In that role, Joe has spent years researching the implications of connected-home technology on the home insurance industry, speaking frequently with leaders from both technology and insurance businesses.
Verisk Review: Can you share a few thoughts about the future of insurer/customer relationships?
Wodark: It’s no surprise that insurers are excited about the opportunity to use data from connected devices to create new segments of risk for underwriting and pricing purposes. And insurance executives who think broadly and creatively about how to harness this technology for each step of the insurance life cycle may uncover additional opportunities to create value for their organization and customers. This wider lens could lead to a stronger business case for investing in a connected-home strategy.
For example, understanding that some policyholders regularly engage with a smart-home application on their mobile devices can present a new opportunity to engage with that policyholder. And engagement often strengthens the relationship between insurer and customer. That could be an avenue for the insurer to advertise newly available discounts or a home repair concierge service.
Consider this: Identifying how the technology and data could be used to improve the claim experience can create a remarkable advantage. Can data from alarm systems be used to initiate and prefill the first-notice-of-loss process, eliminating the need for a customer to invest time on this step? Insurance executives could introduce a stronger business case to implement a connected-home strategy by considering how the entire enterprise might benefit.
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Verisk Review: What are some of consumers’ security and privacy concerns?
Wodark: Critics of this opportunity often point to the general public’s reluctance to share data with insurance companies, citing concerns about where the data may eventually land—possibly even with a third party. While I’ve read multiple studies that have attempted to qualify this perception, I’ve found the results to be fairly inconsistent. Recently, FC Business Intelligence published a report in which 58 percent of survey respondents indicated they would consent to share their smart-home data with their insurer under the condition that only the equipment is monitored, not their personal movements. The study seems to demonstrate optimism in an insurer’s ability to collect data from connected devices.
It’s becoming obvious that both the insurance and home automation industries will need to work together to ensure that consumer consent is obtained legitimately and that any data is securely stored. Both parties may be required to seek consent from consumers separately, and the scope of the data collected and its intended use will need to be outlined clearly.
Verisk Review: What are the some of the challenges that need to be addressed?
Wodark: I’ve personally spoken to executives from a majority of the nation’s top 20 homeowner insurers. One of the few common themes from those conversations is the perception that connected-home technology is valuable to the insurance industry, but not yet statistically substantiated—meaning that, intuitively, it makes sense that the presence of this technology within the home could prevent or mitigate certain losses. But many of these hypotheses haven’t been proven. For example, what’s the optimal mix of devices to lower overall claim severity and/or frequency? Do connected-home systems that are professionally monitored mitigate theft better than self-monitored systems? What is the loss experience of homes that have a professionally installed water shutoff valve compared with those that don’t have the valve? Many questions haven’t yet been answered conclusively due to insufficiently detailed data.
Verisk Review: What about consumer adoption of technology?
Wodark: Analysts estimate that current North American smart-home penetration will probably grow to 28 percent by 2020. While increased customer adoption is expected, the reality is that only about 5 percent of homes currently have a smart-home device. To realize the technology’s full potential, both the insurance and home automation industries will need to work closely to drive consumer demand. While the challenge is undisputed, the best way to generate interest is less certain. Some suggest that insurers could lower the total cost of the devices. Through innovation, home automators are also attempting to design product packages that could be cost-justified with existing protective device discounts offered by insurers (approximately 5 to 10 percent per policy industrywide). Regardless of the tactics used, the two industries must collaborate to encourage consumers to adopt the technology. Without mass adoption, mutually beneficial business models are unlikely.
While consumer adoption will ultimately determine how big this opportunity will become for insurers and home automators, it’s apparent that neither industry is taking a wait-and-see approach. Strategic partnerships between major players in these industries are forming regularly, but they’re being done one-on-one. That approach prolongs the time it takes for both parties to realize value. If one of an insurer’s primary drivers is the potential to obtain data that could reveal new insights, forming a one-on-one relationship with a home automator will fall short. For example, if 5 percent of all insured homes have a smart-home system (about 5 million), a home insurer with approximately 1 percent market share will have an estimated 50,000 policyholders with a connected home. If that insurer partners with a home automator with 1 percent of connected-home market share, there’s potential to collect data from only 500 homes annually. If we assume only half of those policyholders opt to share their data, just 250 households remain. Any data scientist or actuary would agree this isn’t enough data to conduct a conclusive study. Therefore, the question insurers now face is how to get enough data to generate actionable insights.
Verisk Review: Where is the technology headed?
Wodark: Toward a home telematics data exchange. The need for sizable, detailed data in a consumable format is the reason I believe the insurance and home automation industries must collaborate to create a central clearinghouse to share and receive relevant connected-home data.
For insurers, the benefits of a data exchange are obvious: access to data from more home automators, reduced IT costs through integration with multiple partners, the ability to receive data in a consumable and model-ready format, more time for creating insights and less needed to identify sources of data.
There’s also value from the home automator’s perspective. An exchange would serve as a mechanism to provide data to more of the insurance industry and facilitate cost-effective integration with one collective partner. It could also empower insurers to conduct research that might deepen the discounts offered for connected-home technology, thereby lowering the total cost of ownership to consumers.
We expect that 2016 could be a tipping point for the use of connected-home technology within the insurance industry. Who will be the innovators that position themselves as leaders in this space? That’s the important question that remains to be answered.