How insurers are transforming themselves with the help of IoT applications

• The Internet-of-Things (IoT) is becoming increasingly attractive for insurers in order to stand out from the competition and increase customer loyalty

• But IoT also offers the opportunity to develop and introduce new, data-driven business models

• This article shows which strategy is necessary for this, and that it also takes courage to experiment

For example, they can offer their customers added value with everyday helper applications such as smart burglar protection, digital fitness coaches or smart water sensors, and gradually tap into new data-driven business models.

With the spin-off of the start-up company Mitipi, the Swiss insurer Helvetia has taken an important step into the Internet-of-Things world: the young company has developed a virtual housemate that scares off burglars by using light and sound effects to create the impression that someone is home. Integrated into the smart home network and controlled via an app, it can simulate the habits of different groups of residents. For example, it visually and acoustically imitates everyday activities such as watching television, playing the piano or vacuuming. Whether living alone, in a shared apartment or as a family, the user can put together an individual personality profile, which then generates the appropriate light- and sound-scapes. The idea behind the smart everyday helper: the insurer takes care of safety so the damage doesn't happen in the first place!

Standing out from the competition

Developing products like these, which make everyday life easier for their customers, is a sensible step for insurers for other reasons as well – first of all, to stand out from the competition. This is why for years now these organisations have been paying more and more attention to the digitalisation of their core processes. It makes them more efficient and customer-friendly – and meets a standard that policyholders increasingly take for granted. They gain competitive advantage by thinking one step ahead and focusing on products that benefit their customers while creating points of contact with insurance. Companies that start development now have a good chance of placing their product. Smart everyday helpers can be developed in the companies' innovation labs or offered in cooperation with the manufacturers of appropriate products, but even though there are already some initial examples, these helpers are still in their infancy in the insurance sector.

For getting started, the hardware products that insured people come into contact with, ideally every day, such as the fitness watches or sleep trackers that are subsidised by health insurers, are a good route. Another example in the smart home sector is the use of intelligent water sensors, which turn off the water supply in the event of a burst pipe and report the incident to a smartphone. In Germany, insurers such as HDI are offering their customers the Grohe system at a discounted installation price – and also giving a discount on residential buildings insurance. To develop the right devices and services for their own business, insurers should study the customers in the ecosystem in which they operate, such as healthcare or transportation, and take note of where the customer pain points are. To soothe these pain points, they no longer have to develop a new policy as a matter of necessity – as was the case with the previous logic – but can instead rely on services related to insurance.

From Level one to Level four: using the data that has been generated

Smart burglar protection, digital fitness coaches or water intrusion alarms are only the first stage of the selective application of IoT products in the insurance business, however. Even more interesting opportunities open up at other levels through the targeted use of the data that can be generated by using these devices, as well as through networking within an ecosystem.

At the second level, the initial step is about using the generated data to improve one's own offer. If customers provide the insurer with certain data, they can be awarded discounts, for example. An example of this level is provided by the dental insurer Beam from the USA. The start-up, which has raised over €100 million in venture capital in recent years, has developed 'Beam Brush', a bluetooth electric toothbrush, which it sends to its customers. Those customers then receive bonuses for brushing their teeth regularly and properly. The aim is to reduce the number of dental treatments and to offer the customer an incentive through discounts.

Level three, on the other hand, is about sharing and networking via the IoT products within an ecosystem. In other words, about considering the question: which partners can we achieve synergies with by utilising the collected data? This can create win-win situations with customers, but also in the entire ecosystem. For example, an in-car sensor detects a possible defect in the car and immediately reports this to the workshop.

At the fourth level, several IoT devices are networked with one another and act to some extent autonomously. For example, sensors detect a possible breakdown of a machine, order the spare parts immediately and send out the repair team as soon as they arrive.

Combining IoT with future trends

The idea of developing new business models around the use of IoT devices is also supported by some important emerging trends in the insurance market:

1. Parametric insurance (aka index-based insurance)
To avoid costly claims settlement processes, the insurer pays as soon as certain parameters occur: in the event of server failures, for example, as a start-up from Israel is already offering. If we consider the target group consisting of farmers, another conceivable case would be a drought insurance policy that pays out as soon as certain values – soil dryness, for example – are reached. The values are measured by devices implanted in the soil.

2. Pay as you use
Premiums for policies are no longer paid as a lump sum for the period of one year, but are based on the frequency of use. This is a model that is being used more and more frequently in the machinery-insurance market, for example. The rationale: if there is a machine in my factory that I only need for three days a year, then I only want to insure it for those three days. If other companies also offer models like these, for example in the context of car insurance, blanket policies will become increasingly unattractive.

3. Embedded finance
In the future, insurance will more frequently be sold along with other products. An example: it may be that the water intrusion policy will be offered together with the new dishwasher and the water intrusion detector. Or the car salesman will point to the car insurance company, which records driving behaviour with a telematics application and then gives appropriate discounts. This opens up new sales avenues.

Opening up new business arenas

In the IoT field, as with all innovation projects, success can to a certain extent be planned for. However, it is important not to limit oneself to individual projects at Level one. Companies should grasp the opportunity and at the same time create the prerequisites for their own organisation and infrastructure in order to be able to tackle levels two to four as well. Sooner or later, they will be able to develop services that can be monetised independently of concluding any insurance policy. That, too, is an important strategic aspect of innovation activity. After all, making money in the 'core business' is becoming more and more difficult. In addition, insurers must be in no doubt: if they don't develop such new business areas for themselves, then start-ups as well as the large technology groups such as Amazon and Google will do it, and will then compete with them with intelligent products.

Having the courage to experiment

And there's another particularly powerful argument for the rapid deployment of IoT applications: if the development and use of smart helpers in the company is driven forward systematically, the company will be on its way to developing innovative digital business models on the basis of specific, tangible projects. It moves forward methodically and step by step instead of remaining at the level of grandiose strategies and concepts.

In principle, therefore, the development of IoT applications should not be regarded as a niche topic for an insurer's innovation labs, but as a central component of its whole digital transformation. And a large company should certainly aspire to launch not just one IoT project, but many of them. In this way, it can experiment in the best start-up manner, test and adapt prototypes and also discard ideas that don't work. It forges a path that drives change and leads directly to new digital business models.

The article was first published in Versicherungsmonitor.