Technology entered the home with electrification in the early part of the 20th century. However, it wasn’t until the digital revolution, particularly with the internet of things over the past decade, that technology could be used to manage lifestyles and risks within the home.
Homes with technology can be split into two broad categories:
Smart homes. These are homes that have smart devices such as TV’s and Google Home that connect to the internet. According to Telsyte, an analytics firm, more than 50% of Australian homes in 2020 have at least one smart device. Of the homes with a smart device, each had an average of 17 devices in 2018. A surge in the number of devices in recent years is primarily due to the adoption of smart speakers by younger families and tech enthusiasts. They have also embraced drones, location tracking tags and VR headsets.
The penetration of smart devices is expected to increase with the roll out of the 5G network, with much of the growth coming from the application of voice controlled intelligent home networks (Amazon Alexa, Google Home) including the use of smart speakers.
Connected homes. These are homes with smart devices that are connected together to form a home eco-system, and/or connected to external service providers such as monitoring stations. An example of a home eco-system is when external roller blinds close automatically when poor weather is detected by a device connected to the Bureau of Meteorology.
The investment required in connected technology is far higher than for a smart home which limits its appeal. However, that may be now changing with the likes of Amazon now making available a number of devices on its platform that connect with Amazon Alexa. Many new homes are now built to accommodate connected devices.
Home technologies can be delivered in a number of ways;
- Apps on a smart phone that might for example open the garage door.
- Smart assistants such as Google Assist, Siri and Alexa activate based on voice commands. (“Hey Siri, turn the heating up”).
- Automation through programming controls. For example, an automated coffee machine that is connected to the morning alarm.
According to a survey undertaken by US based firm LexisNexis, the key motivations for adopting smart technologies include:
- increased safety/security (47% of respondents),
- the convenience of managing devices remotely (31% of respondents) and
- reducing energy bills/saving money (25% of respondents).
Despite these findings from the survey, it is likely many people want the latest technology for the “gee whizz” appeal of it.
Impact on insurance
Home technology can be split into four broad categories - lifestyle, risk prevention and mitigation, home design and home use. The table below provides some examples of each, highlighting our qualitative assessment of their current and potential level of use, and assesses their risk and insurance impacts. The insurance impact is primarily on the cost of claims which is then reflected in premium.
Does technology in the home increase or reduce risk?
As highlighted above, increased safety and security is a key driver for smart home customers. Given this it is foreseeable there could be an underwriting benefit through ‘natural selection’.
Smart homes should have a higher sum insured to reflect any investment in the technology. In the event of a large loss or total loss, the claim size will be higher.
Some applications are designed to reduce risk. These include:
Web based security sensor/camera systems – which now appear to be very popular and relatively cheap. They allow self-monitoring and are a cheaper alternative to monitoring by a base station. However, in most parts of Australia, burglary is becoming less of an issue (accounting for less than 10% of total contents losses).
Water leak detectors. The installation of a connected water leak detector and shut off valve is not common in Australian homes due to their initial cost (upwards of $800). However, cheaper detectors that can be installed near each water device (e.g. washing machines) and connect to the wifi and mobile phone can now be purchased for under $100.
The escape of water, either through a burst pipe or through poor water-proofing or roof construction, is becoming a bigger problem. Burst pipes alone account for around 11% of the home buildings loss ratio (compared to just 8% 5 years ago).
A recent study in the US included households that had installed Flo by Moen smart water shutoff devices. The study examined the one-year period after the device was installed and the two-year period before, when the homes weren't equipped with any smart leak detectors. In that last year with the device installed, the homes saw a 96% reduction in the number of paid water claims.
While prima facie this suggests a strong argument to fit water leak detectors in homes, the economics still need to be understood (i.e quantum of claims savings vs cost of purchase, installation and management of devices).
Smart smoke detectors. These devices can detect fire and carbon monoxide. They connect to the home wifi and mobile phone, and to lighting and ventilation systems if desired. Smart smoke detectors in some commercial premises already link to emergency services so it would seem reasonable that this could also extend to residential homes in the future.
We note Queensland Fire and Emergency Services have introduced new legislation, requiring all smoke detectors to be hardwired to the mains power supply with a secondary power source (i.e. battery) and to be interconnected with every other smoke alarm in the dwelling so all activate together. Batteries for smoke alarms can now connect with mobile phones to alert owners not at home.
Weather related warning systems can shutter windows and external blinds before an approaching storm or strong winds.
Applications that add to the risk include;
Solar panels and solar tiles. While generally robust against the elements, solar panels degrade over time and they are becoming a more common source of water leaks. In addition, they are expensive, especially solar tiles - an average roof can cost around $65,000. A research study in 2016 found 1.5% of residential house fires were caused by faulty solar panels and DC isolators.
The increased use of home offices and smart devices with insecure data management and data transfer protocols could increase the potential for cyber-crime.
In summary, home technology can reduce risks for those with a particular vulnerability. However, if not managed properly, such as the secure use of data, then home technology could also act to increase risk overall.
It’s about the data.
Smart devices and connected homes produce a lot of data. For an insurer, that data could be used to price risk, prevent and mitigate risk and to assist in the processing of a claim such as the automatic notification of a loss. At this stage, we are not aware of any insurer that is using IoT for these purposes. A massive amount of exposure data will be required before smart devices such as cameras can be applied to insurance underwriting and pricing. At this stage in IoT development, the amount of data required means application is likely to still be some years away.
A better understanding of the claims behaviour of people with devices versus those without will help insurers and their policyholders to reduce risk exposures, which in turn should contribute to a wider take up of smart devices.
But it’s my data!
The internet of things and connected homes generates a lot of data, and meta data, which has implications for data privacy and security.
Data privacy is not a new issue. People now can choose to opt into programs that consume their data in return for a benefit. A recent LexisNexus study recently found 78% of Americans were willing to share their data with an insurance company, but mostly only if they received a premium discount. The study showed many consumers willingly give data to get better service and lower premiums when clearly presented with the facts.
Data security is an issue for many people, with stories of hacking quite common. This is because many smart devices have poor cyber security. Malware caused a distributed denial of service (DDoS) attack across the east coast of the US in 2016 knocking out many websites without homeowners knowing they were involved.
The Australian Government proposed a voluntary Code of Practice in November 2019, as part of the Government’s 2020 Cyber Security Strategy. One of the objectives of the strategy is to improve access to and use of data, while maintaining strong data safeguards. While Australia’s tech future is likely to be better protected by laws, regulations and standards, it is unclear about the security of the many millions of existing smart devices in homes today.
While hacking risks remain, it can be a manageable risk when the appropriate security technology is in place and kept up to date.
It’s a leap of faith to reflect a price discount for installed risk-based smart devices, given the paucity of IoT risk data. However, there might be some sense in providing a sales incentive, as was the case when a major Australian insurer launched its telematics offering some years ago. Pricing considerations include;
- Lower risk. It looks like the jury is out as to whether smart devices do materially reduce risk. In theory, there should be some small reduction in risk, and therefore price. However, the author is unaware of any scientific study that supports the theory.
- Sales incentive. Some US based carriers such as Hippo Insurance provide premium discounts up to 5% if smart locks or smart water shut off devices are installed (especially relevant where pipes can freeze).
- The price of acquiring customer data. Gaining data scale will be key to understanding the data, and without a price incentive, it may take a long time to get to the required scale.
How can an insurance related IoT eco-system be implemented?
When it comes to the use of smart devices, the Australian insurance market is relatively under-developed when compared with the US market. Perhaps this is a function of scale in the US, the technological bias of the economy (as evidenced by the growth of the Nasdaq index since 2010) and the competitive insurance environment there. Regardless, we think the US experience with smart devices should be largely relevant to our market. This section considers the approach US-based insurers have used with smart devices.
There appears to be three logical phases for the gradual implementation of a smart eco-system:
What does the future of home technology look like?
The focus for the technology providers over the next few years will be on the installation of smart devices that can “wow” customers (whether or not they play a role in reducing risk).
There appears to be a case for insurers to connect with smart homes to facilitate a claim and restore a loss. Technology is now becoming available to make this happen. Policyholders will require a leap of faith regarding the use of data by insurers who should pass on any savings due to any reduced risk.
Insurers will not be in a position to collect data until national data security and privacy protocols are in place, and when it is common for new homes to be built with smart and connected devices. In the meantime, some insurers might start offering smart devices as sales incentives for home insurance.
There is still a lot to play out in the IoT space – particularly in how insurance embraces and incorporates IoT into its future product and service propositions. While there is great potential, it will take some time to mature, and will become more attractive over time as data grows and becomes more secure, and as technology reduces in price (making the economic equation more attractive).
So back to the opening question – gee whiz or gee fizz? We think it’s too early to tell, but have cautious optimism that the whiz will win out in the next few years.
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