The near-instant availability of IoT data could overturn traditional forecasting and decision-making processes.
F or years, in order to manage uncertainty and risk, insurance companies have made decisions based on historical data, inferring the likelihood of risk based on previous policyholders, their behavior and claims.
But the massive increase of Internet of Things (IoT) data, available in near real-time, could radically change this model. IoT sensors can provide insurers with up-to-the-minute data about almost anything: individual driving styles, the condition of buildings and our lifestyle habits. This will have a far-reaching impact.
IoT could become a destabilizing factor for the more traditional elements of insurance and the wider financial sector: undermining the current risk management models and the balance between information sharing and information asymmetry, which will have a major impact on operating models and decision-making mechanisms. And companies that do not embrace this new paradigm will struggle and ultimately fail.
Here are some examples.
The popularization of IoT devices has enabled the introduction of a new type of car insurance known as usage-based insurance (UBI), pay as you drive (PAYD) or pay how you drive (PHYD). The condition for obtaining such insurance is the installation of a device capable of monitoring the geographical location of a vehicle, both on the move and when at a standstill.
In UBI, the final cost depends upon the type of vehicle used, measured against time, distance, behavior and place. This differs from traditional insurance, which attempts to identify and reward safe drivers, giving them lower premiums and a no-claims bonus. The statistics about past events act as a signpost for what insurers believe will happen in the future – most traditional institutions from the financial sector, in particular insurance providers, build their decision models on this basis. If all entities have similar historical data about past claims, they can set a safe risk margin and, on this basis, determine the insurance rate that gives them profit on their operations.