Insurance companies are on the front lines when it comes to exposure to the financial risks of climate change. The internet of things (IoT) is shaping up to be a key component in mitigating those risks.
"Insurance companies rely upon historical loss records to guide their underwriting and set their prices," Washing Insurance Commission Mike Kreidler and California Insurance Commission Dave Jones wrote in the forward of Insurer Climate Risk Disclosure Survey Report & Scorecard: 2016 Findings & Recommendations by nonprofit organization Ceres. "More and more frequently, the climate is behaving in ways that we can't predict. Weather patterns are shifting, and the severity and breadth of damage are intensifying, resulting in more costly disasters than we've ever seen. There is no basis in historical data for events like Hurricane Sandy, the Joplin, Missouri tornado, the Oso landslide in Washington state and record-breaking landslides in Western states. In 2016 alone, 31 major disaster declarations were reported to the Federal Emergency Management Agency (FEMA) by the end of August."
Insurers have always been data-driven companies: Their core business is built on understanding and making judgments on data. But with climate patterns shifting, forecasts built on historical data are becoming less reliable.
"The quality of their algorithms is how they make money," says Kevin Meagher, senior vice president of Business Development with ROC-Connect, a supplier of smart home as a service (SHaaS) to retailers, insurance companies, manufacturers and service providers. "They've literally got hundreds of years of property data they use to come up with good assessments."
But as anyone who works closely with data is well aware, "garbage data in, garbage data out." data compiled by Munich Re, one of the world's largest reinsurers, insured losses due to natural disasters in the U.S. in 2016 totaled $23.8 billion. That's up from $16.1 billion in 2015. In 2016, severe thunderstorms caused losses of $14 billion (about 60 percent of insured losses for the year). Floods and flash floods were responsible for $4.3 million in insured losses, tropical cyclones accounted for $3.5 billion, winter storms and cold waves caused $1 billion in insured losses and wildfires, heat waves and drought were responsible for another $1 billion in insured losses.
How climate change will impact risks
The Intergovernmental Panel on Climate Change (IPCC), a scientific and intergovernmental body under the auspices of the United Nations (U.N.), has developed a number of scenarios, or Representative Concentration Pathways (RCPs), that seek to project how climate change will alter the landscape of natural hazards and risks over the long term. In general, the IPCC projects humid areas of the globe, like the humid tropics, will become much more humid, while dry areas will probably become much drier.
In many regions of the earth's temperate zone, extreme heatwaves and droughts will put pressure on agriculture and forestry, limit the amount of cooling water that can be used for electricity generation and increase the risk of wildfires. Other parts of the temperate zones and the humid tropics are likely to see intense rainfall, leading to more frequent flash floods and river floods. One RCP, in particular, projects that the number of people exposed to a one-in-100-year flooding event (as measured in the 20th century) will increase fourteen fold. Severe thunderstorms and tropical cyclones are expected to increase in frequency and severity and rising sea levels are expected to impact coastal cities and their infrastructures.
For insurers, especially insurers in the property and casualty segments of the industry, this means the risks are increasing and their ability to accurately forecast these risks is declining.
How IoT will help insurers
IoT can help insurers collect data and provide services in new ways. But perhaps more importantly, Meagher says, IoT could allow insurers to completely transform their business models and go to market in a new way.
At their most basic, IoT sensors could detect when a frozen pipe has burst (or is just leaking), shut off the water supply and notify the homeowner. A smoke detector in your washroom could detect smoke and shut off your dryer (a leading cause of house fires), and a service could predict the path of a sudden hail storm and alert you to get your car under cover before it affects your area.
"We're seeing insurance companies realize that, actually, the IoT is going to be massively disruptive for them," Meagher says. "If somebody gets better data than they get, more intelligent information, they're going to be able to price better. They're starting to recognize that is some of the big boys [e.g., Google and Amazon] choose to attack the insurance industry because they've got access to data, data better than the traditional models, then they're in trouble."
As a result of that potential competition, Meagher believes that insurers will have to do more than give their customers incentives to hook up sensors to a smart home. Instead, savvy insurers will use IoT and smart home technology to overhaul their business models.
"In my view, in 10 to 15 years, you won't get home insurance unless you have a smart home," Meagher says. "You're already starting to see a whole bunch of interesting new business models sprouting up: Companies that don't sell insurance, they sell a smart home monthly subscription. The insurance is bundled in with the smart home services. They know if you have all these services, you're a low-risk customer."
These services range from home security and monitoring to temperature control to dispatching a plumber at the first sign of a leak.
"Concierge type services will take over," he says. "It's a much more holistic approach to the home as a result of the availability of data," Meagher says. "You can bundle all these different services together to create a broader package, including a warranty service that takes care of everything for the home, including property and personal belonging insurance. One of the services would be if your house should catch fire and burn down, it's covered."
You're collecting what?
Ultimately, he says, a model of this sort depends upon better engagement with customers. Insurers need to be explicit about what data their sensors are collecting and what they will do with that data.
"If I pass your data to an insurance provider, I will only do that with your permission and I'll be very explicit: data from this sensor, this sensor and this sensor," Meagher says. "I need to help the customer understand, 'What's in it for me?' For example, that might be: 'If you let me tell your insurance provider that the battery in your smoke detector is working, I'll give you a 15 percent discount.'"
"In the age of the IoT, data and digital relationships, insurance companies can do a lot more to engage with you as a consumer and be seen to be helping you with the very thing you've come to them to buy," he adds. "I personally think they should take more proactive steps. They should be offering these solutions to their customers, offering them as part of their insurance policies. I believe there are a ton of customers that would perceive great value from having safety devices fitted to their home. Even if insurance companies did nothing more than discount them, offering the lowest possible price points for consumers that have the devices, it's a win-win."
ROC-Connect released its home safety solution as a turnkey solution for insurers in November of last year. The offering includes a Home Safety Kit that helps consumers protect their homes from fire, flood and frost. Customers can use their smart phones to monitor their homes remotely, and a new Home Safety Scorecard that helps them recognize risks and reduce potential losses.
The kit includes fire and water sensors that are monitored around the clock and link directly to emergency services. A range of other smart home and IoT devices can be added to the system, including home automation.
The Home Safety Scorecard is powered by data from global property information, analytics and data-enabled solutions provider CoreLogic. ROC-Connect uses CoreLogic's data, including property size, location and features, to analyze risk. It combines that data with data from smart home devices.
"We believe merging information from IoT devices with our traditional data services can give insurers deeper insights and a new way to more accurately assess property risk," Dave Pedersen, senior vice president, Strategic Business Development and Innovation, CoreLogic, said in a statement last November. "The novel use of data to give customers safety scores with support and advice that can help them protect their home and family is an exciting new development for the insurance industry."
Both the Smart Home Kit and the Home Safety Scorecard are supported by the ROC-Master App, which allows insurance companies to stay in constant communication with homeowners and improve relationships. Insurers can tailor messaging to a homeowner with local weather alerts and advice to help manage known local hazards like bushfires or floods.
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