The Impact of IoT on the Home Insurance Industry

Abstract

Connected devices are becoming the new normal, and our homes today are almost a sci-fi dream compared to domestic life 50 years ago. Nevertheless, homeowners’ insurance has not changed much in the last decades, except from sporadic ratemaking adjustments and the constant rise of annual premiums. The scope of this thesis is to provide a theoretical and empirical overview of how property insurers are coping with the rise of smart home technology, in terms of changes to their policy structures, risk assessment models, reliance on IoT data and, ultimately, the relationship with their customers. A literature review revealed that data from IoT devices may prove useful in mitigating two structural problems of the insurance industry, namely adverse selection and moral hazard arising from asymmetric information. Data from Smart Home devices provides new credible ways of screening and signaling, makes it able to recognize high-risk customers and careless behaviors, and makes it easier to detect fraudulent claims. The second part of the analysis is aimed to demonstrate if, and to what extent, IoTrelated initiatives may increase an insurer’s profitability by lowering its expense and loss ratios. To this aim, all the homeowners’ policy contracts of the major 55 American and European insurance companies were read and searched for IoT-related clauses, and the resulting variables were then summarized in factors. Such factors were regressed against 4 main financial indicators in the two reference markets. It emerged that IoT initiatives are associated to a lower expense ratio, but at the same time with a higher loss ratio: hence, there appear to be more claims, but it’s less costly to assess such claims. The final part of the thesis is dedicated to assessing how IoT is expected 4 to change the relationship between insurers and customers, followed by a collection of experts’ opinions on the future of home insurance.