The insurance industry has suffered continual disruption from new entrants powered by innovative technology and this is set to continue with the advent of the ‘Internet of Things’ (IoT). Andrew Yeoman asks what is this technology and what does it mean for insurance.
The IoT, according to Gartner Group, will have 21 billion devices by 2020. This will include everything from cars to light bulbs, heating systems to baggage systems, buildings to boats. If you can think of it, it will have sensors on it. So how will that impact us?
Simply put, all the data from the devices will allow a business to know something that was previously ‘unknown’ or something that was previously ‘unknowable’. Typical ‘unknowns’ would have included electricity meter reading and typical ‘unknowables’ would be someone’s driving style. The list goes on and on, to 21 billion!
This is very important to the insurance industry as it is built on swathes of unknowns. Indeed, the very concept of risk is just the chance of an unknown becoming known. With the IoT there’s a very bright torch shining into the gloomy lit basement of risk. Taken to its extreme, when all the unknowns become known will that mean the end of traditional insurance?
We’ve been here before, the IoT is not the first ‘new’ technology to hit the market. History has taught us the insurance sector adapts well.
The Telephone: Direct Line Insurance launched in 1985 and using ‘technology’ established a disruptive business model of direct contact with the customer. Customers loved the brand, the service and the low prices. The Direct Line proposition was cheaper and easier for their customers. Direct Line vacuumed up parts of the value chain that had previously belonged to the high street broker, and in doing so disintermediated the market. The business model was dependent on a single core technology (the telephone); if the technology failed the business model failed. In the first 3-months of operation they gave 9000 quotes over the phone. In 2014, Direct Line received more than 22 million calls, the rest is history.
The Internet: In 2006 GoCompare launched into the market as an internet ‘aggregator’ and joined a ‘club’ that now includes established brands such as Confused.com and Comparethemarket.com. Again, customers loved the brand, the service, and the low prices. And again, the business model was dependent on a single core technology (the internet), and again, if the technology failed the business model failed. These companies vacuumed up parts of the value chain that had previously been owned by the insurer. By the end of 2011, GoCompare was receiving more than 10m monthly website visits and recorded revenues of £109m and profits of £34m.
Telematics: Around 2010 the market started to see clever ‘black box’ technologies that could measure when and where a driver was. In a proposition aimed at the ‘Young Driver’ market, insurethebox was among many companies using the information from the ‘black box’ to disaggregate risk. Again, customers loved the low prices and the service from these young innovative companies; new brands were emerging. Again, these business models were dependent on a single core technology (M2M aka as Telematics).
There is a clear trend.
Each example shows that with the introduction of new technology comes a new sense of possibility on the business models that can be operated. It is also clear that to have the competitive advantage you need to make your business model entirely dependent on that new technology.
Interestingly, once the ‘technology’ was adopted the market leader was never the incumbent. Each iteration of technology delivered new market entrants and new market leaders. None of the incumbent players were able to adapt quickly enough as they had ‘point in time’ business models and something to lose with a diversion of focus.
We take comfort from the fact that in insurance it is ‘balance sheet’ strength that wins in the long-term. Indeed, for each of the companies we’ve discussed they were acquired by larger market players and now we can see a reduction in time from inception to exit.
The IoT represents an entire category of information. In the near future there will be two types of insurers – those that have the IoT cemented in the core of their business and those insurers that no longer exist.
The future is here today, let’s participate in it!