricity, detect motion and signal the presence of smoke, carbon monoxide or carbon dioxide.

To derive useful insights, insurers must meet the challenge of capturing sufficient amounts of exposure data in terms of home years to complete an analysis. An insurer with 1% market share that partners with a smart-home technology provider with 1% market share could expect a total of about 15 claims per year from homes with connected devices. That’s almost certainly not enough data to yield actionable insurance insights. To ensure a competitive advantage in pricing and underwriting, insurers should think creatively about how to obtain the greatest amount of data in the shortest time. Partnerships outside—and even within—the insurance industry may be key to reaching fresh insights.

While data may be paramount for establishing rates, insurers shouldn’t lose sight of what’s most important in the eyes of policyholders. Consumers are installing home devices to enrich their quality of life, from improving home security to saving energy—values that extend far beyond the realm of insurance. Some may be motivated by the prospect of reducing home energy costs, while others simply like the idea of operating lights and appliances by remote control. Both groups appear to sense the promise of IoT and may be on their way to embracing this new and potentially rewarding chapter in the insurer/policyholder relationship.

Joe Wodark is director of Internet of Things product development at Verisk Insurance Solutions, a Verisk Analytics (Nasdaq:VRSK) business.