In a previous blog article we looked at future new data sources for home insurance, prefill of the application form, the current level of smart home adoption and how this balances with the expected benefits to the insurance consumer.
Right now, there is a great deal of expectation about what smart home tech could do for the home insurance sector, and the types of data, scores or risk attributes that are going to be useful.
But there are two major aspects to consider.
The first is how smart home tech could reduce the risk of fire, escape of water, burglary and so on. How is it going to reduce loss costs for the market? A study* we carried out on how digitisation is affecting UK home insurance providers found that 75% expect smart home technology to have a positive impact on risk mitigation. But does the current cost of the hardware outstrip the savings that could be made in reduced losses?
The second big question for the market is how smart home data could be used as a factor when underwriting home insurance risk. Is a person who uses their smart home device to operate the lights less ‘risky’ than a person who uses a light switch? And what impact do the more advanced risk mitigation devices really have on loss costs?
We can only know the answer to these questions through data, and lots of it. And that raises more questions around how we can build that volume of data and then use this to assist in pricing decisions.
At this early stage in smart home tech, consumers tend to buy a smart home hub for the convenience and to meet a desire to own the latest tech, not for a risk mitigation benefit. In our recent LexisNexis Risk Solutions study, 30% of consumers said they currently own connected home tech, mostly to control heating and lighting**.
Adoption of smart home devices is increasing, but not as quickly as originally predicted. The number of homeowners with smart tech in their homes has grown just 10% since 2016 and in 2017 Gartner revised its forecast for IoT penetration downwards, to a total of 20.4 billion installed devices by 2020.
Getting off the starting blocks
With such a low proportion of homes currently having any smart technology installed – around 25% in the UK according to reports – some changes in pricing and technology are needed to drive up consumer adoption.
Incentivising or rewarding customers for the presence of a smart home device would seem an obvious tactic. But without claims data to work with, determining an appropriate level of discount or reward is based on guesswork.
Should it be a 5% discount or 25% discount? There are a lot of unknowns, but this could be the next step the sector needs to make to increase adoption levels and therefore increase its understanding of risk related to the presence of a smart home device.
In our study, 81% of home insurers anticipate that the industry itself will have an impact on the adoption of this smart technology. Discounts for the presence of a smart home device could be the way to kick start greater insights around smart home risks.
Then there is the question of whether risk mitigation devices should be subsidised to help encourage take up.
Currently these devices tend to limit rather than stop claims. A leak detector could, for example, prevent a £1,000 escape of water (EOW) claim from turning into a claim three times the size. But the device itself is likely to cost more than an entire home insurance policy, and usually it won’t prevent the claim completely.
It’s a leap of faith for the market but the One Call and Roost partnership is a good example of an insurance provider taking a calculated risk in subsidising devices in the anticipation of reducing losses, building volume and by turn, gaining valuable data which can be used in pricing.
Creating scale is absolutely vital as this will help the industry move to a point where it can create statistical significance in the data, and use it alongside traditional rating factors to price for home insurance.
The more consumer adoption increases, the more insights can be built around claims experience and the potential of a shared industry database of smart home data would then come closer to reality. In our study, almost half of home insurers believe a centralised property database would be very valuable to the home underwriting process, and two thirds stated that they would be willing to contribute if such a database existed. Imagine if that database also held connected home data?
To accelerate adoption, insurance providers across the whole industry would need to be on board to ensure the data is a representative of the total market, benefiting all parties. Collaboration across the market would help build the scale of home technology available on the market, harnessing data to help insurance providers improve pricing accuracy and deliver a more personalised service to their customers.
Home insurance providers are starting out on the same road that the motor insurance sector joined eight years ago.
Motor telematics was a huge cost in those early days but the early players felt confident the cost of the technology would fall. The pioneers in this market also saw beyond the device as risk measurement and mitigation tool, and understood how the data could give valuable insight into driving behaviour.
The same valuable data insights could become a reality in the home insurance space. With a greater understanding of the claims behaviour of people with devices versus those without, insurance providers and device manufacturers can work together to help build wider consumer take up of smart home devices that will help reduce insurance losses.
Claims costs should reduce and premiums will come down for owners of smart home devices. In turn, this will drive further adoption, support investment in research and development, and take us into a whole new era for home insurance.
*LexisNexis Risk Solutions completed a comprehensive study in January 2017 on how digitisation is affecting UK home insurers. Using a mixed mode of online panel and telephone interviews, we collected data from 52 personal home insurance professionals. To take part in the survey, they had to spend at least 30% of their time in underwriting-related activities. Where appropriate, we compared home insurer views with those of 1,500 UK homeowners who we surveyed separately between 25 January and 1 February 2017. In both studies, LexisNexis was not identified as the sponsor.
**LexisNexis Risk Solutions carried out an anonymous survey, the UK Home Insurance Consumer Study, 25 January–1 February 2017. The sample was 1,500 residential homeowners in the UK, who owned their current residence for two years or more, home insurance covering their primary residence, equally or solely responsible for home insurance decisions.
For more insights from this LexisNexis Risk Solutions research, download the LexisNexis Risk Solutions white paper ‘Promise and Potential: How Data and Analytics are Shaping the UK Home Insurance Market’.
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