Some say that, just like advertising is the internet’s business model, insurance is the business model of the internet of things. Not without reason. Virtually every insurer is taking the internet of things seriously. Not necessarily the devices, but definitely the data. We distinguish two stages in the use and implementation of data from connected devices by insurers: product improvement and engagement innovation. Let’s take a closer look at each of these two stages.
STAGE 1. PRODUCT IMPROVEMENT
This first stage is about using the extra data that is now available to improve financial services as we know it. We particularly discern the following four forms that are being explored by most insurance carriers:
1. Underwriting Sophistication
The massive amount of data that for instance a connected car produces contains a lot of granular, detailed information about the car and on actual driving behaviour; which is extremely suitable to understand risk factors much better and to supplement traditional underwriting factors. A driver’s current behaviour behind the wheel is probably a better predictor than age, address and other traditional factors. This should result in ample opportunities to improve actuarial tables, powerful close-knitted risk segmentation, and improved underwriting precision and increased pricing sophistication.
2. Fraud and Claims Reduction
There is also a lot of attention going to using data to fight fraud and improve claims management; for instance, streamlining claims processes to settle claims more efficiently, accurately and faster. Until now, insurers are still dependent on the customer’s account of what has happened. But connected devices are increasingly providing insurers access to real-time information about accidents when they happen. An insurer can also look beyond the time of the accident. For example, have access to better information on everything that happened just before, during and after the accident. This should lead to a better assessment of who was at fault – and also improve the detection of fraud.
3. Usage Based Products
So far insurers have had little and historic information only to base a premium on. The traditional approach to home insurance underwriting focuses on the house, the location and the inventory list. One of the most important causes of loss – the resident – receives much less attention. Yet it is usually one of the residents who leaves the garage door open, forgets to turn off the gas, or floods the bathroom. Many insurance firms already give discounts on a home insurance if the customer has security or fire protection systems in place, for example. Because of connected home monitoring systems, the insurer can now ascertain whether the customer is indeed closing all doors and windows, turning off the stove and turning on the alarm. ‘Usage based insurance’ concepts try to capitalize on these possibilities. The premium is more or less dependent on the second-by-second data that is captured, for instance, about the car, driving behaviour and contextual environment data.
4. Data Based Lock-In
Several insurers are spotting another advantage offered by connected devices data. Connected devices enable them to, for instance, collect data on individual driving behaviour that ‘cannot’ be carried over to another insurer. Especially when customers enjoy a substantial discount based on their driving behaviour, it becomes unappealing for them to switch to a different insurer, resulting in a real traditional ‘lock-in’. As soon as connected cars and usage-based insurance become mainstream, we expect that regulators will view this lock-in as undesirable, and will quickly ensure an easy transference of data.
WHAT WE THINK OF STAGE 1
The first stage examples of leveraging data from connected devices, ‘product improvement’, are basically all conceived inside-out. All these applications focus on realizing internal targets, using data to reduce risk, improve cost efficiency and short-term profit margins. There is little or no added value for the customer. They are solving the frictions of the financial institutions first. The next challenge is to take customers as the most important point of departure; to think Outside-In.
Less Information Symmetry
The customer has given data, but gets practically nothing in return. All applications we have seen under the header ‘product improvement’ increase information asymmetry. That can never be in the customer's interest. In contrast, the real challenge should be to decrease information asymmetry.
The costs focus is to some extent understandable because in the short term the needs are greatest. Usage-based insurance is often regarded as the ultimate innovation. But, since virtually all insurers will carry similar usage-based products, it will create a negligible point of differentiation. Such products are rapidly becoming table stakes, commodities. Moreover, competing on price usually leads to a negative spiral.
Thinking beyond product improvement
Insurers should think beyond using more data to improve ‘products as we know it’. This is also necessary because the objects that need insuring are subject to rapid innovation themselves; think of autonomous cars. Opportunities from connected devices for financial institutions not only come from the data avalanche, but also from the enormous increase in interaction points and more frequent interactions.
Just look at the different ways mobile is impacting customer behaviour and, consequently, also the way financial institutions need to engage with customers. It is easy to imagine that other connected devices will also have a similar impact. Theoretically we would need to see how consumers are handling all these connected devices, and how they are changing their behaviour, expectations and needs, to adapt our engagement strategies.
However, the impact of smartphones is already providing a few pointers, that can help insurers to already start today: The internet of things may provide new engagement channels, new levels of expectations with regard to ease of use and services, and new physical artefacts. The frequency of use may add to trust, loyalty and advocacy. And the right outside-in application of data from connected devices may further shift the asymmetry in information, empower consumers and create new points of differentiation.
STAGE 2. ENGAGEMENT INNOVATION
Financial institutions have to seize the opportunity the internet of things is offering to build an ongoing dialogue, new patterns of meaningful interaction and consequently closer customer relationships. That is where the emphasis should be. In addition to ‘stage 1’ saving costs, connected devices offer new opportunities to engage with customers, new innovative products and services, and even new business models. Let’s take a closer look at the seven ‘stage 2’ applications and specific properties we already see today.
1. New Points of Sale
Just as every smartphone is a point of sale, every connected device is in principle a potential point of sale as well. We already see this in banking. Payment experts expect that the vast majority of payments will be fully automated before 2025. Just like with Uber, where payment is seamlessly taking place in the background, connected cars will also automatically pay for toll roads and parking, as well as refuelling or electric charging. Machine to machine. Obviously this not only offers opportunities, but threats as well. The financial service provider that arranges these payments will remain invisible other players than the traditional banks are taking positions in this as well. The same could happen with all sorts of embedded insurances. Incumbents need to rethink their strategies to anticipate this phenomenon.
2. Customer Empowerment
Most people want to make the right decisions in all areas of life. But up until recently, the data to do that properly was in fact missing. Because of connected devices there now is a world of information for consumers to track, share and then act on. Data enables financial institutions, banks and insurers alike, to help consumers enhance their lives by drawing actionable insights out of their data sphere and by giving feedback to customers, for example suggestions to adjust behaviour that otherwise could lead to excessive debt, damage, or bad prospects. But also by supporting customers with services that help them (financially) to get more out of life. It is the data that enables insurers to offer new added value to customers. Daily service is the sweet spot. The perfect symbiosis with mobile and other connected devices resides there, with the role smartphones play in the lives of consumers, with the constant presence of connected devices wherever the customer goes.
3. New Services
Connected objects will generate a lot of new information, not only directly related to the financial product but also indirectly related. Think of information on daily movements at home, at work and while traveling; on how people interact with for instance their car and home; on mood, sleep, lifestyle choices and habits. If financial institutions are willing to make the effort, it will spawn much deeper customer insights. In turn these should lead to fascinating new directions for product and service innovation.
4. Pro-Active and Preventive
An insurance product used to be a service waiting to happen; and sometimes it never happened. Fortunately, because nothing unfortunate happens, and there is nothing to claim. That whole period the customer experiences no tangible added value from the insurer. Those days are now over. The added value of an insurer is shifting from the product, covering risk when there is damage, to rendering services as a substantial part of the offering. The nature of services will shift from reactive to proactive and preventive. Because of connected devices, insurers will be able to offer personalized services at home, at work or when traveling, meeting the lifestyle needs of customers. For instance, providing flexible opportunities to engage with care providers and home-care solutions for elderly and individuals that live independently. Obviously, empowering customers will further improve the perception of the value of the insurer’s products and services and enhance the brand image.
5. Information Symmetry
New data-based services fuel a radical shift in the asymmetry of information, towards a more equal relationship. An insurer could, for instance, pro-actively inform the owner of a car that is equipped with telematics about the condition of the vehicle, so they can maintain their car better than before. Because of the data, it may well be that the relationship between repair shops and customers improves dramatically. Data will make the conversation between repair shops and customer more objective and transparent, quite different from the suspicions many customers currently have about the necessity of certain repairs, and what they are charged. Data can lead to a good prediction of the costs of the next repair, and insurers can even give customers the opportunity to ask for quotations from different repair shops, and compare them objectively.
6. Active Participation
Concrete tools and feedback and a further shift in information asymmetry lead to a much more active role for customers within products and services. That may sound like nickels and dimes, but it is a fundamental shift in the relationship. ‘The quantified self ’ movement clearly shows not only the need of consumers for more control and empowerment, but also the desire to take a more proactive approach themselves; in assessing symptoms, connecting with healthcare providers and improved self-management of care and personal wellness. A Harris Interactive Health Day poll in the US found that 30% of respondents were “eager to use mobile phones and tablets for actual healthcare services, such as monitoring blood pressure or blood sugar, or even getting a diagnosis”. Connected devices enable customers to take more responsibility, leading to more equality in the relationship with financial institutions.
7. New Business Models
Everyone in the health community agrees that in most developed markets current health systems are not sustainable due to the rapidly-ageing population and rising healthcare costs. Traditionally healthcare delivery has been focused on face-to-face interactions, resulting in high costs. Connected healthcare devices allow healthcare providers as well as health insurers to extend their reach and interactions with patients. Sharing data among all stakeholders, optimal use of this data and remote patient monitoring have the potential to change the business model entirely, keeping healthcare efficient, affordable and accessible. Connected health devices therefore form the foundation for entirely new business models in health; shifting from a transactional to a relational, collaborative, participatory model, assisting customers to manage their health over time.
NO NEED TO WAIT
The rise and ongoing use of connected devices will result in behavioural changes; in the way we live, the way we do business, the way customers interact with insurance carriers. In second stage applications, ‘engagement innovation’, the emphasis is on added value for customers. Outside-in. The notion of the evolution towards better empowered customers and a more participatory model should allow financial institutions to think beyond saving costs when they include connected devices in their primary process.
Insurers can immediately start with applying ‘stage 2’ solutions, based on what we already know about the impact of mobile and smartphones on customers behaviour. There is no need to wait.
If you would like to read more about Reinventing Customer Engagement, check our latest book. It’s available in English, German and it just got launched in French as well.