IoT and Commercial Insurance: Disruption insured

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IoT and Commercial Insurance: Disruption insured

Digital disruption is about to hit commercial insurers full force as the industry prepares to undergo major transformation. IoT will be at the heart of many of the new initiatives as commercial insurance firms find new ways of using IoT data to assess customers, reduce premiums, and provide real-time warnings.

by Stian Overdahl

Collecting data is critical for the insurance industry because it enables under writers and actuaries to – estimate the likelihood and cost of future misfortunes. Consequently, data harvested from connected devices embedded in the Internet of Things could have a major impact on the industry, giving insurers new insights into customer behavior and real-time risks which, in turn, could reduce premiums for fastidious customers while raising them for the risk-takers.

Already there are some trailblazers. Corvus Insurance, based in Boston, Massachusetts, uses IoT data collected from sensors that are transported along with climate-controlled goods in the food and life sciences sectors to assess each company’s performance, using algorithms to customize premiums (Corvus doesn’t sell policies to end users, but relies on brokers for distribution). Businesses with a better track record can also receive broader spoiler coverage, while access to onboard sensors allows Corvus to provide real-time warnings to customers of potential threats to their cargoes, says Phil Edmundson, the company’s CEO and founder.

In bringing its IoT insurance product to market, Corvus investigated where IoT could be used to predict loss, including unusual threats like measuring pressure from the weight of snow on a roof, or detecting water leaks. Despite this, a stumbling block was the fragmented nature of the market – while historical data to build predictive algorithms could be obtained from sensor manufacturers, Corvus couldn’t easily identify who its future customers might be.

The company subsequently narrowed its focus to temperature-controlled goods, partnering with supply chain visibility specialist Sensitech which had a sufficient share of the thermal sensor business to allow Corvus to offer its insurance product to a wide segment of the market. Edmundson says that one key feature of the insurance policies is that they draw on several years of historical data from each customer to produce accurate profiles.

IoT and Commercial Insurance: Crovus Screen

Scoring Big on IoT: Corvus is able to collect information from business-critical management, monitoring, and logistics systems to provide brokers and policyholders visibility into the insured operations for troubleshooting, predicting, and preventing claims.

In other ways the product is still traditional, with policies being sold for a full year rather than being micro adjusted every week or month in response to new data. Edmundson argues that, while it may be “tempting” to implement this, most companies don’t want a high level of granularity. “The customer doesn’t want to be getting an e-mail from their ocean marine insurer every day or every week, saying your Corvus score changed from 86 to 85, so we’re going to adjust your premium for next month by $7,” he explains.

Philip Edmundson: Corvus Insurance - IoT and Commercial Insurance: Disruption insured

Philip Edmundson, Founder and CEO Corvus Insurance

On Further inspection

Another company using technology to give insurers more accurate data is Virtual i Technologies, which sends inspection engineers equipped with recording hardware, including video streaming glasses and thermal cameras, to warehouses and other commercial sites. This provides the of cebased underwriters with a rich data set at a much lower cost than sending in a senior loss prevention engineer. Instead, the senior engineer, or even an insurance underwriter, can watch the feed remotely and give instructions to the on-site inspector, says Mark Pollard, president of Virtual i’s European operations.

Greater use of data will allow insurers to sort between good and bad customers.

Gary Barnett, chief analyst for thematic research at GlobalData

IoT and Commercial Insurance: Gary Barnett - Managing Director of Trak Global

 

The company is targeting small to medium enterprises where the expense of sending a senior engineer to make a thorough site inspection is often prohibitive, says Pollard. At the moment, lower-level surveyors are sent to visit no more than three percent of risks that are insured but the company’s goal is to expand that into double digits over time, he says.

The value of enhanced data feeds from customers will be borne out by future directions for the insurance industry. If insurers could receive data from sensors within buildings – such as sensors within sprinkler valves, or cameras measuring the position of goods within a warehouse – insurers could use these to assess risks constantly. This could also feed into automated underwriting processes and even “continuous and dynamic underwriting” without human intervention, Pollard suggests. “Underwriting has been informed by data since underwriting started. What’s changed has been the quality and the quantity of the available data and the ability to interpret the data,” he says.

Industry in its Infancy

Despite green shoots like Corvus and Virtual i, experts agree that the development of IoT in commercial insurance is still in its infancy. While millions of IoT-informed policies have been sold in the personal insurance world, that number is likely to be just in the tens of thousands for commercial lines, suggests Matteo Carbone, founder and director of the IoT Insurance Observatory think tank.

5G networks will boost the effectiveness of sensors on board cargo containers.

Bob Skerret, Managing Director of Trak Global

IoT and Commercial Insurance: Bob Skerret - Managing Director of Trak Global

 

One of the main reasons for the low penetration is complexity, says Carbone. While personal insurance policies are standardized off-the-shelf products, commercial insurance policies normally have to be tailored to an individual company and its unique risks.

This complexity means there are also relatively few potentially disruptive Insurtech start-ups, since most of them focus on simpler retail products that have larger markets, says Maximilian Straub, an associate partner at consultancy McKinsey & Company. “Commercial lines insurance is very difficult to do – you need the top people for underwriting, very good actuaries, and for good profts you need a significant amount of capital for longer-scale risk.

Start-ups in this space are very few,” he observes. While the number of IoT devices in businesses has grown sharply in recent years, it’s not clear how readily data from these can yield actionable insights for insurers, says Gary Barnett, chief analyst for thematic research at GlobalData.

Much of the data within organizations is hyper-specific and siloed and an insurer of airplane engines doesn’t want to receive gigabytes of data every second from each engine, says Barnett – as it is, insurers are still grappling with using big data sets.

The interests of the insurer and the customer are perfectly aligned.

Dietmar Kottmann,, partner at consultancy Oliver Wyman

Dietmar Kottmann, - partner at consultancy Oliver Wyman

 

“At the moment, the techniques, tools, standards, and simply the volume of data aren’t there to create a realistic prospect,. In the next couple of years, insurers will be able to suck in lots of data and perform either complex post-event analysis or even true real-time analysis,” Barnett maintains.

Longer term, greater use of data would likely allow insurers to sort between good and bad customers better, which could lead to lower premium prices for the former, and higher prices for the latter, believes Barnett. While that could be great news for many good companies, for insurers it would likely mean a reduction in their core income from policies and force a shift to earning revenues through services, such as preventive consulting or real-time warnings.

One area where the service model already predominates is cyber insurance, notes Dietmar Kottmann, a partner at consultancy Oliver Wyman. Specialist cyber insurers provide customers with diagnostic tools to reduce the risk of cyber intrusion; experts to provide urgent advice if a company is hacked, which is especially important in the case of ransomware; and public relations services to contain the reputational fallout following a data breach. Since both parties want to avoid cyberattacks and contain any impact of an intrusion, “the interests of the insurer and the customer are perfectly aligned,” points out Kottmann.

For many insurers, a dramatic shift in their revenue models is not something they want to happen overnight. Large companies are preparing for this disruption but not rushing to usher in the changes: “Insurers want to be ready to go that path if an industry, or a country or region, switches to do it at scale. Nobody wants to be the first – because being the first means losing money,” says McKinsey’s Straub.

Still, some early adopters are bullish. Matthew Madahar, a data analyst at Concirrus, which works with insurers to leverage IoT data to improve their premium writing and “write more risks with less risk,” including in fleet and maritime, believes companies which act now will have an edge. “Our outlook is that the IoT will eventually be adopted by everyone in the market and across all lines of business. In a few years there will be insurance companies that use data and those that used to exist. Traction in the market is starting to increase and it will be the early adopters who will benefit the most.”

IoT and Commercial Insurance: Not Just Premiums

Other impacts of IoT in commercial insurance can be seen around behavior modification and transaction cost reductions, such as streamlining claims processes. For commercial vehicle fleet insurance, telematics information expedites claims processes and even protects insured companies against false claims, says Bob Skerret, managing director of Trak Global. He cites the case of a personal lines motor book that was able to save £564,000 (€652,500) from an annual spend of £10 m on premiums through using its telemetry data when making claims, including using that data in court to defend against a fraudulent claims case.

Despite this, progress in the sector as a whole has been slow, says Skerret. Most companies use telematics primarily to improve logistics and fuel efficiency, not for the insurance linkup. He believes that technology providers are somewhat to blame – many focus more on the technology itself rather than on expanding its uses.

On-vehicle cameras can lower insurance premiums by 30 percent or more.

Simon Marsh,, Managing Director of VisionTrack

IoT and Commercial Insurance: Simon Marsh, - Managing Director of VisionTrack

 

Fleet managers can identify risky behavior, such as tailgating or drivers who become distracted, by installing video cameras on vehicles to provide additional data, says Simon Marsh, managing director of VisionTrack. He believes the on-vehicle camera products his company sells can lower insurance premium costs for fleet owners by up to 30 percent. The mere presence of the system is seen by insurers as a sign that the client is being proactive about safety and it allows the fleet manager to work on curbing risky behavior by identifying the worst drivers. Some insurers have even started recommending VisionTrack to problematic customers because they are facing a time of increasing claim costs, says Marsh.

5G Heralds Cheaper IoT

Beyond insurance, industry innovation, improved technology, and lower costs should also accelerate the attraction of IoT insurance products. GlobalData’s Barnett says the falling cost of track-and-trace devices has the potential to be a major catalyst for innovation. Battery-powered sensors on board cargo containers, for instance, will help the industry home in on the precise time and cause of loss events, and will also help to monitor logistics chains. Developing enhanced supply-chain interruption insurance by monitoring upstream logistics flows, for example, is a major prize for any commercial insurer.

 Matthew Madahar -Concirrus

Matthew Madahar data analyst at Concirrus

The advent of 5G networks will also boost the effectiveness of these sensors, says Skerret at Trak Global. “Marine cargo, and areas like that, are begging for better, low-cost, real-time tracking. With the coming 5G networks and lower latency, you’ll get much longer battery life, so we expect battery-powered IoT location devices to be a big growth area. Micro tracking and low-cost telemetry is going to be incredibly useful,” he predicts.

While there’s a wide expectation in the industry that IoT will have a major impact on insurance, there’s much less clarity about how near-term developments will play out. “Everyone can see the future, but the steps from here to there need careful navigation,” Skerret concludes.

IoT and Commercial Insurance: Marine & Cyberspace

riding the insurwave

Marine hull insurance for shipping dates back to the sixteenth century when merchants at Lloyd’s Coffee House in London began sharing the risks of disastrous voyages, reducing the financial damage of a single ill-fated sailing. Recently, this sector has struggled with cumbersome and inefficient processes involving multiple paper trails between agents, brokers, shipping companies, and underwriters. High overheads eat into profits.

One initiative seeking to overhaul this process is Insurwave, a collaboration between professional services firm Ernst & Young, security specialist Guardtime, the Danish shipping giant Maersk, and a number of insurers. Built on the Corda blockchain, Insurwave uses smart contracts that comprise codified insurance agreements, automated processes that include quote generation and purchasing, and making the data available to all parties instantly, says Jamie Steiner, financial services manager at Guardtime. “Insurers today don’t have an up-to-the-minute view of what their risks are, where the ships are, what the profile is – they really don’t know about the value of the cargo that is being transported. As a result, they have to price their policies defensively, which takes up more capital than it would otherwise,” says Steiner.

Insurers don’t really know about the value of the cargo being transported.

Jamie Steiner, general manager for financial services at Guardtime

Jamie Steiner - general manager for financial services at Guardtime

Real-time data has been available from GPS transponders since they were made mandatory in 2012 for all marine vessels above 300 tons. This information is publicly available but few marine insurers make use of it, even though knowing a vessel’s position can be crucial. Through Insurwave, brokers have access to all this real-time data, allowing them to account for spikes in policy prices when, for example, vessels enter and leave war zones. These additional premiums can be immediately encoded into the insurance contract – automating a process that once relied on shipping companies sending faxes to insurers.

Beyond marine hull insurance, the Insurwave investors plan to address new business areas to cover IoT and all sectors of commercial insurance. “Marine insurance has lagged in digitization and automation but now there is an opportunity to leapfrog over technologies that have been around for ten to 15 years,” making it a prime target for Insurwave, Steiner believes.

IoT and Commercial Insurance - Infobox 2

On Course to the Future: Marine insurance hasn’t changed much since the days of Lloyd’s Coffee House in London, but IoT and modern blockchain technology are making important inroads.

Sins of Omission

Cyber risk insurance is one of the fastest-growing areas of commercial insurance as more and more companies suffer devastating attacks that disrupt business operations, destroy hardware, reveal private data, and damage reputations. According to Munich Re, a reinsurer, the market volume for cyber insurance may grow to $9 bn by 2020 – more than twice the level in 2017. Some of the costs of a cyberattack may be covered under a company’s existing general cover but nobody will be fully covered, says Sjaak Schouteren, a partner in the cyber team at Jardine Lloyd Thompson (JLT) Group, a specialist insurer. Cyber insurance is designed to return a company to the same operational level it was at before an incident occurred, he says

Writing a policy requires an holistic approach and the 14 people in JLT’s EuInsuring IoT against Cyberattacks vices, such as preventive consulting or real-time warnings. One area where the service model already predominates is cyber insurance, notes Dietmar Kottmann, a partner at consultancy Oliver Wyman. Specialist cyber insurers provide customers with diagnostic tools to reduce the risk of cyber intrusion; experts to provide urgent advice if a company is hacked, which is especially important in the case of ransomware; and public relations services to contain the reputational fallout following a data breach. Since both European cyber team conduct workshops to help companies to identify and assess their IT risks and mitigate them. The sessions also consider issues such as technology errors and omissions (Tech E&O) insurance, which covers losses as a result of an error or omission in a service or product they have supplied to an outside company.

Cybercriminals, like burglars, will always look for the weakest spot.

Sjaak Schouteren, Cyber team partner at Jardine Lloyd Thompson (JLT) Group

IoT and Commercial Insurance: Sjaak Schouteren - Cyber team partner at Jardine Lloyd Thompson (JLT) Group

When it comes to IoT, Tech E&O blended with cyber insurance is the most important form of cover for most companies, maintains Schouteren. Having these policies in place is key, especially when acting as a supplier to companies in the US, where there is the greatest awareness of cyber risk management and therefore insurance.

The thorny questions of who is liable if an IoT device is used as the point of entry for a cyber intrusion – such as the case in 2017 when a newly fitted smart thermometer / feeding device in a fish tank was used as a gateway into a North American casino’s database – will usually come down to the fine print in an individual contract between supplier and client, says Schouteren. The good news is that IoT is not a main focus for hackers, who currently find it easier to make money through methods such as ransomware or phishing e-mails, says Schouteren. Levels of security within Industrial IoT systems are normally much higher than in consumer IoT devices, like a coffee machine, he says. “Cybercriminals, like burglars, will always look for the weakest spot where they can get in as easily as possible. At this point there are far more easy access points for criminals than Industrial IoT. But every organization should always look at where the impact of a possible incident is the highest.”

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