How IoT and Web3 Technologies Reshape the Future of Insurance
Why insurance brands should leverage IoT data to expand usage-based insurance, while also exploring the opportunities that web3 technologies may unlock
Author's Note: The unabridged version of this article was first published on the IPG Media Lab blog. If you wish to get the latest insights from us, please consider following us on Medium and Twitter @ipglab.
The insurance industry is looking at an uncertain future: a global pandemic, worsening climate change, aging populations, and general geopolitical instability are ushering in an age of anxiety. While that in theory may be good for business, in reality, the combination of these volatile factors means that it is increasingly difficult for an industry built on risk management to navigate, both in terms of dealing with new types of risks and building accurate projection models as we enter the entropocene.
Technological disruptions may also add to the turbulence: new risks such as ransomware attacks and personal data loss can present new challenges for insurers to address. Yet, they also present innovative solutions to help the insurance industry to transition into the future. In response, insurance brands must learn to leverage the Internet of Things (IoT) to supercharge usage-based insurance (UBI), while also exploring the opportunities that web3 technologies may bring.
IoT Supercharges Data-Driven Insurance Model
Usage-based insurance (UBI) is not exactly a new idea. It is most common in car insurances today, with some auto insurance companies offering lower premiums to drivers whose driving skills are deemed low-risk, based on a host of data tracking. These programs generally collect vehicle telematics data to measure speeding, acceleration, and harsh braking, along with mileage and the time of day you drive, calculated into a driving score over a review period. Once completed, you may be offered a discount on your insurance premiums based on your scores. In short, the better you drive, the lower your auto insurance rates.
And all these data collections would not have been possible without the proliferation of connected cars and IoT devices over the past decade: generally, these telematics data are collected either through native OEM dashboard systems, such is the case with the BMW ConnectedDrive or GM’s OnStar, or through a connected device plugged into your car’s on-board diagnostics port, such as the Nationwide SmartRide. Occasionally, the IoT device may also be just a Bluetooth “tag” attached to the car’s windshield or rear window, such as Liberty Mutual Insurance’s RightTrack.
The UBI products have been a hit with customers, appealing to those who prefer more customized services and rewards for good behaviors. According to Insider Intelligence, the number of UBI drivers in the States is set to triple between 2019 and 2023, hitting over 25% of all insured U.S. drivers by 2023.
Source: Insider Intelligence
It is not hard to see the reasons behind UBI products’ growing popularity: unlike conventional auto insurance pricing that typically rely on demographic and socio-economic variables such as age, gender, ZIP code, and credit score, usage-based insurance promises to see each driver who they are and judge them solely by how well they drive. As more vehicles continue to come online, more cars will be able to collect, analyze, and deliver data to insurers, with drivers’ consent.
Interestingly, as the owners of the telematics systems that generate much of the data fueling UBI products, auto-makers are also jumping into the arena — at least 13 car brands have launched insurance telematics products in the past two years to compete against offers from traditional insurance brands. Still, some auto brands took a more collaborative route and forged partnerships with insurers to offer dynamically-priced insurance products. Either way, insurers now have to push beyond the conventional mindset in order to compete against the rise of embedded insurance solutions.
Every marketer knows that consumer expectations travel across categories. Consumer perks like fast shipping and flexible booking never stay within the vector they originated in, and neither will UBI products be confined to auto insurance only. With the proliferation of IoT devices in other domains, such as connected home, bluetooth tracking devices, and fitness wearables, there are plenty of opportunities in other insurance categories, such as home, theft, and healthcare, to explore.
Over 43% of U.S. households have at least one smart home device installed, per estimates by Statista, and that adoption rate is expected to grow to over 57% by 2025. Many of these, such as smart thermostats, video doorbells, or smart lights, provide data about when and how houses are occupied while offering added security. A 2020 study by LexisNexis found that 78% of smart home consumers are willing to share their data for an insurance purpose, and upwards of 70% said they would invest their own money to purchase devices if given an insurance incentive. Combining the two factors, there’s a real opportunity for insurers to bring the UBI model to homeowner and theft insurances.
Operating on the premise that occupancy impacts loss costs, smart home devices can provide a fuller picture of home occupancy for better risk management. Therefore, it should come as no surprise that some insurers are already offering discounts on smart home devices, such as security alarm systems and video cameras, as part of the insurance plan.
With the launch of AirTags in early 2021, Apple has introduced bluetooth items trackers into a mainstream audience, and could be an interesting component to add to valuable loss and theft prevention. One notable shift within the insurance industry has been the shifting focus from simply reimbursing costs incurred by damages to incentivizing preventative measures and behaviors that would stem the damages from occurring. And connected devices will play a crucial role in helping insurers to add value to their plans with preventative tools and cut down the premiums to competitive rates.
Even healthcare insurance may benefit from the enormous trove of valuable data that fitness wearables now generate. Granted, given the sensitive nature of personal data, insurance brands will need to take extra measures to make sure they are getting explicit consent from customers to share them and keeping them secure, and not many health insurance brands are quite up to the task yet. For now, most healthcare insurers are running similar preventative programs to those in home insurance, offering customers free Apple Watches or alternative devices to encourage a healthy lifestyle.
The biometrics and activity data generated by wearables can clearly point to how healthy a customer’s general lifestyle is via characteristics that are linked to better health (such as regular exercise, a healthy number of daily footsteps, and a healthy BMI), and their premiums can be adjusted to reflect their reduced risk. This not only benefits both customers through reduced premiums and the insurers through better pricing, in the long run it could also help governments via the reduced cost of healthcare. No wonder the government of Singapore launched an Apple Watch-enabled public health initiative in 2020, aimed at incentivizing more citizens to work out more with cash rewards.
Overall, customers are generally well aware that digital communications mean that their insurer collects their personal data — anything from behavioral data to their location or any information they have submitted. In return, customers expect a business to use this information in order to improve and personalize their experience. While usage-based insurance products have been a niche market confined to auto insurance to date, they point to a future for the insurance industry where lower-cost and a broader range of flexible policies could be attainable through data-driven hyper-personalization and connected services for the benefit of each customer.
Exploring the Community-Driven Web3 Opportunities
Insurance is fundamentally a financial product built on risk assessment and management; and no other industry has been severely impacted by the web3 revolution than the finance sector. The DeFi movement aims to decentralize the way we handle money and other financial assets via cryptocurrencies and NFTs, but the market volatility has rendered them merely speculative investment vehicles so far. And the traditional insurance business has so far remained largely unscathed by the DeFi movement.
That being said, the principles of community-driven self-governance and distributed, permissionless trust that blockchain technologies, especially smart contracts and DAOs, underline and promote should be taken into consideration by future-forward brands in the insurance industry. Of course, some DeFi developers have started early explorations and developed an emerging sector of decentralized insurance. Naturally, most of these projects are primarily concerned with the security and theft of crypto assets through smart contract covers and crypto wallet insurance.
For example, Nexus Mutual bills itself as a “decentralized alternative to conventional insurance” and promises to harness the power of Ethereum so users can shoulder the risk together without the need for an insurance company. All member decisions are recorded and enforced by smart contracts on the Ethereum public blockchain, and only members can decide which claims are valid. Similarly, companies like Etherisc have developed solutions to cover the risk of theft of crypto wallets in case of attacks. As the company explains in a recent Medium post:
Due to their immutable nature and decentralized security, blockchains can act as a reliable mechanism for processing insurance claims. Smart contracts allow for the terms of an insurance agreement to be codified into digital logic that executes in a tamper-proof manner based on predefined conditions (i.e., if x event happens, execute y action). In the case of flight insurance, insurance policies can be programmed to autonomously process claims and make payouts once certain data is received about the flight’s status.
Anyone who has dealt with insurance claims knows that insurance claim filing and processing can be a tedious, drawn-out affair. So if there’s an innovation that could potentially address this major pain point and speed up the process, then that is certainly an area that insurers need to look into today. A Deloitte report outlined six key areas that blockchain technologies can help modernize the health insurance business, including securing interoperable, comprehensive health records, and simplifying the application process by making it more client-centric.
To realize blockchain’s full potential as a business transformation opportunity, insurers will need to leverage several other technologies in tandem, including automation, artificial intelligence, as well as the aforementioned IoT devices, A good starting point may be start to consider what your insurance offers for web3 goods like NFTs would be. A 2021 survey conducted by Morning Consult of U.S. adults found that around 23% of Millennial respondents claim to collect NFTs as either a hobby or an investment. Overall, 10% of all respondents self-identified as NFT owners, representing a growing market for insurance companies to tackle.
With more components of our lives moving online, our digital processions are becoming equally important as our physical belongings. This is especially true for younger generations who grew up with digital goods and form their identities in digital spaces. However, cyber insurance loss ratios have increased for years, despite exponentially growing rates. Risks of cyber attacks for medical imaging and all of healthcare are increasing exponentially. As computers make more decisions, the risks and consequences of this will only become more dire and catastrophic, presenting a blue ocean territory for insurance companies to explore and conquer, presumably with the help of blockchain technologies.
Beyond these two major technological disruptions set to reshape the future of the insurance industry, demographic and generational lifestyle changes will continue to impact the insurance business. Delay in average age for getting married, having kids, and retirement among younger generations all calls for a revamped strategy for insurance brands to build a long-term relationship with their customers throughout their reconfigured life stages.