The ‘Internet of Things’ (IoT) refers to the billions of physical devices around the world that are currently connected to the internet. How can insurance companies utilise IoT to help better assess risk and enhance customer experience?
Risk assessment ‘information’ is the key that quantifies both likelihood and severity. Insurance works on the concept of pooling of risks where all information is required about the risks themselves so that the pool is as homogenous as possible. Heterogeneity in the pooled risk is the source of variation resulting in large volatility in the claim experience, leading to fluctuating profits.
Underwriting is a process where an insurance company gathers all possible information to charge the right premium to the customers, based on the risk presented and create a homogenous pool of risks.
The challenge with the insurance companies is that information submitted at the time of application may or may not be correct either knowingly or unknowingly. This brings unassessed risks into the insurance company bucket that may result in adverse claim experiences, leading to losses. At times, the cost of collection of risk about the customers may be proportionately higher. This may not allow insurance companies to collect all risk-related information and rely on the customer’s declaration which is done in good faith.
Some of these challenges can be addressed through digitalisation such as IoT, Big Data, cloud computing, machine learning and artificial intelligence. These technologies can help in continuously gathering information about the proposal and ensure that risks and price is assessed accordingly.
Insurance proposals ask for customers’ data at the start of a policy, but IoT devices help to regularly gather data about the insured through the life of a policy.
To do this they collect, transmit and share information related to the risk presented. This helps in informed underwriting decision making, automated claims processing, reduced administrative cost, greater customer satisfaction, and so on. The IoT device also helps in forewarning about the risks that may crystalise at the customer’s end, leading to a better customer experience and reduced insurance costs. It is estimated that the administration cost is reduced by 30% whereas some benefits are passed to customers reducing the premium by 25%.
The customer’s insurance process starts with the proposal submitted to the insurance company. This includes details about the risk factors of the risk that the customer is presenting. The insurance company performs an underwriting process that assesses the risks presented, confirming pricing assumptions and charging premiums accordingly. The insurance company performs the underwriting based on the evidence produced by the customer such as proof of age, income statement, health condition, and medical reports in life insurance.
At times, this information submitted by the customers is not always correct; however, due to the high administrative cost of verifying details, particularly in lower premium policies, insurance companies do not verify all such information and underwrite. Such cases in the insurance terms are referred to as anti-selection or self-selection.
As insurance is a contract written in utmost good faith, when a claim arises and the insurance company identifies that the information given at the time of proposal was not correct, they have a right to repudiate the claim because the premium charged at the time of underwriting was lower due to higher risk actually presented.
The decline in claims leads to customer dissatisfaction and increased customer complaints, and regulators do not like it. All this leads to adverse press publicity, court cases, and loss of reputation, which has an adverse impact on the future business of the insurance company. Further, all these anti-selection results in unanticipated claims leading to higher losses increased administration costs and greater cost of capital.
How IoT helps in addressing these risks
IoT is a system of interrelated computer devices that transfer data over a network without requiring human-to-human or human-to-computer interaction. This device is placed on the object exposed to risk to help the insurance company to collect and transmit critical data on a real-time basis. Such an object can help the insurance company at the time of underwriting decision making by directly receiving the information from the source and removing the chances of human intervention in submitting the required documents.
Also, IoT helps in automated claims processing because the claimant can share the claim-related information directly to the insurance company from the site of an accident or from the hospital where death has been taken. This helps in reduced administrative costs and greater customer satisfaction leading to more future new business for an insurance company.
These connected devices help the insurance company in gathering accurate information about the risk which subsequently helps in charging appropriate premiums through the initial or renewal underwriting process.
Such better gathering of information helps in classifying risk in a more homogenous group. The direct submission of documents required for the underwriting helps in reducing the chances of anti-selection and thereby creating a more homogenous pool of risk, which will have lower claim volatility. This reduced anti-selection increases the claim settlement rate and reduces administration costs which are otherwise often spent on claim investigation and longer time spent. A better claim experience results in insurance companies allowing discounts and vouchers to customers, particularly in health insurance.
In motor insurance, the connected devices help the insurance company as well as customers who are alerted when a risk crosses a particular limit and inform the customer about the likely impact on his renewal premium if they take a particular route to reach his destination. For example, based on the camera, GPS, and accelerometer, the driver is alerted about the likely accident if he takes a particular route based on the traffic density, speed of the vehicle, and driving behavior of that day.
For home insurance, the insured are alerted for possible theft, taking mitigation action on the possibility of flood, thunderstorm, or likely change in the temperature. IoT is very useful in health insurance where there is a continuous flow of information between insurance companies and the insured through the connected devices, giving real-time feedback about the health to customers when to go for medical examination and necessary special medical tests.
This can save the life of customers as well as the cost to the insurance company.
IoT helps insurance companies in automating the initial and renewal underwriting process, instant approval of claims, and more accurate assessment of risk that reduces the claim management cost and optimise the additional margins that insurance companies otherwise to keep for claim fluctuation. This further enhances the customer experience and increases the satisfaction and hence higher reputation
In summary, IoT bridges the information gap between the insured and insurance company, and traditional methods of collection of data does not work. The traditional method works in utmost good faith basis, but human behavioral issues create an information gap. The application of IoT is still in a developing phase and many other areas in insurance are yet to be tapped such as life insurance.
The overall impact on the insurance company is a reduction in fraud and anti-selection, optimisation of capital due to lower volatility, and higher profitability. Customers on the hand are also benefited by getting alerts when risks are about to crystalise. However, digitalisation brings the newer risks of cyber-attack and the collapse of the system. Many global insurance players have recognised IT and digitalisation as one of the key emerging risks.
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