How will the internet of things impact the insurance industry?

Like it or not, the Internet of Things (IoT) is here and it’s changing the way you live, work and do business like never before.

It is estimated that almost 200 million everyday items including normal hand held devices and home appliances, sensors, health monitors and vehicles and even office gadgets will all be connected to the internet by 2020. By then, we are also likely to even see the rise of fully fledged smart cities that survive entirely off grid and online.

According to the McKinsey Global Institute, the emergence of IoT technologies could unlock up to $11 trillion per year in value to the global economy by 2025, but not everything looks so rosy. The insurance sector alone, is plagued by plenty of uncertainties and many questions have yet to be answered.

The motor industry is likely to see some of the biggest changes in the way consumers transact.  It is anticipated that so called Advanced Driver Assisted Systems (ADAS), coupled with the semi-autonomous technologies and state of the art tracking systems will be deployed in half of all cars on the road by 2025. It is all aimed at helping reduce driver error and, in turn, limit the risk of being on the roads. In doing so, it however, also reduces the need for motor insurance as we currently know it. In fact, it is estimated that the global auto insurance market will shrink by more than 60% in the next ten years.

In order to have any form of relevance, the sector will have to look at ways of servicing this new car industry, possibility re-evaluating the notion of liability (who exactly is liable for a car accident, if both vehicles are autonomous?) and creating new products and policies that cater to the needs of the autonomous car driver.

On the opposite side of the spectrum, one of the main areas of growth for insures is likely to be in relation to cybercrime. The market has already doubled over the past three years and shows no sign of abating, thanks primarily to sophisticated and often anonymous hacking groups who continue to hound large scale corporations and in turn affect the personal data of millions of ordinary individuals.

However, the rise of IoT has caused large-scale hacks to turn into huge global cyber catastrophes. Already, there have been successful hacks on industrial control systems that have led to major physical damage in certain industries. A good example of this was in Germany in 2014, where an unnamed steel mill suffered massive damage thanks to a spear phishing attack consisting of an email sent to a staff member that resulted in them downloading malware and giving attackers control of the system. Attackers broke into the digital controls for a blast furnace and disabled its ability to shut down.

The incident shows just how deadly a cyber-hack can be and having a standard cybercrime insurance policy will simply not do. Instead, there is likely to be an expanding list of critical cyber perils that won’t be covered under a standard insurance policy. Those insurers who have specialty cyber insurance policies and endorsements to fill in the need for IoT cyber risk coverage, will definitely see an increase in revenue.

The emergence of IoT is a tremendous technological development that promises extensive benefits for everyone. However, its rapid progression is also propelling major flaws into the limelight and dramatically changing the way we insure.