(Image credit: Dollar Photo Club.)

Can the Internet of Things (IoT) really conquer the insurance industry’s greatest challenges? We wrote a headline to that effect in last week’s report from the Insurance IoT USA Conference. Some readers asked whether the headline weren’t a little hyperbolic, and to what extent we could clarify the claim.

Well, precisely what are the industry’s greatest challenges is debatable, so we might as well just say which challenges the IoT won’t conquer. Even with the IoT, insurers will face various regulatory measures that can only be treated, not cured; the IoT will do nothing to raise interest rates; and inexorable secular demographic changes are afoot which the IoT can do nothing to change.

However, the IoT does indeed have the power to change the insurance in fundamental ways, while reversing some of the industry’s most intractable challenges. Here are three worth calling out:

• Product commoditization
• Too few touchpoints, and those often unpleasant (billing, claims)
• The life insurance sales conversation being about the buyer’s mortality

If these three aren’t enough, there’s another point that isn’t exactly a challenge, but rather a gratuitous improvement of potentially staggering value: the IoT has a Midas-like touch that makes risks less risky. More about that later; in the meantime a discussion about the three points above.

Personal lines and individual insurance products have fallen to the level of distinguishing themselves from competing products by the quality of their advertising and by brute price competition. The IoT has enormous power to break this impasse by providing myriad opportunities to differentiate themselves through new products and services. For example, insurers can deploy applications that connect smart phones and devices in the home, or wearables that the policyholder wears, and deliver a variety of useful services. Many will help to mitigate risk, some will simply add a little fun or convenience to the policyholder’s life.

It is through such differentiating products and services that insurers can achieve a frequency and degree of relevance that will make banks jealous. It’s hard to imagine the limit of potential IoT-enabled services that would make sense in an insurer/policyholder relationship.

Among the most discussed to date are applications that help parents track the activities of young drivers, or homeowners services that use sensors or other remote transmitting devices to enable the monitoring of various metrics or other circumstances associated with risk, such as:

• Temperature
• Moisture
• Home security
• Inventory of personal possessions
• Remote doorbell response
• The insured’s own physical health or vital signs

Regarding how the IoT can address one of the greatest challenges in life insurance: the problem is that life insurance forces a hard gaze at the buyer’s own mortality—which is an inherently unpleasant reflection. As John Hancock’s Brooks Tingle noted at the Insurance IoT USA Conference, the appeal of covering the risk is somewhat blunted by the fact that in the best case scenario, the customer is still dead.

(Related: John Hancock’s Vitality program: SVP Brooks Tingle Talks Wearable Devices)

What the IoT can do—and is doing with wearables in the case of John Hancock’s Vitality program—is to change the insurer/policyholder conversation to one about living well and even postponing the inevitable as long as possible. Policyholders in the Vitality program get rewarded for doing things that will enhance their health and well-being, such as going to the gym, walking a certain distance—all of which are sensed and recorded on their wearable device. It’s all about how the policyholder feels now, and how that in turn will make for a longer, happier life.

The IoT can take one of the best things insurance does—loss control in commercial lines—and make it much, much better by taking it from spot-checks taken months apart to real-time monitoring. More revolutionary still is that the IoT can take loss control and make it relevant and cost-effective for personal lines. We’ve already discussed the homeowners’ context above. While it’s still early days for these developments, it’s a major direction. As we’ve noted, new offerings of this sort create the opportunity for an infinity of differentiation strategies while at the same time radically recasting the insurer/policyholder relationship from one in which customers pay and might file a claim, to one in which both parties are partners in the mitigation of risk.

Taking Risk from Static to Dynamic

And that’s perhaps the greatest magic of the IoT: it tames risk and can reduce both the frequency and severity of loss. It turns out that human inertia is a powerful contributor to risk. Accidents happen when people aren’t paying attention, when they don’t know what to look for, when they are negligent in their maintenance, when, for whatever reason, they are forgetful about things they should be monitoring. The IoT introduces capabilities that either focus the insured’s mind on the risk or simply automate its monitoring.

In the past, at least outside commercial loss control, insurers underwrote risk generically and hoped for the best. Risk was a static thing, calculated from past experience and assumed in the absence of better information. The IoT provides new information in the form of immediate feedback from objects about potential hazards, and it engages policyholders, alerting them to potential risks as they develop. In that way, the IoT turns risk from something static into something dynamic that can be improved through interaction.