For years thought leaders have been evangelizing new insurance products and value propositions driven by the Internet of Things. The IoT, of course, is the network of embedded connected devices generating massive amounts of data, combined with ubiquitous connectivity and the analytic capabilities to draw insight and drive actions from the data.
While adoption in commercial insurance is sporadic and meaningful structural and economic barriers exist, early successes and market dynamics are laying the foundation for an expansion over the next few years. But, to realize this opportunity, commercial insurers need to shift from primarily bystanders or recipients of solutions to active participants willing to invest for the long-term, experiment, and disrupt the current insurance model.
In the personal lines market, insurers are acutely aware of the longer-term threats and opportunities, and IoT-powered value propositions are beginning to come to life. Telematics auto coverage is now being offered by most major insurers, and autonomous vehicle technology promises to materially reduce premiums over the next two decades. In addition, wearables are being incorporated into life and health policies, and insurers are investing in the connected home.
Attention to IoT in commercial lines is far less pervasive. But a range of emerging applications are beginning to demonstrate the potential. They include telematics solutions tracking the performance of vehicle fleets; wearables such as posture devices, activity trackers, and exoskeletons monitoring workers’ compensation incidents; drones and ground-truth data collected to assess drought conditions and hail damage; and smart buildings and equipment monitoring to inform maintenance schedules and prevent breakdowns.
These initial forays certainly have the potential to develop into game-changing products. But there are obstacles preventing widespread uptake. The primary barriers are structural and economic. In commercial businesses, understanding usage patterns, identifying risks and taking preventative actions frequently requires sensors and connectivity embedded into heavy-duty equipment, commercial buildings, broader systems (such as fleet management platforms), and operating and work practices.
Installation and servicing of sensors and connectivity into these “things” is expensive, has long lead-times, and requires a set of capabilities foreign to insurers. Further, given the intricacy and criticality of this property and equipment (and people), companies are hesitant to incorporate new technology that add complexity or can cause issues down the road.
The role of the insurer in the application of sensors is further muddied by the fact that the economic value associated with an IoT-enabled asset goes well beyond the boundaries of insurance. An IoT-enabled machine has capabilities that make the best use of its performance, with the effect of reducing operational costs or increasing output. With the benefits extending beyond risk pricing and mitigation, the role of the commercial insurer shifts from risk transfer to an orchestrator of prevention and performance improvement solutions.
The situation is further complicated by the nature of commercial coverage. Unlike in personal lines, where the asset (like a car or a home) is distinct and clearly aligned with the policyholder, commercial coverage is often applied to an elaborate system or facility sometimes including third-party manufacturers and leasing agreements.
This situation, when coupled with companies’ hesitancy to tinker with complex systems and the broader sources of value mentioned previously, means that insurers must navigate a highly complex ecosystem that includes technology companies, equipment OEMs, and maintenance providers, along with commercial customers, in developing IoT-enabled value propositions.
Compelling Business Cases
While complexity is a factor in the speed at which IoT is taking shape in commercial insurance, recent experiments are revealing increasingly compelling business cases. The potential value in claims prevention in commercial lines, for instance, dwarfs the benefits associated with personal lines.
While the investment may be higher and more complex, the risks that can be prevented or mitigated are also higher. For example, in a pilot program with Church Mutual Insurance Company, an IoT capability provided by Hartford Steam Boiler saved policyholders more than $500,000 by avoiding property losses from frozen pipe leaks. Crane Logistics and Caterpillar have leveraged wearables to reduce the number of high-risk lifts performed by workers by roughly 80%. This effort cut the number of injuries in half, dramatically reduced workers’ compensation claims, and improved productivity.
Continued advancements in technology and the enormous emphasis traditional manufacturers are putting on IoT will continue to create opportunities for insurers and their commercial clients to demonstrate new applications and economic potential. In the last decade, this has played out in the personal auto insurance industry, where advancements are overcoming technical challenges and customer appetite for improved value have combined to make telematics economically viable and a commonplace offering in the marketplace.
More exploration is needed to reach the pivot point in which game-changing applications propel the adoption of IoT in commercial insurance. Gathering and harnessing data will enable an insurer to not only improve pricing capabilities and risk selection, but help clients prevent losses and avoid not only the claims process but business interruption.
The Internet of Things is in the early stages of development in commercial lines. The journey will not be straightforward. But, if personal lines is used as a guide, barriers will come down, value will become more apparent and a rapid expansion of IoT applications in commercial insurance will soon follow. While insurers are not currently the frontrunner in this space, the promise of loss prevention, mitigation and restitution enables a value proposition that commercial insurers can make to their corporate customers.
Joe Reifel is a partner in the financial institutions practice of A.T. Kearney, a management consulting firm. Michael Freilich is a principal in the same practice.