By Mithula Guganeshan
The new tech buzz word, Internet of Things, is all about connecting data, people, machines and processes using sensors attached to devices.
Despite IoT being in its early stages, it has been predicted that IoT would become universal in a decade or so. Gartner, Inc. forecasts that 5.5 million new things will get connected every day in 2016 and will reach 20.8 billion by 2020. The simple promise of incorporating IoT to business processes is expected to increase efficiency eventually leading to lower costs and greater profits.
Internet of Things is expected to disrupt various industries from agriculture to construction. The most intriguing part is the revolution brought about by IoT to the most static industry, insurance. The IoT landscape would change how insurance businesses are conducted such as customized risk assessment according to individual customers.
With IoT, the insurance industry has the potential to bag in more than their usual profile of customers.
Revenues can be boosted by using IoT to improve risk monitoring, early loss detection, accident prevention and other preventive maintenance. The focus of this particular article is on how risks can be eliminated by using IoT within the insurance industry in Sri Lanka
A.T Kearney, a global management consulting firm headquartered in USA, says the traditional insurance industry of recovering losses is eventually transforming into an industry preventing losses. This is achieved by transitioning from a restitution model, which basically works from compensating the loss to a loss prevention model.
Devices with sensors attached to it are installed inside the car to analyze driving behavior by measuring distance, braking speed, acceleration, fuel consumption etc. Telematics/black box car insurance would monitor acceleration, speed thus offering insights about two key customer groups, high risk and low risk (responsible drivers), thus contributing to the overall safety and preventing incidents from happening.
Ronald Berger, Germany based strategic consultants, recommended that insurance companies are able to provide a customized value proposition to its customers i.e. is by customizing pricing and guarantees.Telematics policies could be personalized so that a safe driver could pay lower premiums than an average one.
Ronald Berger further states that insurance companies would be able to maintain a strong relationship with their customer, through increased interaction, value added services, thus achieving differentiation. As of 2014, 60% of European top insurers have already launched connected car solutions according to an IoT insurance study conducted by Ronald Berger among 23 European insurers from 8 countries. The results states Italy is leading in terms of providing telematics policies with 5% of telematics based premiums, followed by UK being the 2nd connected car insurance market.
Evolution in underwriting
IoT is transforming the way insurers assess and manage risks. With increasing transparency, a safer environment is created through automatic monitoring & real time connectivity.
Real time data significantly changes the nature of underwriting – as insurers are able to move beyond customer segmentation and price precisely based on a particular event/exposure level. Other benefits include operational efficiency and improved fraud identification.
Insurers are able to use data and provide value added services such as maintenance alerts, commercial fleet management and supply chain optimization. Insurers can also monitor risk elements such as Carbon Monoxide presence, heat, fire/leaks and smoke within the environment (Offices/homes). Other General Insurance services could be customized by using IoT at a construction company in order to monitor and report in terms of reducing accidents or correct fuel levels. Insurance company’s primary role being to manage the risks can certainly take advantage of Internet of Things to eliminate risks.
Sri Lankan insurance & technological innovation
Sri Lanka’s Insurance penetration levels are low with a total Premium to GDP ratio of just 1.09% in 2013 according to Fitch Ratings mainly due to lack of awareness/understanding about the concepts and benefits of insurance, thus resulting in lack of confidence within the industry.
At the moment, insurance companies in Sri Lanka work under the traditional insurance practices, where reactive actions and decisions are made instead of following a proactive model. By adopting IoT, insurance companies would be able to deliver value added services in order to remain competitive in the highly competitive yet saturated market.
Insurance companies in Sri Lanka have also been a conservative, static, risk-adverse industry & rarely considered as a pioneer for any technological innovation over the past decades. Sri Lankan insurer’s revolutionizing technological innovation seems to be introducing mobile apps for faster claims, using GIS from publicly available data to assess risk, automating claim processes and money transferring methods.
This would have been considered an innovation many years ago, however not anymore, especially not in 2016. There are local technological companies providing IoT related services for an affordable cost while many more startups/entrepreneurs would enter the market once the companies are open for advanced technological innovation in Sri Lanka.
Changing consumer needs
2015 World Insurance report states changes in consumer expectations coupled with emerging technologies are going to exert high pressure on insurance industries. The report also states that Gen Y’s behavior in terms of heavy digital channel usage & interactions communicates a meaningful message about the future, and this should not be ignored. The study states, Generation Y is more likely to purchase insurance from a technology company, if they chose to venture into the insurance market. And, that signals increased competition around the corner. A product/service driving the savings potential is attractive to customers, especially the younger ones.
Increased competition from new entrants
Emerging players in the insurance industry could use IoT as a way to achieve differentiation in a commoditized market. Entering early would enable the insurance companies to learn and adapt as the market is still evolving thus, being able to position themselves as an innovative player.The only requirement to offer a differentiated insurance service is by providing a renewed digital strategy and some investments in the IoT technology.
Sri Lankan Insurers are clearly underestimating the power/the level of acceptance for connected technologies by delaying technological related investments, whereas the Western world has started exploring modern landscapes. However, it’s only a matter of time till an insurance company enters with a unique & appropriate strategy to suit consumers. There is a high risk as competition would emerge from both within and outside the industry. In order to utilize the exciting opportunity ahead, companies need to perfect operational excellence, while innovating and staying ahead of the curve.
With the ongoing technological revolution, insurance industry will not be spared anymore like in the past. It’s time that Sri Lankan insurance companies start incorporating technological innovation to cater to the needs of the ever changing consumers. In order, to benefit from IoT, insurance companies must act now.
( –Mithula Guganeshan work as a researcher and writes on business/technology related topics –)