Insurance and the Internet of Things

For many, the concept of a “smart home” is a futuristic, and perhaps even frivolous, offering where lights shut off automatically once we fall asleep, thermostats are controlled from your phone and security cameras can show you what’s going on in your home from thousands of miles away. However, as I have written in many previous posts, we are only at the start of the Internet of Things (IoT). Significantly more sophisticated devices are already entering the market and soon consumers will see the benefits of both enhanced personal safety and home protection. Forward-thinking insurance companies are not only recognizing the potential for reduction in non-catastrophic loses, they are embracing the potential by filing smart home discounts to create incentives for consumers who use these technologies. Let’s look at a few of these enabling technologies and their potential for loss reduction/avoidance around the core perils of water, fire and theft: 1) Advanced home security products — The professionally monitored home security market has limited penetration in the U.S. — a significant number of home owners don’t feel the need to have their homes monitored for theft. However, many IoT devices enable basic self-monitoring features as a secondary benefit. From video cameras with 24x7 recording, to controllable door locks, to lights that are triggered on with motion, home owners are now getting home security features included with IoT products that might otherwise be purchased primarily for convenience. 2) Leak detection — Traditionally, these products focus on single points of failure, providing coverage in specific locations, such as below a dishwasher or a hot water tank. While providing a lot of utility relative to their cost, it’s been hard to programmatically prove loss reduction with these devices as the location of the sensor has so much to do with catching the leak. That said, more ambitious forms of leak detectors are entering the market, enabling whole-home monitoring, from flow sensors installed on mains, to lightweight stripping that can be installed in floor boards. Additionally, a series of whole-home shut-off valves are also being introduced into the market. Most of these valves require professional installation; however, they are capable of automatically closing the water main with the slightest detection of a leak or abnormal usage patterns. Water losses may be greatly reduced if a home could automatically respond to a burst pipe or an overflowed toilet. 3) Connected smoke alarms and “listeners” — Fire alarms have saved many lives, but the original design was intended to notify occupants of a fire so they could quickly exit. Unfortunately, if no one is home to hear a smoke alarm, there isn’t much that can be done by way of stopping a fire before a total loss. But the new generation of connected smoke alarms and “listeners” (an add-on that hears an alarm and sends a signal) can message not only the home owner but also a third party who can dispatch emergency crews on a homeowner’s behalf. It’s not hard to imagine how dramatic loss reductions will be when all homes have connected fire safety devices. An exciting aspect of all of these enhancements is that they are incremental improvements on already approved safety devices, enabling a fast track of the actuarial analysis/regulatory acceptance of additional discounts. But these improvements are just the start… See also: Global Trend Map No. 7: Internet of Things   Connected devices are particularly special because the “intelligence” doesn’t necessarily need to reside on the device itself, but could also live in the cloud, where processing is getting more powerful and less expensive by the day. As such, there is a tremendous amount of innovation in the data analytics space — and here are a few technologies that will almost certainly result in greater loss reduction: 1) Real-time analytics — the more information that can be analyzed in real time, be it from multiple sensors or devices or historical data, the higher the accuracy in early detection of a potential loss situation. For instance, a sharp rise on a temperature sensor might indicate a fire, but it also could be caused from sunlight striking the device. Long-term tracking of that temperature data might quickly indicate what is normal, what is not. Or perhaps a flow sensor might detect a flow of water similar to shower running, but when paired with alarm system that shows the home is unoccupied and the alarm has been in “away” mode for several days could be a clear indication of a burst pipe. 2) Automated response logic — connected devices lend themselves well for automated responses. Homeowners will be able to create steps that are enacted when emergencies are detected. For instance, when a fire alarm rings, the sequence might be something like: a) snap a picture from each camera and take a temperature read from each sensor in the house, b) email/text all of the family that lives there with the data to confirm or override an emergency call, c) if no response within 60 seconds, forward the notifications to a third party for emergency dispatch. Automation combined with human intervention allows for a more accurate and effective response. 3) Predictive analytics — ultimately the best way to lower losses is to prevent problems before they start. This is where heavy processing power is required — as well as buy-in from consumers on the use of their data. Connected homes provide streams of output data and, with it, anticipated performance. Variances in this data might indicate early stages of problems. For instance, a packaged HVAC system might be showing degradation of airflow in the summer, which could mean trouble for gas heating as temperatures drop. It might be in the best interest of the insurance company to ensure performance is restored as the winter comes, prior to the risk of freezing pipes. Additionally, as we are seeing in telematics and auto insurance, you can bet that consumer behaviors will also have the potential to be analyzed, no doubt showing correlation between “safe” homeowners and reduced loss. While more forward-facing than the device enhancements listed in the first section of this article, it’s these enhanced intelligence features that will truly revolutionize loss models. The more advanced the technology becomes, the less dependent the loss prevention becomes on human behaviors. See also: Insurance and the Internet of Things   Imagine a world where the main perils for homeowners insurance carriers such as water, fire and theft are dramatically reduced through the IoT and smart homes. Yes, consumer mistakes/negligence, even moral hazard, will always be an issue, but at some point it’s very possible the home will become smart enough to compensate even for these factors in a substantial way. We are already seeing rapid advancements in these areas in both telematics for auto insurance and wearables for life and health insurance. Similarly with smart homes, these IoT technologies have significant potential to lower losses from non-cat perils.