The growth of the Internet of Things (IoT) has the potential to increase complexity and amplify risk, but it could also enable more innovation throughout the entire insurance value chain, including future claims settlement, according to the latest Lloyd's emerging risk report.
By 2020, some 25bn devices will be connected to the Internet, with some studies estimating this could rise to 125bn in 2030, including many devices which have never been connected to the Internet before.
The report, Networked World: Risks and Opportunities in the Internet of Things’, which Lloyd’s published in collaboration with University College London’s (UCL) Department of Science, Technology, Engineering and Public Policy (STEaPP) and the PETRAS Internet of Things Research Hub, a consortium of nine UK universities exploring critical issues in areas of privacy, ethics and security, analyses the impact of the IOT on the insurance sector.
IoT enables better data management and risk prediction
IoT will lead to data capture and management at an unprecedented scale, according to the report. This could mean better risk assessment and more flexible, bespoke and real-time products. However, this may also increase policyholder concerns about the use and accuracy of their data.
Meanwhile, interconnectivity will create new business models where more is known about insureds, policies are generated in real-time and are bespoke, and fraudulent claims are recognised quicker. The ability to create personalised policies will also enable insurers to more accurately predict and mitigate risks, said the report.
IoT creates new risks
However, the report also noted that new types of threats will emerge, which will increase the demand on insurers to come up with new products and services. The scale and variability of the type of disruption that could occur will affect multiple sectors and lines of business.
In addition, the range and quality of security standards that currently exist for the IoT will make it hard for insurers to make risk assessments. And there are critical blind spots in the regulation and legislation of IoT devices and their impacts. These include uncertainties surrounding attribution and liability should anything go wrong.
Some of the risks elaborated on in the report are as follows:
- Multidimensionality: IoT devices and services can be a target of cyber attacks, and can multiply security and privacy risks.
- Harms: IoT functionalities and disruption will see the emergence of new harms like loss of data, privacy and business.
- Scale of impact: With multiple connections between IoT and the Internet, there is a systemic failure risk should security be breached at any one of the connection points.
- Changes to risk assessment and management: As a consequence of changes in the nature of threats, losses, and vulnerabilities, the IoT will require new processes and mechanisms for risk assessments and risk management to account for variability and scale in the dynamism of interconnected IoT systems and convergence.
- Liability and attribution: With the number of stakeholders involved in IoT development and use, assigning liability when things go wrong is complex
To help insurers to understand the evolution of the adoption of the IoT and its potential impacts, the report includes ten extreme scenarios on four critical sectors: Infrastructure and Water, Agriculture, Marine and the Smart Home. Each scenario highlights how IoT technologies could generate and exacerbate risks that could cause losses in several lines of business at the same time.
IoT and insurance
The report also noted that IoT will affect the insurance sector in these areas: enabling new business models and customer relationships; change underwriting, product development and pricing models; drive further evolution on claims with a focus on loss prevention; change capital reserving practices as they become more fluid and real-time; and enhance modelling and exposure management.
With market forces alone unlikely to drive significant changes to the IoT sector, insurers could play an important role in shaping the IoT landscape, said Lloyd's head of innovation Dr Trevor Maynard.
“Lloyd’s has proposed several options from leading on data standardisation to working with governments and tech companies. Insurers should proactively talk with clients to review and assess all risks associated with IoT to provide them with advice on best practice and appropriate risk solutions, thereby shaping the development of the IoT ecosystem in which they operate,” he said.
STEaPP’s Digital Policy Lab director Dr Madeline Carr said, "Any large-scale technological shift raises challenges to the status quo and creates opportunities for those who see them early on in periods of transformations. Early adopters, especially in markets, are afforded additional benefits, as they can shape expectations, terms of engagement, and best practices in ways that address their interest.”