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Internet of Things (IoT)

Last Updated 1/13/2020

Issue: The Internet of Things (IoT) is a network of internet-connected devices transmitting, collecting and sharing data. IoT applications are present in nearly all industries and aspects of daily life. Among the most mature and fast growing IoT applications involve connected vehicles using telematics, smart home devices (e.g., Amazon Alexa), and wearable devices (e.g. Fitbit). According to McKinsey, there are approximately 127 new devices connected to the internet every second, and it is anticipated that the worldwide number of connected devices will increase to 43 billion by 2023, which is almost a threefold increase from 2018.

IoT-connected insurance represents a new paradigm for the insurance business. This new approach is based on the use of sensors to monitor the state of an insured risk and transforming rough data into actionable information that can be immediately processed along the insurance value chain. Advances in IoT can improve productivity at top line levels, overall profitability of the business, and the risk profile of the portfolio. Through IoT, insurers can better connect with consumers adding important touch points in particularly sensitive phases, such as acquisitions and claims. Moreover, IoT advances can be realized for the full range of products and lines of business, from commercial, to life, property and casualty and health.

Background: The use of IoT sensor data creates many opportunities. IoT technology--with the proliferation of data from sensors and smart devices--presents opportunities for insurers to reduce and mitigate losses, improve underwriting and enhance the personalization of products and services.

New data types allow for increased precision in assessing risk and pricing policies. Underwriters could, in theory, recommend real-time pricing and policy term adjustments through continuous monitoring and assessment. According to Forbes, IoT can help insurers cut the cost of the claims process by 30%, while IoT- connected devices can help lower premiums by 25%. The integration of IoT can also help in loss mitigation and prevention through behavior modification and active alerts. For example, drivers using telematics can learn how to be safer drivers and sensors placed in cars and homes can provide warning signals when recognizing unusual actions or patterns which could potentially lead to accidents or damages. As stated by the United States Geological Survey (USGS), storm sensors are placed in durable structures, such as bridges, where they “collect water pressure readings that help define the depth and duration of the storm.” This helps insurers and public officials assess the damage. In fact, sensors used during Superstorm Sandy in 2012 allowed insurers the ability to track the impact of the storm. Policyholders were then contacted immediately, describing the imminent risks.

IoT can also give insurers greater insights into consumer behavior creating greater levels of granularity in risk modeling. Since IoT greatly expands the universe of accessible data, it provides opportunities for more personalized service offerings to consumers. For example, wearable technology provides increased and connected data streams to help determine consumer needs and life changes. The use of medical wearables provides real-time access to health records and quicker diagnosis and treatment of various conditions. These devices are also being integrated into life and health insurance policies as insureds that exhibit healthy behaviors are rewarded through discounts and low premiums.

In addition, through auto telematics, insurers can now provide value-added services, such as driver feedback, theft prevention and road assistance. However, although using telematics can help insurers more accurately estimate accident damages and reduce fraud by enabling them to analyze the driving data (such as hard braking, speed, and time) during an accident, the practice of tracking mileage and behavior information has raised privacy concerns. As a result, some states have enacted legislation requiring disclosure of tracking practices and devices. The NAIC Center for Insurance Policy and Research (CIPR) conducted a study in 2015, Usage-Based Insurance and Vehicle Telematics, looking at technological advances, exploring changes in the insurance industry and analyzing the implications of telematics for insurers, consumers and state regulators. The study concluded that telematics-supported usage-based programs offer societal benefits as well as advantages for both the insurer and the consumer.

With the wide implementation of IoT everywhere from individual households to corporate offices, a 2019 McKinsey study points out that IoT could further be useful for digital networking. With these devices and technologies, insurers can partner with companies to provide more personalized products and services across multiple industries, creating a collaborative environment in this new ecosystem.

However, the increasing use of IoT does present a number of risks and challenges for insurers. As IoT applications are becoming more ubiquitous, new opportunities for cyber criminals and fraudsters open up. With data transferred back and forth from system to system, the risk of interception increases. New IoT products may also lead to new types of applications and claims fraud. As a result, IoT may require an expansion in data security and fraud protection. Additionally, data privacy is a key concern for state insurance regulators. 

Status: State insurance regulators are evaluating new innovations and technological developments, such as IoT, and are making sure the regulatory community is equipped with the tools, technology and talent to oversee a changing marketplace. The NAIC Innovation and Technology (EX) Task Force is tasked to provide a forum for the discussion of innovation and technology developments in the insurance sector. In addition, the CIPR provides resources and hosts programs to inform the public on the benefits and risks associated with these developments. At the 2019 NAIC Insurance Summit, CIPR  hosted the Innovation track which focused on various topics of innovation and technology including artificial intelligence, Blockchain technology, and cybersecurity.


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