5 Challenges for IoT in the

insurance industry
By Norman Black, Principal Industry Consultant, SAS

What a dierence a few years can make. In 2012, 59

percent of risk managers responding to a survey said
resistance to change was insurers and brokers
greatest weakness. Since then, the industry has
drastically changed its attitude toward innovation,
particularly around the adoption of the internet of
things (IoT).

IoT has the potential to radically disrupt the traditional insurance business model
and modernize traditional processes, especially in risk assessment. IoT refers to
connected devices that can transmit data using technologies such as Wi-Fi and
Bluetooth. These devices include things like wearable devices, sensors in
household appliances and connected vehicles using telematics.

Insurance executives face a major dilemma

with the emergence of IoT.
In every insurance sector, IoT promises to substantially reduce losses and transform
the relationship with policyholders. For example, recent automobile insurance
commoditization has placed downward pressure on premiums. IoT allows insurers to
provide value-added services, such as driver feedback, that can lead to a closer,
more proactive relationship with policyholders while generating new revenues.

These advantages apply across the organization. For actuaries and underwriting,
IoT provides new data to more accurately assess and price risk. From a claims
perspective, IoT can power automated loss notification based on sensor data. For
marketing executives, IoT brings opportunities for unprecedented insights into
customer behavior.

Significant progress has been made in bringing these new apps to fruition. But IoT
adoption in insurance remains in the early stages. Widespread adoption will come
about when the industry overcomes the following five challenges:

1. Disruption to existing insurance business models

Insurance executives face a major dilemma with the emergence of IoT. The benefits
for insurers center on risk mitigation and lower claims. But the competitive nature of
the insurance industry means that fewer losses will lead to lower premiums over
time. Shrinking revenue is never good for any industry. New sources of revenue
growth will be a driver to IoT adoption.

Further, insurers will encounter new competitors who are already focused on the IoT
opportunity, including auto manufacturers, home security companies and digital
companies such as Google and Amazon.

Finally, IoT promises to provide discounts for individuals who are safe drivers or
exhibit healthy lifestyles. But unless IoT can change behavior across an entire
population, individuals or businesses found to be a bad risk could be more heavily
penalized than in traditional insurance models. This may cause a backlash among
the general public and hinder the growth of insurance products linked to IoT.

2. Data management
The insurance industry has always been data-centric. In the past, insurance
companies relied on historical data from policy administration solutions, claims
management applications and billing systems. Newer, bigger data sets add another
dimension. The challenge is to process this explosion of data in a timely manner to
make the right business decisions. Unfortunately, many insurance companies
struggle to process and analyze even traditional data.

Addressing the challenges arising from big data volumes generated by IoT requires
an enterprise data management strategy. This is important in merging the new IoT
sourced data with traditional data like customer and policy records. This data
management strategy should provide unified solutions, tools, methodologies and
workflows for managing IoT data as a core asset.

3. Data ownership
Data created and made available through IoT enables insurers to better understand
risk. But data ownership remains a challenge for many insurers.

The big question is, Does the data belong to the insurance company or the
customer? Customers may argue they have rights over the data and need access
to historical data on their claims history to switch insurers at renewal. This will be an
interesting discussion point for insurance companies in the near future.

4. Regulation
The insurance industry was one of the first business sectors to be regulated and it
continues to be closely scrutinized by public authorities worldwide. Many insurance
authorities will struggle with how to regulate the data created by sensors.

While regulations already cover data privacy, the more invasive nature of IoT data
can present many new challenges. Indeed the mobility of IoT data may even lead to
issues on the regulation of cross-border data; for example, when a driver travels to
another country.

5. Data security and fraud

As IoT becomes more widespread it will attract more potential for cyberattacks and
fraud. The vast quantity of data that will flow between the connected vehicle,
connected home and the insurance company is vulnerable to interception. The new
IoT products are also likely to lead to new types of application and claims fraud.
Insurers will need to invest more heavily in data security and fraud protection.

While realizing the full potential of IoT for insurance will not be without its
challenges, its early exploitation is already producing positive results. IoT
undoubtedly makes losses easier to predict and prevent. Smart home devices,
wearables and the imminent arrival of the driverless car will usher in a shift toward a
new type of customer relationship where insurance will become less reactive and
more preventative. The winners will be organizations that overcome todays
obstacles to embrace change and capitalize on uncertainty.

Read Next
Download the white paper: The Internet of Things: Opportunities and Applications
Across Industries

Learn about SAS Analytics for IoT

Check out the blog post: How IoT is changing the insurers ecosystem

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