There are ‘smart sensors’ now for all sorts of places around the modern home: heating, lighting, motion, water, windows, doors, appliances and smoke detectors, to name the main ones. These add up to what insurers sometimes call an ‘ecosphere of prevention’.
And insurers are forming partnerships with sensor system providers, to wider their installation and use across the home. In return, policyholders can get the sensor system, the sensors and the on-going monitoring service at a discount. It seems to add up to being a good thing all round. After all, what’s wrong with there being few claims? All that cost and disruption would become a thing of the past. It comes across as a sort of subscription service for lower or no losses.
If only it is going to be like that in practice. The narrative emerging out of the sector at the moment is changing, becoming far less rosy than it was a few years ago. This is signalling a hardening in attitude to how policyholders use their sensor system. The emphasis is shifting from being on service (this prevents losses) to now leading on compliance (the sensors are telling us you’re not taking enough care).
So why this shift in emphasis? I suspect it’s because insurers are finding that claims are not falling in response to sensor system uptake, or at least are not falling fast enough. As a result, insurers are turning to the terms and conditions of their policies, mainly in respect of policyholders having to maintain their house and take reasonable care. This will result in claims being turned down because of a failure to take sufficient care to avoid a loss.
Ecosystems of Claims Prevention
The net outcome of this shift in emphasis will be that smart systems will feel to policyholders less like ecosystems of loss prevention and more like ecosystems of claims prevention. Too strong? Not really, for these ecosystems are not really being used for the benefit of policyholders, but in reality, for the benefit of insurers.
Consider the pricing of a homeowners policy in the US from State Farm. In partnership with ADT, they’re offering policyholders the following deal, as explained in this Coverager article...
“The insurer is offering ADT's home security system which includes installation of one ADT security panel, three water sensors (up to seven depending on home layout), one smoke detector, and two door/window sensors. The package requires a 36-month monitoring contract starting at a "discounted rate" of $19.99/mo, and customers will need to share their account information, available telematics and system usage (excluding audio and video) with State Farm. Customers who cancel their policies or revoke their consent for ADT to share their ADT system usage data with State Farm will have their rate increase to $42.99/mo. In addition, customers can get up to a 6% discount on their homeowners premium from State Farm.”
The average homeowners premium in the US is said to be $1,428, so a 6% discount amounts to $85 per year. Compare that with the $516 cost of the ADT system without data going to insurers, and $240 with data going to insurers. The premium saving is pretty weak in comparison.
If you’re really wanting such a system, these discounts on premium and system subscription may of course still be of value. However, people who are not tech enthusiasts may wonder whether there’s any real value there.
It’s Hidden Value that Matters
There could well be some sources of value hidden away. That data streaming from your home to your insurer is going to have a resale value, something which US insurers have at times been keen to exploit. That 6% discount will not end up costing the insurer so much after all.
And then there’s the underwriting information to be found in that data stream...
- motion sensors will tell the insurer how often you’re at home at night, in the evening or during the day.
- door and window sensors will tell the insurer how often you’re locking them at night or when out of the house.
- water sensors will tell the insurer how much attention you’re paying to pipe leaks and what you’re doing in response.
- smoke detectors will tell the insurer how often they’re triggered and so tell a story about fire risk.
Insurers will use the information from these sensor systems to make decisions about you and your policy, in respect of underwriting, marketing, counter fraud and claims. Their savings will emerge from across these functions, perhaps even to the tune of the $276 difference between the ‘with data’ cost of $516 and the ‘without data’ cost of $240.
Policyholders Who (Don’t) Care
What’s more, it’s very likely that not having sensors will in itself be seen as a negative underwriting factor. In other words, the policyholder just doesn’t want to be careful. This is a judgement top heavy with pre-conceptions and self interest.
Hold on though, some of you will be saying. These sensor systems will still prevent some losses. So why should the careful people using them pay for the losses of the not careful people who don’t. Yet that’s a short step from why should people who don’t have claims pay for the claims of those that do? They need to remember that insurance was created for a reason.
And while your average claims person is very likely to know how to maintain their house carefully, not everyone is up at the same level – some just don’t understand how a lot of things in houses work. That’s not them being odd – that’s the norm.
There are clear monetary trades going on here, but remember that there’s also a huge shift in relative power going on as well, from the policyholder to the insurer. In the past, reasonable care was a policy term that insurers could only occasionally apply. With a sensor system streaming data to them, the insurer would now be able to take the initiative about its interpretation and application. They will decide if you’re doing enough to look after your home, and if they’re unhappy with something, your cover for it could be suspended.
To Sum Up
The insurance sector is in danger of turning its talk about an ecosphere of loss prevention into little more than a pipedream. The evolution from claims payment to loss prevention amounts to a generational change, not one suitable for a five year strategy. Where insurers now find themselves is on the edge of that change, firmly rooted in the culture and mores of traditional underwriting and claims, looking across to the world of loss prevention and realising it will take an awful lot to bridge it.
The danger is that should they swing too strongly towards compliance with policy terms, they will disillusion policyholders too much. They will in effect be burning the bridges to their own dreams.