Innovation is the only insurance against irrelevance – Gary Hamel, Business Thinker.
The home insurance sector in India has achieved less than 1% penetration level against a global benchmark of more than 95%,which by any measure is not an impressive number to speak about. Various reasons such as, not being mandatory, lack of thrust by insurers and intermediaries, and the latent fatalism of the Indian populace could be attributed for this pitiable statistic.
In comparison, the penetration levels inmature economies such as France (99%), UK (97%), and US (96%) is a picture of envy. While it is easy to brush aside these numbers with casual remarks that home insurance is mandated in those countries and the frequency and severity of the risks encountered are more in those regions.
Notwithstanding the excuses, the number and impact of the natural catastrophes that have struck the Indian sub-continent in the past few years convey a different message. Frequent cyclones, heavy monsoonal rains, and floods have proven to be calamitous, crippling all activities and inflicting monumental losses. It is expected that the Indian market wakes up to reality and witnesses an increased thrust by insurers and intermediaries for promoting home insurance products, and customers get rid of their reluctance to purchase home insurance.
While Indian market is yet to realise the benefits of home insurance and purchase it even for remediatinga loss from a covered event, mature economies are moving ahead to reinvent the business models and alterthe purpose of insurance to prevention and protection. The growth of internet-of-things (IOT), which is the interconnection of computing devices embedded in everyday objects, enabling them to send and receive data is extensively expanding its scope to home security, automation and energy management. Sensors, controllers and actuators are bringing many of the hitherto unmonitored and uncontrollable risk events into controllable ambitthereby changing the nature of traditional risk landscape. This, in turn has the potential to change the contractual commitment by insurers and responsibilities of policyholders.
This article captures the evolving changes in home insurance sector, the new reality it establishes and the collaborative multi-stakeholder ecosystem that it is attempting to create.
Genesis of Connected Homes
The use of sensors for home safety is not a new concept. Home owners have traditionally used sensors such as fire alarms, security systems, gas and water leak detectors to send alerts on identifying a hazard condition for mitigating the losses. It is however new, that the proliferation of internet-of-thingsenables these sensors not only to monitor the condition but also communicate proactively to customers even before the risk eventuates and take preventive action that a customer initiates from a remote location or send trigger to the support system for initiating intervention action. This brings forth a new experience of ever-connectedness and protection to the customers.
A connected home ecosystem is made of three layers: At the core of the connected home are the sensor device manufacturers, communication protocols, network service providers, platforms for data consolidation and the applications. The second level comprises the support and assistance providers for maintenance (AMC, repair service) of sensors, early intervention services for preventing a hazard (e.g. plumbers, electricians) and emergency support providers (e.g. fire service, hospitals). Peripheral services such as analytics, app connection platforms (IFTTT, Zapier), and insurance are in the outermost layer.
The evolution of the connected home is in the incipient stages. Device manufacturers such as Apple (Home kit), Nest (Google), Samsung (SmartThings), ADTetc., are flooding the market with an array of sensors spread across all the spaces such as home entertainment, security, monitoring and automation, and energy management.
The connectednessbrought in by these devices is attempting to upend the traditional way of conducting business and forcing industries, including insurance to invent new business models to offer new products and services. Connected devices are becoming the foundational elements for the evolution of business ecosystemsthat focus on preventing risk and ensuring protection. In the new business model, customer engagement is a 24×7 activity and companies offer services such as risk monitoring, proactive care, emergency support and even activities for positive reinforcement to effect behavioural changes.
What Insurers Are Doing Now?
Insurers are enthused by the success they had while implementing connectedness in auto insurance with telematics solutions. Insurers want to capitalise on the capabilities of connected home to achieve prevention or mitigation of losses due to certain types of perils.Insurers are currently qualifying the adoption of devices for home security (cameras, locks) and protection (smoke, water, humidity sensors) for offering discounts.
Insurers are looking for the data obtained from sensors to understand the usage and behavioural information to get deeper life insights about their customers and use the data for finer risk segmentation, quantifying risk, offering personalised products and services, charge personalised risk premiums, and fortify customer relationships.
Implementing connected insurance for auto has been a simple unitary solution for insurers. On the other hand,it is very complex to do so for home as several elements such as,number of stakeholders involved, number of hazards and perils that could result in a risk event, possibility of control over them, variety and count of devices needed, cost of setting-up, and implementation modelsare to be considered for implementing a connected home.
Another important aspect is thatinsurers are the prime beneficiaries of a telematics solutionwhereas, there are many architects and core beneficiaries with respect toa connected home, and insurers are mere peripheral players. Considering the scope, it is impossible for insurers to establish a connected home by adopting the B2C model that worked for auto insurance.
To overcome the limitation, insurers are partnering with other stakeholders to adopt B2B2C models for promoting connected home solutions. They (Statefarm, US – Canary home security monitor, Liberty Mutual – Nest Protect smoke detector, Allstate, US – Rogers smart home monitoring, American Family Insurance, US –Nest, Ring video door bell,Aviva, UK – Canary Homes, Cocoon, Hiscox Insurance, UK – Neos) are embarking on co-marketing initiatives such as subsidizing the cost of the sensors, providing a sensor at no cost for signing ongoing maintenance contract, offering discounts in home insurance premiums, providing maintenance for few years at no cost, and assuring assistance in times of need, to entice customers into embracing connected homes.
The incentives and discounts offered are determined by the penetration strategy adopted. The discount on the sensor cost is mostly sponsored by the device manufacturers to increase their customer base. It is plain knowledge, that even with a connected home and an efficient support system, it may not be possible to prevent or mitigate losses caused by all types of perils. Hence, the premium discounts are calculated by insurers based on sensor type, severity, frequency and type of the peril that can be prevented, the premium charged for those perils and probable reduction in the claims payments.
Insurers are also experimenting with the adoption of voice assistants. Devicessuch asAmazon Alexa and Google Home are adding a new dimension to connected homes.The current use of these devices is more to increase the customer engagement. Insurers such as Progressive, Nationwide, Grange Insurance, Liberty Mutual, Allstateare offering services such as controlling the sensors and devices with voice commands;get details on – products, premium due dates, minimum premium payments, local agents; and tips for buying and savings.
Barriers to Adoption
Only a few innovators and early adopters are seen to be experimenting with the launch of connected home insurance solutions. Connected home devices are still in the early stages of evolution and the benefits are not yet quantified unambiguously. Insurers and customers are seen to be taking cautioussteps in promoting or embracing it.
- Cost: The cost of the devices is drastically coming down. However, customers still have a perceptionthat the cost of setting-up a connected home is high
- Interest: Customers are inclined towards devices meant for entertainment, improving efficiency and automation. However, the focus of the insurers are on the devices meant for security and protection
- Technology Maturity: The technology is still nascent and common standard protocols are yet to evolve. With many manufacturers in the fray, challenges still persist with respect to identifying simple methods for inter-devices communication
- Uncertainty: The extent of the benefits that insurers can realise are not clear and the business models for the support ecosystem are still evolving. The responsibilities and mutual commitments of each of the stakeholders are yet to be framed. The legal issues involved in exceptional situations where there is a failure of device, response or support failures, are not yet articulated
- Reputation Risk: By promoting sensors of one manufacturer, the insurer may be perceived to be endorsing them. In case of a sensor failure resulting in a loss, insurers may be inviting liability, litigation and face reputational riskfor the erroneous recommendation
- Ambiguity: Even if the cost of the sensor is discounted by a manufacturer-insurer, ultimately it is customers who pay for the sensors and service. It is quite natural that they may prefer to look at value‑for‑money while selecting the sensors. There is no clarity regarding the insurance premium discounts and support for customers who install sensors from manufacturers other than those promoted by the insurer
- Data Sharing and Cyber Risk: The success of a connected model rests on the data shared. Resistance to sharing data prevailed extensively when telematics was introduced. The concerns regarding sharing and use of data have now been largely allayed and customers are slowly getting acclimatised to the new business models that revolve around the data. However, security of data still remains a challenge as a cyber-attack event in a connected home environment could cause mayhem
As the capability of sensors and ecosystem matures, the barriers will be overcome and connected home will become an industry norm. In due course, it is likely that few of the existing perils could be totally prevented or mitigated resulting in the reduction of base insurance premium rates. At the same time, new risks such as cyber-risk for personal lines could emerge and become an integral part of home insurance.
Traditionally, factors such as age of the home, type, wiring, plumbing, roofing foundation, and locationhave been considered for calculating the risk of a home. With the use of connected sensors, the safety of home will invariably increase, but the actual efficacy depends on the following two aspects.
- Primary:Sensor type, model, number of sensors installed, parameters tracked, accuracy levels, at what stage outliers are observed, alert type and method, and the action initiated
- Secondary:Regular maintenance of the sensors (including change of batteries), when they are turned on or off, status of the Wi-Fi connection, approachability and response of the customer when an alarm is raised, promptness and capability of the support ecosystem
In the risk and pricing models that are to evolve in the future, all the particulars such as traditional data, new data about and from the sensors, and the details regarding the instances where intervention for protection and emergency services may be required, will get factored in to arrive at personalized risk classification and premium.
In insurance, morale hazard has always remained as a complex subject. Insurers could potentially deny settlement of claims if it could be established and proved beyond dispute that morale hazard was involved in causing a loss. Since it has been difficult to track and prove the behavioural inconsistenciesin the traditional method, insurers have very rarely pursued it.
By tracking the data feed from the sensors, it is now possible to continuously monitor the usage and behavioural aspects of the insured. It is also possible to accurately construct the events that preceded a claim and how it actually eventuated. It can be ascertained without any ambiguity by analysing the dataif a sensor worked properly, raised an alert, and if the customer or the support system responded appropriately.
In future, terms and conditions of connected home insurance contracts may be reworded to include the roles and responsibilities of all the stakeholders involved. Certainadherence protocols pertaining to periodical servicing, automated and manual alert types, appropriate response required alongwith turn-around-time, and product upgrades may get codified for mandatory compliance.
Insurers may take steps for positive reinforcementto make customers adhere to the prescribed safety measures. If the customers are consistently at default, insurers may initiate penalty or even deny payment for certain claim types. As both inappropriate action and inaction by customers will qualify under the definition of morale hazard, insurers may invoke ‘mistake exclusion’ clause (Mistake exclusion currently precludes coverage in cyber insurance if the insured is not maintaining adequate data security safeguards.) to reject the claims. Mistake exclusionmay get suitably modified and extended for other lines of businesses where continuous monitoring of usage and behavioural is being done.
Connected life, which is created by the use of sensors in home, health and commute, paves way for innovation at the edges – where various industries intersect and converge to design innovative offerings that cater to the complete life journey of the customers. Connected life is the future and is bound to become the basic standard. Insurers being an important financial link in connected life will have to include responsibilities for risk prevention and protection to their core functions. They will have to re-invent their business models, products and services to stave off redundancy.
Currently, the inter-sensor communication is not linear but achieved in a roundabout way. Creating collaborated insights and intelligence from all the sensors, and orchestration of the devices are not present. The growth of artificial intelligence and machine learningwill play an important role inachieving this orchestrationto perform synchronised activity and learn the home owner’s preference to self-regulate.This will elevate insurance into an entirely different experience stratosphere where insurance is likely to become ingrained, blended and invisible amidst the holistic products and services offered to customers.
By SRIVATHSAN KARANAI MARGAN, B.Sc., M.B.A., FIII, AAPA,
Working as Insurance Domain Consultant in Insurance & Healthcare Innovation Lab at Tata Consultancy Services Ltd.