Home > Insurance Blog > How smart home technology is influencing home insurance
By now, most Americans have grown accustomed to smart devices. Whether it is a smartphone or a smartwatch, we interact many times a day with some sort of smart device. These gadgets have changed the way we live providing unprecedented convenience and productivity. Smart devices in the home are no different. Over the last few years, smart home devices and the internet of things (IoT) have grown from novel to mainstream. In fact, Allied Market Research expects the “Smart homes and buildings market to reach $35.3 billion, globally, by 2020.” Many homes currently on the market have existing smart home equipment. Inspecting these devices is important for the safety and privacy of new homeowners. Smart devices in the home do provide some convenience and productivity, but the consumer’s primary motivators are security and protection. If this is true, then home insurance companies must be equally interested in the implementation of smart home devices. To understand the relationship between the smart home industry and home insurance, we must analyze the benefits of smart home devices, along with the potential risks of their adoption.
Top Reasons for Using a Smart-Home System*
Source: Icontrol Networks, State of the Smart Home
First, let us consider several of the smart home devices on the market and the ways each device enhances home security and protection. By understanding these benefits, we can better understand why these devices are important to home insurers. Note that this list is not comprehensive, but rather intended to highlight a few important smart home devices.
As evidenced by the above list of home security and protection enhancements, home insurance companies could significantly reduce their exposure to a loss and its severity by having homeowners implement smart home devices. Home insurance underwriters use predictive analysis to determine insurance rates based on a limited number of general factors. By implementing smart home devices with their insureds, home insurance underwriters have a plethora of data to help in developing a more accurate prediction of potential losses. Furthermore, since these devices aid in loss prevention and engagement of homeowners in the home protection process, home insurance companies should be all-in on smart home devices. In fact, below is a timeline identifying the increasing development of insurer/IoT partnerships. Should insurance companies even issue their insureds a basket of smart home devices to use in order to reduce the risk of loss? While this sounds ideal, there are risks to consider when it comes to depending on smart home devices.
First is privacy. A homeowner may want to use a smart device in their home, but not want to share the data with an insurance company, even if it means forgoing lower insurance rates. Due to the prevalence of data scandals, i.e. Facebook, Cambridge Analytica, many consumers are wary about sharing personal data, especially when it is personal and relates to the intimacy of a home. Insurance companies must find creative enticements to help get past this barrier, as evidenced below.
Another risk relates to the early adoption of certain smart home devices. Insurance companies have an opportunity to partner with smart home device producers or risk being left behind. In a similar vein, an insurance company must have comfort that a particular device is going to be effective and useful in the long term. As the industry grows, consolidation of devices will continue and certain brands may become obsolete.
Perhaps the most significant risk revolves around cybersecurity and connection reliability. As the internet of things grows, the risk of a third party hacking a home network or a device increases as well. These devices in the home are dependent on a connected network. This means that the internet service provider, the Wi-Fi router, extender, etc. must all be working well with one another in order for the smart home to work as designed. If the power goes out during a storm or a router fails, then the network could go down along with the devices it supports.
Water detection is one of the most important IoT devices to insurance companies. Claims related to water leaks in the home remain one of the most reported claims to insurance companies. Some insurers are giving premium reductions to homeowners that install water detection sensors. For example, in a Sep. 18th 2018 NBC news article, Farmers insurance spokesperson, Trevor Chapman, indicated that homeowners could receive, on average, a 3% premium reduction for installing water detection sensors with automatic water shutoffs. This strategy appears to be the most likely way for insurers to incentivize homeowners to utilize these devices in the home.
Smart home devices are here to stay. Insurance companies must find innovative ways to use the allure of smart home devices to enhance customer experience and incentivize homeowners. These devices benefit homeowners and insurance companies, but only time will tell how the marriage between the two will grow.
Filed Under: Homeownership, Insurance Claims, Smart Home