That digital technologies are a huge opportunity for insurance companies is no longer new, and the Internet of Things (IoT) theme itself has officially become one of the drivers driving the digital transformation of the insurance industry. Consulting firm McKinsey has identified 4 IoT ecosystems where insurance can innovate and bring value to the market.
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The expansion of IoT
The Internet of Things is radically transforming the world and in the coming years connected devices will be a substantial part of that change, McKinsey analysts say. In 2010, people owned 12.5 billion networked devices; it is estimated that by 2025 this number will reach, and perhaps exceed, 50 billion. People use such devices, many of which are equipped with sensors and automatic activation functions, are wearable or can be easily installed in virtually any area of their lives, from work to leisure. These devices can transfer huge volumes of data to their suppliers or third parties – either for real-time analysis or to automatically trigger reactions or services – and are already altering traditional business and operational models in multiple industries.
Opportunities for Companies
How have insurance companies interpreted the integration of connected devices to date?
According to McKinsey, insurers have so far mainly used IoT capabilities to facilitate interactions with clients and to accelerate or simplify underwriting and claims processing.
But much more can be done: the new technological environment allows insurers to develop new products, open new distribution channels and extend their role to include forecasting, prevention and care.
‘In the context of these new business models, networking through the Internet of Things could become a strategic component for insurers. For example, insurers could work with companies to provide new or improved cross-sector products and services that exploit IoT technologies and new ecosystems‘.
As the following infographic shows, these are innovations that act on the two fronts of the business well known and precise: the reduction of costs and the identification of new channels of gain.
The connected devices are able to allow the Companies a more precise determination of risks. Motor insurers, for example, have always relied on indirect indicators, such as a driver’s age, address and solvency, to determine premiums. Data on driver behaviour and vehicle use, such as driving speed and night-time driving frequency, are now available.
Another positive aspect is that the connected devices allow insurers to interact more frequently with their customers and to offer new services based on the data collected. Currently, often the only touchpoint in the relationship with the insured is represented by agents or brokers and limited to the time of contract renewal and claim handling. The Internet of Things could therefore have significant benefits for customer relations, allowing companies to establish more intensive and targeted contact with customers.
What are the most interesting IoT ecosystems for Insurance?
Mobility/connected car, smart home, connected health and commercial lines are the areas where Companies can play an important role and innovate and be more competitive, as long as they are able to build specific strategies for each of them.
So let’s see McKinsey’s indications for each ecosystem.
The increase in connected car applications is creating a completely new digital ecosystem around the car, including not only automotive OEMs, but also telecommunications operators, sensor and chip manufacturers, operators of digital platforms such as Uber, research institutes, standardisation centres and, of course, insurers.
This ecosystem alters the competitive parameters for all participants, particularly insurers. While the frequency of claims of connected vehicles will decrease, all on-board technology, starting with the numerous sensors, will increase the damage, i.e. the average amount of claims, due to the high repair costs. Although it is possible to distinguish high risk from low risk customers using the additional data obtained from the new ecosystem, overall premiums may decrease due to the discounts offered for telematic use. Diligent motorists can legitimately expect substantial reductions in insurance premiums, but insurers will have to find new ways to compensate for this reduction without increasing tariffs for high-risk motorists. One of these avenues is to reduce claims expenditure through optimised risk selection: through more effective fraud prevention, increased use of allied repair shops and the provision of smart service and support, such as alerting drivers to necessary maintenance or finding smart parking solutions. Insurers can also sell their data and analysis solutions to third parties, such as media agencies that focus on location-based advertising.
Smart Home and Smart Health
The insurance market has slowly approached smart home devices, mainly due to the same limitations of devices.
However, this situation has changed as technology has matured and the advent of Google, Amazon and other providers in this area has also shuffled the cards competitively, as well as demonstrating that the technology is now ready. There are several insurers around the world who have already started to work with tech companies, but there is room for more, it is the consumers themselves who expect new services from their insurers, who have so far played the game without too much momentum compared to traditional proposals, without taking into account the development of additional services or more attractive price models for customers.
An extension of the smart home are the technologies of Ambient Assisted Living, a sector that then connects to connected health, which is particularly relevant due to the ageing of the population. People with limited mobility, for example, are increasingly looking for innovative services that support their daily activities and enable them to pursue an independent lifestyle at home. Potential customers in this segment are likely to have a positive attitude towards the Internet of Things and related technologies, as well as towards insurers acting as global providers of such new service packages.
According to McKinsey, the IoT will be a great lever for the development of innovation and business in commercial insurance.
One example is cybersecurity, as only through additional risk management and support services can cybersecurity risks be insured: hence the increase in new partnerships between insurers and suppliers of software and hardware for cybersecurity related to the Internet of Things. As a practical example, IoT-based risk prevention can include sensors in warehouses to assess risks – and therefore price – at a more granular level.
The range of opportunities offered by the IoT is quite wide, but it requires a strong effort on the part of the Companies, which must adopt a precise strategy that defines first of all ‘the playing field’, also based on what their clients are ready to accept; that immediately establishes appropriate partnerships and rapid timing, but with a long-term investment perspective.
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