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Insuring the connected home

By Doug Wing October 1, 2014

We’re not yet in the Jetson era, but the technology behind modern smart homes, or connected homes, would astound our ancestors. Whether adjusting thermostats with a smartphone, watching video surveillance from a tablet, or receiving alerts on mobile devices, the capabilities of connected homes grow every day.

How will those smart innovations affect homeowners insurance? And how will they reduce losses for residential property insurers?

In this article, we’ll examine how the industry has integrated three common home security and sensor technologies into systems that protect against homeowner exposures to theft, fire, and water damage. We’ll also look closely at how those enhancements have provided ways to mitigate home damage more efficiently.

Home security systems

Today’s security systems and home automations aren’t simply the product of technological developments of the past few years. The foundation for smart homes was laid decades ago. To understand better how connected homes will affect future insurance solutions, you have to take a look at the past.

Following World War I, the United States experienced a significant increase in crime. That led Americans to have a renewed interest in security measures and find methods to protect themselves and their homes. Insurance companies reacted by offering premium discounts to alarm subscribers. Initial security involved door shakers — watchmen who made the rounds nightly to subscribers’ doors to make sure they were locked. Next came bells and batteries connected to electromagnetic contacts on windows and doors.

In 2014, home security has evolved from door shakers to automated web-based systems. To feel secure that their homes have locked doors and activated alarms, users can log in remotely to check the status of their homes. They can also add video surveillance cameras and program their security systems to send a live video clip if motion is detected. While more than 90 percent of burglaries go unsolved, the addition of video surveillance is helping to bring those numbers down. Many police jurisdictions across the country have credited home surveillance cameras with assisting in identifying burglars and helping to solve more crimes.

Insurers soon recognized that homes under a watchful eye were at decreased risk. Early adopters were able to offer lower premiums than their competitors while still remaining profitable. Advanced home security systems reduce theft rates and allow homeowners to react quickly in the event of a burglary. Two million home burglaries are reported each year in the United States. Homes without a security system are 300 percent more likely to fall victim, with about 30 percent of all burglars entering through an unlocked window or door.1 Advanced technologies allow insurers to offer homeowners insurance at lower, more competitive prices.

My home has a security system with video surveillance, and it gives my family and me peace of mind. It also gives me an annual discount on my homeowners premium. However, wouldn’t it be better if the insurance company could verify that I’m actually using my security system when my family’s away? Finding the balance between discounts and privacy will always be challenging, but I can envision an additional discount in the future for policyholders willing to share access to and verification of loss mitigation devices.

1. Safeguard the World, www.safeguardtheworld.com/statistics

Fire alarms and smoke detectors

As security systems evolved, so did fire alarm technology. In the early 1960s, a team of Canadian researchers published a study regarding the life-saving potential of heat and smoke detectors. The findings played a major role in the development of policies and standards for smoke detectors in new and existing residences. Smoke detectors are responsible for a 50 percent decrease in U.S. fire deaths between 1975 and 1998.

The sensors in modern smoke detectors often rely on two technologies — photoelectricity and ionization — to detect both smoldering and smoking fires. The smoke detectors are part of a system that will alert occupants of a fire in another part of the home. Today, smart technology can connect the smoke detectors to the Internet and allows homeowners to check the status and battery life of their fire alarms remotely through a web-enabled device.

One of the challenges for insurance companies is how to manage older homes. Safety codes have improved over time, and newly constructed homes are required to have multiple interconnected smoke detectors. However, many older homes have insufficient smoke detectors and don’t meet current construction codes. Bringing those homes up to date with smart technology benefits homeowner safety and lowers the assumed risk that an insurance company takes on. Those insurers that properly promote the technology and encourage policyholders to invest in their own safety can expect less risky exposures.

While it’s not practical for insurers to go house to house to check for functioning smoke detectors, there are incentives for all parties to ensure the devices are working properly. The better an insurer communicates the life-saving benefits, the safer the homeowner can be and the less risk the insurance company has to cover.

New smart technologies can be a major benefit to homeowners. Imagine getting an e-mail or text alert letting you know the battery life in a detector is low. Not only could you change the battery before it starts chirping at 3:00 a.m., you could also rest easier knowing your family will get an alert in the event of a fire.

Water leak detection and shutoff

Water losses have continued to increase dramatically in the past ten years, and water detection technology is quickly becoming a way to minimize that risk. Advanced sensing and monitoring technologies deliver reliable and easy-to-use leak prevention and automatic water shutoff.

Water detection devices can be installed around dishwashers, washing machines, under sinks, or anywhere water leakage may occur. When the devices sense water, they can send mobile alerts through e-mail or text to give you much faster response time. Additionally, if you have an automatic or smartphone-enabled shutoff valve, you can quickly stop the flow of water in designated areas or at the water main. That will prevent hundreds of gallons of water from spilling onto your floors and causing severe water damage.

Embracing the Future of Connected Homes

An additional benefit is that these systems often allow users to monitor their water use over time. By better understanding water use and possibly detecting leaks early, individuals may become more efficient in their water usage.

In the insurance world, we’ve all seen claims from broken pipes, failed hoses, and leaky faucets that result in extensive damage when the homeowner is away. Not only are floors ruined, but malfunctioning second-story bathrooms or washing machines often lead to first-floor ceiling damage and a variety of other repairs.

Last summer, while my neighbors were away at work for the day, a broken hose caused flooding in their home. The insurance company paid out $20,000 for repairs and restoration, but they still owed a $5,000 deductible. Imagine the benefits to the homeowner and the insurance company if the homeowner could have detected water damage sooner and automatically shut off the system. My neighbors would have saved the cost of their deductible and avoided the inconvenience of home repairs. The insurance company could have avoided the cost of the claim as well.

Embracing the future

A Smart Garage Door Opener

The benefits that technology companies and vendors promote in smart homes make homeowners feel safer and more connected to their homes. Lowering homeowner premiums is a welcome additional perk. Insurers get peace of mind and a lower risk exposure knowing that homes receive efficient and reliable monitoring.

While this article is not a comprehensive list of home technologies, it provides a glimpse into some of the industry’s advances. Other devices on the market, such as remote door/window locks, timed lighting, and mobile pool sensors, provide practical ways to update homes and lower insurance premiums.

The largest hurdle is persuading customers to install such devices in their homes and potentially share the information with insurers. The more homeowners understand their premium cost benefit and the advantages of cutting-edge technology, the more likely they are to adopt. While it’s convenient to open your garage door with your phone or set lights on timers while away on vacation, knowing that you could save thousands of dollars in premiums or deductibles is a stronger incentive for homeowners to embrace the future.

I believe insurance will continue to promote new technologies — and those technologies can lead to new discounts and new ways of assessing risk. Imagine if my neighbor could have avoided water damage by installing moisture detectors or purchasing new hoses and notified the insurer to receive an additional discount. The more data created and collected, the better insurance companies can evaluate risk and offer the best price to insure homes such as yours and mine.

Doug Wing

Douglas Wing, assistant vice president of Analytic Products for ISO Insurance Programs and Analytic Services, is responsible for the ISO Risk Analyzer® suite of predictive analytic tools. He leads ISO’s initiatives to enhance its offerings through analytics and predictive modeling across all lines of insurance. Before joining Verisk, Doug was in actuarial research and development at Liberty Mutual.