Connectivity isn’t a new concept. It was as far back as 1991 – when Nirvana’s Nevermind was riding high in the album charts, Robin Hood: Prince of Thieves was the must-see film in cinemas; and escalating tensions led to the first Gulf War – that we had a sneak preview of how networked connectivity would eventually impact our lives.
That year, researchers at the University of Cambridge Computer Labs invented the world’s first webcam to solve their coffee problem. Frustrated by pointless trips down the hall to the coffee machine only to find the pot empty, they set up a video camera near the machine and networked it to a computer. Now they could see whether the coffee pot was full or empty in real time.
Today billions of devices across the world are networked, sharing what they see, hear and otherwise sense with the internet. We talk to our televisions and they listen, thanks to embedded sensors and voice processing chips. We drive down the road and sensors gather data from our mobile phones to measure the flow of traffic.
"BY 2020 IT’S ESTIMATED THERE WILL BE 26 BILLION DEVICES CONNECTED TO THE INTERNET, RANGING FROM SMARTPHONES AND WEARABLES TO CHILDREN’S TOYS AND INDUSTRIAL ROBOTS."
Our houses have sensors to adjust the temperature when we enter a room. Our watches collect data about our movements and sleeping patterns. Devices that defy the usual definition of ‘computer’ are communicating over networks and it’s changing how we interact with the physical world.
Inexpensive computing power, cheap or free connectivity and our ‘always on’ mobile mentality have created the ‘perfect storm’ for the rise of the Internet of Things (IoT). The number of networked devices already outnumbers our global population. And by 2020 it’s estimated there will be 26 billion devices connected to the internet, ranging from smartphones and wearables to children’s toys and industrial robots.
“The numbers are just staggering,” says Noel Condon, CEO of AIG Australia. “Individual households are beginning to embrace the IoT world. Some industry sectors are already there and probably have been for quite some time.
“Things are moving quickly and the insurance industry is playing a bit of catch-up. We know these technologies exist. We already insure them. But what are the future implications? That’s what we need to get out heads around.”
Sascha Hunt, Group Digital Manager at Allianz Australia, agrees. “The world, society and the way we do business is always changing and always has been, but just now it’s moving incredibly quickly. What we currently think the IoT world might look like in 2020 will probably happen sooner. If we can imagine it now, we will make it happen.”
THE NEXT INDUSTRIAL REVOLUTION?
Insurance and the Internet of Things are intrinsically linked. For the insurance industry, the potential for IoT to be a driver of transformation is high. Tego Insurance CEO Eric Lowenstein –a well-known cyber expert after several years specialising in the field as a broker at Aon – predicts the IoT will be the catalyst for the start of another industrial revolution.
“The impact of IoT is becoming a regular conversation throughout the insurance eco-system so, unlike previous revolutions, we won’t be caught unaware,” Lowenstein says.
“Most, if not all, insurers have some kind of research and monitoring activity going on for IoT initiatives. IoTs allow information to become instantly and accurately available, and this is a game changer from an insurance perspective.”
Steven Raynor is Executive General Manager Transformation at QBE Australia and New Zealand. He concurs with Lowenstein. “The impact of IoT on the insurance industry will be significant,” he says. “As more devices, connected home technologies and wearables come online they will have the ability to collect and transmit all sorts of data about people’s lives.
“Insurers will have the opportunity to model and engage in greater analysis and understanding of customers’ needs, as well as fact-based risk assessments about people’s assets.
“This opens up the possibility of a whole new range of products and services, and will enable us to more proactively support customers in the management of their risk rather than simply indemnifying them against risks reactively,” he adds.
In insurance, opportunity often comes hand in hand with new risks and exposures. The Internet of Things will be no exception.
“Security and privacy are themes are often raised in relation to the IoT – and for good reason,” Tego’s Eric Lowenstein says. “The IoT will allow companies to track customers, harvest their data and perform analytics based on it. There’s a growing concern that the IoT will attract more cyber risks and fraud.”
QBE’s Steve Raynor echoes this viewpoint. “As we become more and more reliant on our networked devices, including household appliances, homes and cars, the extent to which devices are connected becomes a risk in itself,” he says.
“This may represent an easy access point for hackers who can disable thousands of devices through a single breach.”
The proliferation of the IoT will result in businesses becoming increasingly dependent on the internet and their own data networks to operate – yet another form of risk.
“Network outages could result in significant business interruptions and lead to large losses for businesses. Again, the importance of robust cyber security cannot be understated,” Raynor adds.
The annual cost of cyber crime to the global economy is already estimated to be $400 billion – and is constantly on the rise. According to AIG’s Noel Condon, this is an area that is evolving very quickly, and it makes pricing risk extremely challenging.
“When it comes to cyber insurance, we generally think about hacking and we can take care of that,” Condon says. “But we’re also now receiving more requests for coverage of socially engineered crime. Stories about experienced business people being taken advantage of by criminals playing the long game are on the rise.
“How do you insure for that? These are the type of challenges we’re dealing with. It goes back to the world being more connected than it’s ever been before and people trusting the devices they use.”
"CONSUMERS STILL VALUE EXPERTISE AND BROKERS CAN CUT THROUGH THE OCEAN OF INFORMATION AND DELIVER THE RIGHT SOLUTION."
And then we’ve got to consider that there will be risks that we haven’t even considered yet.
“Even today the internet is driving businesses such as Uber and Airbnb, which have sprung up from nowhere and changed the landscape,” Allianz’s Sascha Hunt says.
“Was the insurance industry ready to support these new customers? Not really. We are playing catch up, but consumers will want us to be ready to provide them with insurance and manage their claims in the same way they will be living their lives.”
The challenge for the insurance industry is to be ready to deal with this change and recognise that the power lies with the consumer. Sascha Hunt foresees that insurers will need to have closer and more personal relationships with individual customers.
“We will have access to much more detail about their lives, which will make individual risk pricing a much more real thing,” she says. “Brokers will need to think about where they can add value in a more direct digital world. They will need to think about what type of advice a policyholder who is connected to every possible data source might need.”
Even in a world where consumers look to Google for quick answers, Hunt believes there is still a role for brokers. “Consumers still value expertise and brokers can cut through the ocean of information and deliver the right solution,” Hunt says.
The chance for insurers to harness IoT data to provide new ways of providing a better, personal experience for individuals isn’t lost on QBE’s Steve Raynor, either.
“For insurers, doing business relies heavily on the sophisticated modelling of data through actuarial risk analysis, so the information that the IoT will bring represents the Holy Grail for underwriting data,” he says.
“IoT will provide new and exciting ways for our industry to connect and engage with customers and make the process of understanding, communicating and managing risk more intuitive and relevant to customers’ needs. The potential to radically change the experience of our customers in new ways is hugely exciting.”
"IT’S AN EXCITING TIME TO BE ALIVE AND IT’S AN EXCITING TIME TO BE IN THE INSURANCE BUSINESS."
The true potential of the IoT for insurance is not yet know, but according to Tego’s Eric Lowenstein, the one unifying theme is opportunity – and data will be the key.
“The future success of the industry lies in whether we can combine traditional underwriting methodologies and adapt the data that the IoT can provide. Smart industry players will be open to the disruption caused by the IoT and adapt to the demands that come from consumers and competition alike,” he says.
Noel Condon of AIG believes the best is yet to come for the industry. “I think people look at the insurance business from a distance and think it’s boring, but we’re enthusiastic about innovating and ready for the challenges that IoT is throwing our way,” he says.
“It’s an exciting time to be alive and it’s an exciting time to be in the insurance business.”
This article originally appeared in NIBA’s Insurance Adviser April 2016, and was written by journalist Cath Dickinson