The Internet of Things, the network of sensors/connected devices that generate massive amounts of data, combined with connectivity as also analytics capabilities to draw insight and drive actions from the data, offers immense potential for insurers.
IoT adoption in commercial insurance has been limited, given the structural and economic barriers. However, a few early successes and market dynamics are laying the foundation for an expansion over the next few years. To realize the potential of IoT in insurance, a shift is required in insurers’ mind-set from primarily being spectators or recipients of solutions to active participants willing to invest for the long-term, experiment, and disrupt the current business model.
In the personal lines market, IoT-powered value propositions are beginning to take off. Telematics motor vehicle coverage is now being offered by almost all major insurers, and autonomous vehicle technology promises to reduce premiums and also add value in claims through crash alerts, fraud management etc. In addition, wearables are being incorporated into life and health policies, and insurers are also investing in the connected home.
However, IoT’s traction in commercial lines has been much less pervasive. That is now beginning to change with a range of use cases emerging. They include telematics solutions tracking the performance of vehicle fleets; wearables such as posture devices, activity trackers, and exoskeletons monitoring workers’ compensation incidents; smart buildings and sensors that continuously monitor factory and other equipment to schedule maintenance plans and prevent breakdowns.
Though these early forays of IoT in insurance industry have the potential to develop into game-changing products, there exist primary barriers for mainstream adoption that are structural and economic. In commercial industries, understanding equipment usage patterns, identifying risks and taking preventative actions requires sensors and connectivity embedded into heavy-duty equipment, warehouses etc.
Installation and servicing of sensors and connectivity into these “things” is expensive, with long lead times and the capabilities required are something that insurers currently do not possess. Further, given the complexity and criticality, companies are hesitant to leap into the unknown, since IoT is as yet untested in mainstream commercial applications.
The situation is further complicated by the nature of commercial coverage. Unlike in personal lines, where the insured risk (like a car or a home) is distinct and clearly aligned with the insured, commercial coverages often apply to an elaborate system or facility that includes third-party manufacturers and equipment that are leased.
Crane Logistics and Caterpillar have deployed wearables to reduce the number of high-risk lifts carried out by workers by almost 80%. This initiative reduced the number of injuries in half, significantly reduced workers’ compensation claims, and improved productivity.
In another instance, in a pilot program with Church Mutual Insurance Company, an IoT capability provided by Hartford Steam Boiler saved insureds more than $500,000 by avoiding property losses from frozen pipe leaks.
The Internet of Things is still nascent in commercial lines. The journey will have its challenges. But, if the trajectory of personal lines is used as a guide, barriers will come down, value will become more apparent and a rapid expansion of IoT applications in commercial insurance will soon follow. While insurers are not currently moving aggressively in this space, the promise of loss prevention and mitigation will enable a value proposition that commercial insurers cannot afford to ignore for their corporate customers.