Modern humans are well and truly embedded in a technological world. From smart thermostats and security systems, to self-driving cars and voice-controlled entertainment systems, virtually every aspect of our lives is marked by a growing encroachment of technological interconnectedness. At the same time, it is the cloaking of these inanimate objects themselves in a mass of data capturing sensors–known as the internet of things (IoT)–that is one of the fastest growing industries in the tech sector.
IoT essentially means the utilisation of technology to create a network of physical objects, devices and appliances by equipping them with actuators and sensors that generate and relay information about these objects in real time. This data is then collected and used to make changes to the environment the devices work in, as well as for the optimisation of products and services.
Machina Research's annual report estimates that the total number of IoT connections is expected to grow from 6 billion in 2015 to 27 billion in 2025, a massive 350% in 10 years. This explosive potential is also reflected in rising investor interest for companies involved in the manufacturing of semiconductors and sensors required for IoT technologies, and exchange traded funds (ETFs) in particular illustrate this trend, having experienced a boom of their own over the same period. For example, the PowerShares Dynamic Semiconductor ETF ($PSI) is up 308% over five years.
However, more interesting is the impact this technology is having on one distinctly 'untechy' area of finance: the insurance industry.
Not only has the IoT been responsible for moving away from assessing risk using historical data in favour of real-time monitoring, the resulting 'insurtech' revolution has the potential to alter consumers' relationship with insurance products from being passive policy holders, to active managers of tailored, tech-based policy solutions.
Tracking the untrackable
Picture this scenario: you're at home watching your favourite TV series, blissfully unaware that months of vibrations in the waste pipe under the kitchen sink have just caused it to separate, spraying waste water inside the walls. This quickly sets in motion a chain of events ultimately leading to a total stripping out of a mould infested kitchen and months of misery dealing with property insurance claims.
Now the IoT allows us to replay this scenario: you're at home watching your favourite TV series, when all of a sudden you get a notification on your smart phone alerting you to an issue in one the pipes in the kitchen detected by your smart monitor. You check it out, call out a plumber, and get the problem solved before it happens.
Now rinse and repeat that scenario for heating systems, security installations, vehicles, white goods, and it quickly becomes clear how the IoT has the power to significantly reduce risk profiles and fundamentally reconfigure the traditional insurance model in the process.
Home Serve partnered with Aviva to release pipe tracker 'Leakbot' (Source: Leakbot.io)
Crucially, for the first time players from outside the insurance industry (i.e. the IoT providers themselves), are building up vast amounts of risk related data analytics, and gradually assuming the role of gatekeepers for prospective insurance buyers.
Compounding insurers' woes are the current challenging underwriting conditions across the insurance industry. According to the Association of British Insurers (ABI), net written premiums–a measure of the financial health of an insurer–has declined steadily for UK property since 2012, from £5.85 billion to £4.46 billion in 2016, a decline of 24%.
Source: ABI; McKay Research
Leveraging partnerships with IoT providers
Although the insurance industry has fared reasonably well adopting a relatively slow approach to embracing new technologies in the past, the IoT has upped the stakes with regards to technological uptake so dramatically that insurers have no choice but to act, and fast. The need to provide consumers with more frequent and personalised interactions through insurance services that can adapt to their changing demands is now a top priority.
According to a recent Accenture study, 80% of insurance customers are looking for personalised offers, messages, pricing and recommendations from their auto, home or life insurance, and would switch providers for a more tailored insurance package. This reflects buyers' willingness to essentially trade connected, behavioural data to get more of a personalised product, which is creating opportunities to develop all new consumer bases through innovative, tech-based engagement.
Insurtech is the future but data breaches must be addressed
Insurers looking to capture the best opportunities and create the most value must start anticipating the extent to which the IoT will shape their business and industry, and begin the transformation accordingly. Thankfully, underwriting opportunities through partnerships and/or acquisitions of insurtech firms offering IoT technology are considerable for those able to successfully tailor dedicated IoT strategies to key consumer demands.
On the other hand, major obstacles still remain that have prevented insurtech from really hitting its stride. The spectre of large-scale data breaches remains the most significant barrier to entry for consumers, and a recent PwC survey found that 28% of respondents were aware of devices available to monitor the security of their home, but chose not to use them due to privacy concerns. To assuage consumer fears therefore, insurers must both invest in the necessary cybersecurity systems and effectively communicate how these investments address specific privacy concerns. Getting this balance right may well hold the key to staking a claim as a top provider in the new world of insurtech.
The information contained within is for educational and informational purposes only. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. McKay Research/James McKay is neither being compensated for this article, nor has any positions in the stocks/funds mentioned. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.