With some form of automation now in place in nearly three quarters of homes, Sam Barrett examines the challenges and opportunities for the insurance sector
Technology has brought significant benefits to the way we run our homes, with smart devices giving us the power to remotely switch on the heating, dim the lights and check who is on our front doorstep. And while research by Policy Expert found that 40% of people purchase these devices to make their lives easier, this trend could also transform their home insurance.
The benefits are significant according to Nigel Walsh, insurtech partner at Deloitte. "By gaining a more detailed understanding of the risk a home presents, an insurer can deliver improvements in pricing and risk management as well as helping to foster better customer relationships," he explains. "There are challenges but there are also plenty of opportunities for insurers."
All manner of smart devices are being developed for the connected home. Properties can be fitted out with sensors to detect smoke, air-quality issues and leaks, and camera technology is also increasingly commonplace, helping to detect and deter intruders.
Connected home technology also includes a number of safety and security devices. Smart plugs can ensure that devices are switched off, helping to reduce the risk of an electrical fire, while connected security systems can turn on your lights when someone rings the doorbell or send a notification to your phone, so you can speak to the caller.
Being able to keep tabs on a home in this way can reduce risk. As an example, Arslan Hannani, head of market management at Zurich Insurance, points to the use of this technology in a large municipal building. "Monitoring factors such as humidity, temperature and leaks enables us to help our clients respond better to their customers' needs," he explains. "As soon as something unusual is detected, such as damp in a tenant's property, we could send a maintenance person to fix it."
PREVENTION IS BETTER THAN CURE
Detecting issues at this early stage can help to control claims costs. Take escape of water as an example. With total claims costs rising sharply during the past few years, the Association of British Insurers labelled it a key priority back in November 2017. However, the latest figures from Consumer Intelligence show that although home insurance costs have fallen marginally during the year to October 2018, with average premiums dropping by 0.4% to £137, claims costs from the increase in escape-of-water claims plus last winter's storm and snow damage are set to fuel price hikes.
Connected homes also have the potential for fraud prevention. Mike Hallam, head of technical services at the British Insurance Brokers' Association, explains: "As claims will be based on the data that these smart devices have collected, it will help to reduce fraud. In addition, it should also see the claims settlement process going up a gear."
Mr Hannani agrees: "Insurers traditionally focus on what happens from the point of claim but, with a connected home, we can look before this point. It's about selling a real prevention proposition."
As examples, a plumber could be sent out to fix a leak before a customer is aware of a problem, or an insurer could provide security advice if it detected attempts to hack into the smart devices.
While there are clearly benefits, there are also potential downsides to consider from a risk perspective. In particular, using connected technology to control and monitor the home introduces cyber risk. "What happens if the system goes down?" asks Mr Hallam. "If it runs your security, it could potentially leave your home unlocked and a potential target for burglars."
As well as the risk of the technology failing, there are already examples of this type of security technology being targeted by criminals. Key-fob cloning is concerning the motor market, and lax security has enabled baby monitors to be hacked -- with parents horrified to find strangers watching and talking to their children.
There are also issues around liability. With the technology provided by another company, if it inadvertently introduces malware that compromises a home's security or turns off sensors, it could find itself liable for any claims that might occur as a result.
Policy Expert research shows that some form of home automation is now in place in nearly three quarters of homes, however, there are a number of obstacles that stand in the way of its adoption in the home insurance space.
Firstly, cost is prohibitive and during trials, the Hood Group looked at around 20 different devices that targeted escape of water. To achieve the best results, it found it was necessary to combine three of the technologies currently available: sonic, which listens to noise in the pipes; flow; and temperature. "If you combine these, you can tell whether you're dealing with a drip, a leak or the additional water usage resulting from guests using the shower," explains Gavin Dobson, head of marketing at Hood Group. "Unfortunately the cost of installing this technology isn't commercially viable yet."
Time will inevitably bring the cost down, but insurers face further obstacles. With so much of this technology monitoring the home, consumers may be reluctant to allow an insurer to have this insight. Adam Beckett, sales and marketing director at Aviva, says work is required around this. "There is some anxiety around having cameras in the home but, by creating the right propositions, we should be able to build consumer confidence."
Similarly, insurers could run into issues around accessing the data, especially where they have not installed the devices and the manufacturers own the relationship with the consumer. However, Mr Hannani believes the General Data Protection Regulation will help. "This makes it clear that individuals are the owners of their own data, and can control who has access to it," he says. "Most people are more than happy to share their data, providing they get value for it."
COST OF COVER
Average annual premium -- £137
By region Highest annual premium -- £183 in London
Lowest annual premium -- £124 in Wales and the northeast
By property age
Highest annual premium -- £162 for properties built before 1895
Lowest annual premium -- £121 for properties built after 2000
Source: Consumer Intelligence
STEMMING THE FLOW
£483m paid out in domestic escape-of-water claims in the first nine months of 2017
24% increase in the total cost of these claims between 2014 and 2016
31% increase in the average cost of these claims between 2014 and 2017 Average claim is £2,638
Source: Association of British Insurers
Nearly 1.5 million households plan to have their home fully controlled by smart devices by 2023 (Policy Expert)
£10.8bn will be spent on smart home devices in 2019 (PwC)
40% of device owners are expecting to upgrade within two years (PwC)
The insurance sector is already looking at how it satisfies this consumer demand for value. While it's still early days, Mr Walsh believes insurance will become a by-product of a more service-driven proposition. "Insurers could offer a product that helps a consumer look after the things they love," he explains. "This might be monitoring their home, a holiday cottage or even an elderly relative to make sure they're safe. This could be underpinned by the insurance promise to put it right if something goes wrong."
Further value could be delivered through greater personalisation of the cover. "We can move away from a one-size-fits-all product and make the relationship with the customer much more dynamic," says Mr Beckett. "If someone's going on holiday, we could increase the level of protection or add in new features. We're exploring a number of different propositions but we do see a real future in this area."
And while many expect it will be five years-plus before this type of proposition becomes more mainstream, the benefits it brings
to consumers and insurers mean it is an area to watch closely.