IOT: Switched on

The Industrial Internet of Things is bringing inevitable shifts in how insurers do business. Martin Allen-Smith reports on the attendant wave of opportunities and threats

A decade ago there were about 500 million devices connected to the internet. Today, there are 10 to 20 billion. In five years’ time, that number could reach 40 to 50 billion, according to estimates by technology firm Cisco. This rate of growth goes a long way to explaining how the Industrial Internet of Things (IIoT) has, in a short space of time, gone from a vision of how information and data could be managed in the future, to something that is at the heart of modern business and utterly ubiquitous in its scope.

But the phenomenon of the IIoT is unique because it allows the forward-thinking company to prepare, adapt, and thrive in this new economic age. The rise of IIoT also means we are at the start of a new age of data. Two chief components of an ‘IIoT object’ are its ability to capture data via sensors and transmit data via the Internet. The declining cost of sensors since the start of the new millennium has been a main driver in this growth. This has had profound implications on organisations’ ability to capture data that was previously out of reach.

According to the Norwegian research organisation SINTEF, approximately 90 per cent of the world’s data has been generated over the past two years. Every second, over 205,000 new gigabytes are created – roughly the equivalent of 150 million books.

The challenge for the insurance industry is how to leverage all of this data and adapt its own approach to business in this increasingly connected world. The sector is far from resting on its laurels, and the story is one of growing excitement about the opportunities that await those switched on enough to embrace them.

While much early attention was directed at vehicle telematics, in the past year or so, the sector has seen a two- to three-fold increase in the number of IoT-related products, services and pilots focused on homes and buildings, health and fitness, and other wearables according to research by Accenture. Consultants at the firm surveyed insurance executives in Europe, North America, Asia-Pacific and Latin America, finding that 39 per cent have already launched or are piloting connected home or connected building initiatives that use the IoT, and 44 per cent consider connected devices to be a driver of future insurance revenue growth.

The IoT presents unprecedented opportunities for growth. It gives insurers the potential to move up the value chain, from providing only indemnification for a loss that has occurred, to a more proactive, positive role that includes continuously helping customers prevent the loss. Alex Koslowski, head of consumer proposition at Royal London Group, says, “We’re definitely excited about the potential of the IoT. Already, any smartphone user has got a motion sensor, GPS and a step counter with them at most times. At some point you will be able to create behaviour profiles that are incredibly valuable when it comes to risk-pricing that particular person.”

Given the proliferation of sensors in business operations of all kinds, these same principles that are being applied to assessing and covering risk for individual consumers can be scaled and applied on an industrial level to a wide range of business sectors. Lisa Hansford-Smith, senior underwriter, cyber, tech and media at XL Catlin, says: “The IoT is definitely changing the risk landscape significantly. On the one hand, IoT devices are helping in underwriting risk. However, as well as changing the methods with which we underwrite, IoT developments can increase or decrease the risks faced by clients. Generally, the changes brought about by the IoT should be positive, since eliminating or reducing risk in a given process is often one of the main outcomes of an IoT device.”

She adds that some industries will see particularly major ramifications: “Connected objects in manufacturing industries like energy and chemicals for example can help reduce exposures to toxic and hazardous materials.

“Some risks will be increased or introduced for the first time however. One of the biggest issues with the IoT in general has been that of liability – working out who or what is responsible for errors and malfunctions. IoT devices communicate with each other in a highly complex manner, and working out which device is responsible when something goes wrong can be challenging.”

Werner Rapberger, an executive in Accenture’s insurance practice, agrees that widespread IoT developments will bring about a sea change for insurers: “The risk landscape will change – old risks may cease to exist (for example, with a lower accident risk in fully automated factories) as new risks, such as cyber risk, will emerge.”

He adds that risk analysis will be conducted using data sources in the future, not only from machines in plants, supply chains and logistics, but also using data from employees – for example, a connected worker leveraging Google Glass. “As IIoT emerges, we may see less frequent claims but with much higher severity,” Rapberger adds. “Automated claims do not create a lot of small claims, but maybe a few very costly ones, especially in product liability. This may lead to larger corporations providing coverage for the small things themselves.”

So what does this mean for the relationship between insurers and their customers? The current emphasis seems to be largely on the many opportunities and benefits, but has the nature and extent of potential risks and exposures taken a new – and increasingly complicated – direction?

XL Catlin’s Hansford-Smith says: “There is a great opportunity here for insurers to work closely with their clients to identify and manage the risks – such collaborations can really drive advancements in different technologies and industries. At XL Catlin, we have recently partnered with Oxbotica, an Oxford based mobile robotics company, recognising the transformative potential of IoT technology.”

One thing likely to change – but in ways that it is impossible to accurately forecast – is the way in which individuals view their personal data and the ways in which it is used by businesses or all kinds, including insurers. Whilst these issues will perhaps have the greatest impact on the personal insurance sector, the principles of data ‘ownership’ could also have far reaching implications for all manner of systems within the IIoT sphere.

Sarah Stephens, head of cyber at JLT, believes it all sets up an increasingly complex, integrated environment for those in the business of risk. “From an insurance perspective there is quite a bit of interesting crossover between general and product liability cover, product recall cover, and cyber insurance cover. We have not yet seen exclusions in recall policies for recall associated with a cyber security vulnerability, since most actual cases (such as the Jeep recall following the Wired magazine test that exposed vulnerability to hackers) have cited the potential for bodily injury as the key reason. It will be interesting to see if there is an incident where a major recall is triggered just because of the possibility of a data privacy issue.”

With billions of devices collecting data, the lines get blurred on who is responsible for what data. IIoT objects function autonomously and in conjunction with multiple other objects. Data is quickly shared, processed, reshared, and reprocessed before it might be seen by human eyes. In other words, it is too simple to associate one device with one piece of data, since so much of the IIoT’s potential lies in the seamless transfer of this data between objects.

Stephens adds: “As people use connected devices more and more, they will be amassing new types of consumer or employee data, which may or may not be regulated today, but which will certainly be focused on by regulators going forward.”

Insurers are already preparing for an inevitable shift in their clients’ ways of working, and the need to adapt their own business models accordingly. Accenture’s Rapberger says: “Yes, I do think insurers will have to prepare for fundamental changes to the ways in which they work with clients. Connected cars and autonomous driving are just the first example of where this is likely to go.

“Initially, IIoT companies might be big and international, which may present a challenge for some insurers, but overall there is likely to be much more transparency in the market, which will lead to increased efficiency. Crucially, new products and services around risk avoidance and management – in collaboration with industry partners – will move insurers away from just paying for claims.”

In many ways, the insurance industry stands to gain much from embedded sensors that produce massive amounts of data, providing deeper insights into reducing risks to customers. Long at the centre of data-driven analytics and risk mitigation, the sector will need to be ready to play a leading role in helping both to maximise businesses’ IIoT opportunities and minimise their exposure.

This article was published in the March 2016 issue of CIR Magazine.

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