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The Power of Insurance IoT for Risk Management

Traditionally, insurers have used proxy data to identify the risk of loss for an asset. The internet of things (IoT) gives insurers access to real-time, individual, and observable data on an asset’s (or person’s) risk of loss. This data is directly actionable for risk pricing and mitigation. By identifying actions or behavior that are causative of risk and leveraging IoT sensors that monitor these behaviors, insurers can create algorithms that tie observed behavior directly to pricing models. Insurers can similarly leverage this data for risk mitigation by providing timely and specific feedback to insureds rewarding safe behavior and warning of risky behavior.

In addition to risk assessment and pricing, IoT can drive improvements through:

  • Improved customer segmentation: IoT data gives new insights into customer behaviors that can be leveraged for upselling and cross selling opportunities across business lines. IoT data allows insurers to ask – and answer – new and more complex questions about their customers and prospects than ever before.
  • Personalized insurance offerings: Deeper understanding of policyholder behavior and individualized risk data allow insurers to personalize insurance offers to their customers’ needs.
  • Behavior-based feedback and engagement: With IoT-based monitoring individual behaviors can be detected and acted upon in near real time. This enables insurers to provide feedback in the most critical moments to either positively reinforce safe behaviors or educate about risky behaviors. Additionally, if a loss event is detected, insurers can provide immediate support to mitigate losses, protect policyholder safety, and reduce the time it takes to settle.

Workers’ compensation risk management

Worksite risk mitigation

Safety videos, training programs, and on-site safety services today focus on mitigation of common risks in common situations. Trainings are often sporadic and general or after-the-fact and specific. It is difficult to monitor the results of trainings and tie incentives to individual behavior.

Wearable sensors provide employers with the opportunity to detect risky worksite behavior (such as poor lifting behavior), provide on-the-spot feedback to avoid that behavior, and enable employers to monitor improvements in that behavior over time. Crane Logistics and Caterpillar, for example, have leveraged wearables to reduce the number of high-risk lifts performed by workers in a pilot program by 80%. Other examples include the use of smart helmets to detect and respond to heat stroke and chemical exposure tracking via sensors. With improvements in safety management and risk mitigation, employers can see major decreases in claims.

As in other lines of business, IoT allows insurers to get deep insights into individual behaviors, identify risky behaviors, and underwrite that risk accordingly. Employers are incentivized to reduce risky behaviors, with the benefits of risk reduction accruing to both the employer and the insurer. IoT-driven behavior change can reduce workers’ compensation costs by more than 20%.

Lifestyle risk mitigation

The growth of workplace wellness programs globally is indicative of the business value of improving employee health. Improving employee health can be on the most effective way employers can reduce health-related employee costs in the long-run. Insurers often participate in employee wellness improvement programs by incentivizing healthy behaviors through gym cost reimbursements or healthy living discounts.

Wearables provide insurers and employers with the insight they need to monitor health and wellness program adherence. Insurers can tie gym reimbursements to workout frequency and severity. Employers can monitor physical rehabilitation via IoT sensors to ensure injured workers are completing the programs their doctors prescribed. Smartphone-based IoT programs can similarly monitor drug rehabilitation program participation and help mitigate recidivism.

By leveraging IoT, employers can also take a more proactive approach to health and safety. Through IoT data, employers can identify potential risk scenarios such as a driver who is too tired to perform their duties. Fatigued workers are more likely to be injured on the job with people who sleep less than five hours per day, for example, have 3.5 times higher injury incidence rates than those who sleep between seven and eight hours per day. A study from Liberty Mutual ranked overexertion as the leading cause of workplace injuries, directly costing companies $13.8 billion each year. Wearable IoT devices can help employers monitor health indicators such as lack of sleep, workplace stress, and overexertion and proactively address these risky behaviors.

Risk mitigation in life and health insurance

The costs of care for hypertension, diabetes, asthma and other chronic conditions amount to 86% of the United States’ $3 trillion annual healthcare spend. As employers bear the majority of the burden of this cost, anything that can help employers prevent chronic conditions is critical to their bottom line. IoT devices can be used to detect health characteristics such as blood glucose levels, temperature, and heart rate and identify healthy behaviors such as sleep, exercise, and stress. This data can be analyzed to provide automated feedback that encourages healthy habits.

John Hancock recently announced that it would only sell interactive life insurance policies that incentivize health behaviors through the optional use of a wearable device for policyholders of their life insurance Vitality product. The program is designed to incentivize policyholders to stay fit via rewards and discounts.  The announcement came after a successful pilot in which participants:

  • Lived 13-21 years longer than the rest of the insured population
  • Generated 30 percent lower hospitalization costs than the rest of the insured population
  • Took nearly twice as many steps as the average American
  • Logged more than three million healthy activities including walking, swimming, and biking
  • Engaged with the program approximately 576 times per year – compared to customers with traditional insurance, who engage with their life insurance company one or two times per year on average

UnitedHealthcare’s Motion health insurance program, launched in 2017, is similarly focused on incentivizing healthy behaviors. Participants’ fitness habits are monitored via an IoT sensor and incentives are deposited in HRA / HSA accounts based on meeting frequency, intensity, and tenacity of fitness goals. Participants can earn up to $1100 per year. Motion’s results to date have been similarly impressive:

  • 12,000 steps daily
  • 60% of participants sustain engagement over 6 months
  • 45-65% of those eligible to participate in Motion registered for the program

Compliance is another area where IoT could have a potentially significant impact on health and life insurance outcomes. Innovations such as smart pills contain ingestible sensors that can report when the pill has actually been taken by the patient. Patients who comply with their drug regimen may be at lower risk for adverse healthcare outcomes and those who don’t may achieve better outcomes through automated follow up and feedback to improve adherence.

Risk mitigation for homeowner’s insurance

Water damage avoidance

Over one-third of homeowners’ insurance claims are related to water damage. Non-weather-related water damage (such as a burst pipe), makes up almost 20% of total claims. Estimates put the average water-damage claim at almost $9000.

Thanks to water flow sensors, this type of damage is now easily monitored and prevented. Smart water flow monitors can detect leaks in a home’s plumbing, alert the homeowner, and in many cases shut off water flow to affected pipes. Non-emergency alerts, such as a faucet being left on can also be triggered by some sensors. This type of targeted feedback can be critical for behavior-based risk reduction. IoT moisture sensors can also be valuable for detecting and alerting homeowners to both weather-related and non-weather-related flooding. One study by the ACE Group predicts that more than 90% of water damage claims could be avoided through the use of automated leak detection and mitigation systems.

Neos is an innovative connected home insurance company in the UK that offers IoT sensors as part of its insurance offering. They are successfully using leak sensors for water-related claims mitigation, along with other IoT sensors to combat all major home-related risks.

Fire risk mitigation

Fire-related claims are the most expensive homeowners’ insurance claims, responsible for nearly one quarter of total claims costs. Three of every five home fire-related deaths resulted from fires in homes with no smoke alarms (38%) or no working smoke alarms (21%). Dead batteries caused one-quarter of smoke alarm failures.

Smoke detectors are required by most, if not all, insurance carriers. Smart smoke and carbon monoxide detectors have been developed to address the two greatest challenges with traditional alarms: off-premises notification and alarm status verification. Through a mobile app, smart smoke detectors can notify homeowners of an event no matter where they are. This is critical for claim mitigation as the homeowner (or their insurer) can notify emergency services immediately upon notification and potentially reduce the severity of property loss. If the insurer is

integrated directly with the sensor or service provider, they can also get insight into the status of fire alarms on an insureds’ property. For example, Liberty Mutual’s smart home insurance product offers a discount on home, condo, or renters’ insurance and a free Nest Protect smart fire alarm if insureds share their Nest data with the insurer. For those who opt in, Nest shares only the devices battery level, status, and Wi-Fi connection strength with the insurer for verification purposes.

More than half of U.S. households with broadband internet find the idea of an IoT device that alerts them to smoke and fire highly appealing. BI Intelligence  estimates a home equipped with a connected smoke detector that automatically alerts the fire department could potentially cut an insurance payout by an average of $35,000 USD. Similarly, most consumers would be willing to share smoke or carbon monoxide detector information with an insurance carrier for the right incentives.

Roost Telematics has partnered with leading North American insurers to successfully launch home telematics programs focused on fire and water damage claims mitigation. Roost has reported that their sensors and automated reporting lead to 5-15% reduction in claims for their insurance partners.

Burglary avoidance and mitigation

According to Safeguard the World, the chances of a home burglary rise by 300% when a home has no security system. The average cost of a property-theft related claim is around $2250. Most insurers already incentivize the installation of a security system through insurance discounts. Like fire alarms, insurers have little insight into security-related behaviors except one-time confirmation of enrollment in a security program.

IoT-enabled devices allow for the remote monitoring of the home and remote activation of home alarm systems, locks, indoor/outdoor lighting, smoke alarms, and even doorbells. In the event of a theft, fire, or flood, in-home video monitoring can be used as a catalog of property damaged or destroyed to help accelerate the claims process and combat fraud.

One example of a connected home insurance program is American Family’s partnership with Ring. American Family offers a $30 discount on Ring’s video doorbell products. If the homeowner installs the doorbell, they become eligible for AFI’s Proactive Home Discount. In the event of a burglary, Ring will reimburse the homeowner’s policy premium.

Auto insurance risk management

Improving risk assessment

Insurance telematics provides a step-change improvement in risk assessment over traditional factors that are largely proxies for how, how much, when, and where vehicles are operated. Insurers can combine granular telematics data with contextual, policy, and claims data to develop a score which is highly predictive of risk. Done correctly, insurers can create a score that provides double-digit lift, optimizes the lift above and beyond traditional factors, and identifies factors that cause vehicle accidents.

One 2018 study, when comparing a classical (non-telematics) risk model against telematics-based and hybrid (telematics and traditional factors) models by level of predictiveness showed the classic model ranked least predictive of all models. Progressive Insurance, the US leader in UBI has released findings stating that driving behavior predicts accidents more than two times over traditional risk factors. Milliman has similarly announced a telematics-based risk score that is up to six times more powerful than using traditional factors alone. Octo’s risk score, the DriveAbility Score has been proven to provide 10-12 times lift to score predictiveness.

Risk mitigation

A review of relevant studies on traffic accidents by Stanford Law School suggests that greater than 90% of all vehicle accidents are caused by human errors and deficiencies. Yet most drivers rate themselves as safer than average. Claims mitigation – critical for driving down an insurers’ combined ratio – requires timely and specific education and training to improve driver safety. Vehicle telematics gives unprecedented insight into driver behaviors and habits, allowing insurers to detect risky habits in near-real-time and provide feedback and education on the specific behaviors exhibited by the policyholder. In one study by the Insurance Research Council, 56% of participants said they had made changes in how they drive after installing a telematics device. Another study found that safe driving increased by as much as 30 percent with the use of a telematics app.

Telematics risk mitigation mechanisms

  • Short- and long-term behavioral feedback on policyholder behavior: Immediate alerts, daily reports, and driver scoring provide feedback to telematics users, allowing drivers to understand how their driving habits impact safety, and respond accordingly. Immediate feedback helps drivers change their behavior, while trend reports and driver scoring help reinforce behavior change and improve habits over the long-term.
  • Incentivizing safe driving: Insurance discounts offered for safe driving incentivize improved behavior, helping to reinforce gains made in safety. Gamification flips the focus of driver improvement from reactive feedback to proactive. By incentivizing drivers toward safer behavior – whether the incentive is a coupon, reward, or digital badge – telematics can help people drive safer immediately, without the need to wait for a critique of poor driving.
  • Reducing distracted drivingAccording to AT&T, 70 percent of drivers use their smartphones while driving. 64 percent of all road accidents in the United States involve cell phone use. Telematics-driven mobile apps can identify when someone is driving and restrict inbound texts, calls, or other cellphone behavior to reduce distracted driving. Telematics devices can also detect the symptoms of distracted driving, highlight these events to the driver, and provide awareness of the impact of this behavior.

Accident reduction efforts need to start with improving driver safety. Telematics-driven programs have been shown to improve driver safety which is critical to reducing claim frequency.

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