Blog: Smart homes need discounted insurance

Smart home illustration
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  • Adoption of smart home devices isn’t as quick as predicted
  • Creating scale is crucial to price home policies
  • Insurers need to take a leap of faith in offering discounts for smart devices
  • Once take-up is wider, data could be fed into an industry-wide platform

Insurers need to offer discounts for smart home devices, argues Jay Borkakoti, director of home insurance, UK and Ireland, at Lexis Nexis Risk Solutions.

The growth of the Internet of Things is primarily a customer-driven evolution. While there are clearly opportunities for smart home technology to help mitigate risk and create more accurate pricing for home insurance, some key challenges need to be surmounted first.

Most consumers choose to buy a smart home hub for the convenience and ‘cool’ factor, not for the risk mitigation benefit. In a recent Lexis Nexis Risk Solutions study, 30% of people said they currently own connected home tech, mostly to control heating and lighting.

Added to this, although the adoption of smart home devices is increasing, it is not growing 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 to the next stage of growth needs some changes in pricing and technology to help drive consumer adoption.

The first issue for home insurance providers is deciding whether to provide incentives and rewards for the presence of a device, on the broad assumption that someone with a smart home device is less risky than someone without. But working out if and how much discount to offer needs both a leap of faith and a bit of guesswork at this stage of the game, with so little claims experience to refer to. Should that be a £5 discount or £25 discount?

This leads to the next challenge for the sector: should it subsidise the cost of installing risk mitigation devices in customers’ homes as a means to build volume and eventually price based on the data from the device? 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.

But this needs many devices in many homes. This would be a huge cost for devices that on the whole don’t stop claims. A leak detector could, for example, prevent a £1000 escape of water claim from turning into a claim three times the size but it is likely to cost more than an entire home insurance policy.

The sums need to add up and currently there is not enough experience for insurance providers to know the return they’d get in lower claims costs from the investment.

So where do we go from here? To my mind, the sector needs to take that leap of faith in offering discounts for devices. The recent One Call and Roost partnership highlights the potential of taking a calculated risk in subsidising devices, perhaps for the value they expect to gain from being one of the first to market.

The industry can then gain an understanding of the claims behaviour of people with devices versus those without. Based on this knowledge, 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.

The ultimate vision is for the data from these devices to be fed into one platform of connected home data shared across the insurance sector in return for a reflective premium.

With input from the whole industry, we will be able to enhance risk assessment at point of quote based on the data from smart home devices.

As more devices are taken up, 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.

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