Next-Generation Insurance: Tapping Into the Intelligence of Smart Homes

The proliferation of household data from sensors and smart devices, plus advances in data analytics, present compelling opportunities for property and casualty insurers to reduce and mitigate losses, improve underwriting, enhance the personalization of products and services, and enrich customers’ digital experience.

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Executive SummaryMost of us have experienced remote-controlled home lighting, voice-controlled

televisions and automatic garage door openers. The concept of smart homes —

houses equipped with smart devices and sensors that remotely control lighting,

heating and appliances through a smart phone or computer — is not new. The vision

of how these developments could influence our daily lives has been well depicted in

popular culture via television shows such as The Jetsons and films like The 6th Day.

Since the beginning of this century, consumers have recognized the value and

security provided by smart homes, and the ease of managing and monitoring home

appliances and devices at any time, from any location. With the dawn of the Internet

of Things (IoT), technologies like near field communications (NFC), wearables,

smartphones and the inexorable penetration of Wi-Fi and Bluetooth, an ever-

increasing number of people can now afford smart devices, and connect in ways

that were never before possible.

In our view, smart homes comprise three unique components: home appliances,

home security devices and home infrastructure. Built on the same principles as the

IoT, smart homes allow information related to a household and its contents to be

collected and disseminated, then put to use in a variety of ways. Today’s smart home

devices range from simple stand-alone sensors that detect changes in basements’

water levels, to highly sophisticated appliances and devices equipped with self-

learning and artificial-intelligence capabilities that are connected through the IoT

and can be controlled from anywhere in the world.

Smart homes’ utility and interconnectivity have sparked the interest of a large

number of players — from device manufacturers, service and integration framework

providers, to homeowners who are actively engaged in facilitating the use of smart

home environments.

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 3

However, the impact of smart homes extends well beyond traditional entities.

In fact, adoption has increased — piquing the interest of property and casualty

insurers at a time when carriers are struggling to remain profitable and

differentiate themselves in order to acquire and retain more customers. From

the perspective of these companies, the proliferation of data from sensors and

smart devices, as well as advances in data analytics, can help reduce and mitigate

losses and improve risk selection and pricing. All while refining personalized

products and services and enriching the digital experience of customers. For

carriers, these capabilities afford key opportunities to:

• Better understand risks, exposures and hazards.

• Enhance pricing accuracy through granular segmentation.

• Prevent and mitigate losses through targeted initiatives.

• Enhance claim adjudication through causality determination.

To reap the full benefits of smart homes, personal lines carriers must address

fundamental challenges, such as device costs, adoption rates, access to data, the

lack of standardized communication protocols, and privacy and security concerns.

However, with technology giants like Apple, Google and Samsung entering the

smart homes market and introducing universal frameworks such as HomeKit

and Brillo, there is huge growth potential for the smart homes industry. Personal

lines carriers would thus be well advised to collaborate with other players in this

ecosystem, and sharpen their analytical capabilities to improve underwriting,

pricing and loss prevention.

This white paper discusses the growing adoption of smart home technology, as

well as its implications for the personal lines insurance industry.

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The Evolution of the Smart Home Smart homes have been around for some time. Among the first smart home devices was the so-called “Kitchen Computer” offered by Neiman Marcus in 1969. It weighed 100 pounds, and was sold at the sticker-shock price of approximately $10,000.1 Since then, these devices have become more personalized, much less expensive, easier to use and more lightweight — sparking the interest of consumers with features like remote operation, intelligent learning and artificial intelligence. These capabilities are expected to trigger a rapid increase in smart home adoption, with the worldwide smart home market projected to more than double — to $71 billion by 2018 from approximately $33 billion two years ago.2

Figure 1 (next page) depicts the three unique components that comprise a smart home solution: home appliances, home-security devices and home infrastructure — all of which are smart, independent and intuitive, and equipped with sensors that can be instrumented to detect, communicate and control tasks and activities.

Inside a Smart HomeSmart homes include three primary components: home appliances, home-security devices and home infrastructure — each equipped to detect, communicate, and control tasks and activities.

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 5

As noted earlier, smart homes are a subset of a larger technological wave known as the Internet of Things, or IoT. The IoT allows businesses of all sizes to arm devices with sensors that capture and share data on device usage and user behavior via the Internet Protocol. This allows companies to use IoT devices to deliver new user experiences, continuously improve product operation and optimize processes, among other things. The IoT is expected to generate huge amounts of data, which can be used to derive important insights from different scenarios. As more devices are added to this network, its capabilities, technological possibilities and analyzable data will rapidly increase. Figure 2 (next page) puts the IoT phenomena into context for the smart home space. (For additional insight on our view of smart homes and communication service providers, please read “Unlocking the Smart Home.”)

Consumers’ interest in smart homes has grown expo-nentially — inspiring large technology players to make substantial investments. Chief among these:

• Apple has developed HomeKit, an iOS 8-based framework for communicating and controlling connected devices in smart homes.4 The framework enables users to discover and configure HomeKit accessories in their home, then create actions to control those devices.

• Google has announced its own smart home framework, Brillo,5 an operating system for the IoT that will allow smart home devices to “talk” to each other, the cloud, and your phone. Google also acquired Nest,6 the maker of programmable and self-learning Wi-Fi-enabled thermostats that permit consumers to program and remotely control the heating and cooling of their homes.

• Microsoft has partnered with Insteon to offer support for products using its voice-activated personal assistance app, Cortana.7 It also sells Insteon smart home devices at its retail stores.8

• Samsung has acquired SmartThings,9 a startup that makes smart home controllers.

• DirectTV has acquired LifeShield,10 which allows the company to bundle security services with its core video products.

Smart Home Components

Key Benefits• Personalized experience and

convenience through self-learning. • Loss prevention and mitigation

through sensor technology.• Decrease in home energy costs by

15-20%.3

Key Benefits• Control devices remotely — offering

convenience and ease of use. • Sensors and remote monitoring

prevent home and appliance claims.

Key Benefits• Ensures the safety and security of home

and occupants.• Provides medical care and security to

the aged and disabled without requiring a dedicated caregiver at home.

Programmable smart appliances used in the home (e.g., washer, dryer, refrigerator, crock pot).

Programmable devices for protecting occupants, home and perimeter.

Programmable, connected devices that can monitor electrical wiring, water mains, roofing and energy consumption (e.g., smart thermostats, pipe-leak sensors).

Key Industry Players• Belkin • GE• LG • Samsung • Thermador • Whirlpool

Home Appliances

Home Security

Home Infrastructure

Key Industry Players• Apple • Crestron• Google • Honeywell• Insteon • Tendril• Tesla

Key Industry Players• ADT • AT&T • Comcast/Xfinity • FrontPoint Security• LifeShield Security • Verizon • Vivint

Figure 1

Factors Driving Smart Home Adoption• Increased penetration and speed of broadband

technologies.

• Decreased cost of sensors, bluetooth, wireless technologies — making smart homes more affordable.

• Increased functional capabilities of sensors, devices and technologies.

• Increased demand for homes designed with smart sensors and devices (e.g., IOTAS).

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Home Appliances

Remotely controlled appliances• Wi-Fi enabled and smartphone

connected appliances.

• Sensors to remotely monitor appliances’ condition and contents.

Ability to self-learn and suggest recommendations

• Notifications to customers about issues based on current performance.

• Ability to automatically suggest items to shopping cart based on prior purchases and consumption.

Home Security

Home Infrastructure

CURRENT STATE FUTURE STATE

Video monitoring and proactive event notification

• Remote/fingerprint/key-code sensor-activated door latches.

• Alarms to indicate door/window-lock status, high carbon dioxide presence and break-ins.

Intelligent devices with better and easier connectivity with each other

• Increased ability to control security devices remotely, live video feeds, and proactively initiate emergency contact.

• Systems with artificial intelligence to analyze, predict and act.

CURRENT STATE FUTURE STATE

Interconnected devices• Devices to measure water

consumption, identify leaks and inform users.

• Programmable and interconnected thermostats.

Devices with artificial intelligence and connectivity with smart grid

• Intelligent systems that regulate usage based on self-learning and utility costs.

• Infrastructure that triggers automat-ed maintenance calls based on indicators and weather predictions.

CURRENT STATE FUTURE STATE

Current and Future Features ofSmart Home Components

Figure 2

Smart Homes: An Insurance Industry ContextAccording to a 2014 press release from Jupiter Research, the growth of the smart home market is expected to approximately double to $71 billion — presenting important opportunities for homeowners insurers. Yet to effectively participate and benefit from this market, carriers must become knowl-edgeable of the smart home ecosystem. Two key dimensions for these companies to understand are:

• Stakeholder involvement.

• Potential interactions among carriers and stakeholders.

Stakeholder Involvement

• Device manufacturers such as Samsung, Honeywell, LG and Google (smart products) are vital foundational technology players in the smart home space. Their products span all categories of smart homes — home appliances, home security and home infrastructure. These manufacturers have complete autonomy to determine the standards to be followed in communicating data produced by their devices.

• Service providers like ADT, AT&T and Leak Defense offer services such as security monitoring, energy management and leak-detection management. The products used in these services are manufactured by the service provider or sourced from other manufacturers. The range of services provided varies, from elementary home monitoring to total home integration solutions.

• Integration framework providers such as Apple (iOS Homekit) and Google (Brillo) offer a unified mechanism for overcoming the challenges of varied communication standards used across devices. Integration framework providers and device manufac-turers collaborate to define and adopt a set of common standards.

• Consumers purchase devices and utilize products and services offered by device man-ufacturers, service providers and integra-tion framework providers. When it comes to data management, consumers in the smart homes ecosystem are usually governed by the terms specified in service contracts.

Quick Take

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 7

CLAIMSLOSS PREVENTION

Real-time information from homes will help carriers understand hazardous conditions and prevent/mitigate losses:

• Sensors in plumbing systems (e.g., pipes, control valves) can detect freezes or leaks and shut off main water supply to minimize damages.

• Sensors can assess the presence of mold, the stability of walls and potential insulation problems, and automatically notify maintenance workers when conditions fall below desirable thresholds – preventing fire and other losses.

Data from sensors, photos and videos will help carriers better manage the claims process by:

• Automating FNOL for predefined conditions such as break-ins, water leakage in basement.

• Determining the cause of loss and claims adjudication.

• Establishing a claims preventative ecosystem to improve customer engage-ment.

PRICING

Access to perimeter and interior home videos/photos assist carriers in ascertaining conditions such as:

• Presence of hazards (e.g., swimming pools, trampolines, cracks on roofs and sidings).

• Presence of intruder, home burglary alerts and pet security.

• Detection of morale hazards (e.g., frequently forgetting to lock garage doors, back doors or windows).

• Presence of home business vulnerabilities that significantly increase liability exposures.

• Existence of emerging risks, such as accommodation-sharing.

• Accurate classification of insured as preferred risk, since smart home devices reduce the frequency and severity of losses.

• Risk assessment based on actual characteristics of the home rather than to proxy data.

• Access to personalized, customizable products and services.

• Modified expectations around warranties and enhanced coverages.

• Pricing discounts for adoption of sensors and data sharing.

• More accurate pricing, since carriers use precise data and granular variables.

• More personalized and attractive offers from homeown-ers carriers.

• Improvement in safety and security of property and contents.

• Access to resources that monitor sensors/devices and provide alerts, warnings and proactive maintenance.

• Ability to react in a timely manner – minimizing and preventing losses.

• Improvement in claims experience through reduced claims-settlement time and fairness in settlement.

• Improvement in customer engagement through more transparency and visibility to claims process.

Access to new types of data, such as wall and roof temperature; humidity levels; roofing; plumbing; HVAC conditions, and mechanical vibrations help carriers to:

• Predict homes’ structural vulnerability and price risks accordingly.

• Achieve better ROI on marketing spend by targeting and reaching desired customer groups through atrractive offers, thus improving customer acquisition and retention.

UNDERWRITING

Access to smart homes information will enable carriers to introduce differentiated products and allied services such as:

• Personalized product, coverage and service offerings with attractive pricing that is commensurate with risks.

• Services that coordinate with different parties, such as warranty and service providers, in case of a loss – improving revenues and customer retention.

• Discounted replacement of appliances/components after specified time intervals, based on smart home device data.

PRODUCT MANAGEMENT & SERVICES

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Potential Interactions Among Carriers and Stakeholders Information from various stakeholders in the smart home ecosystem can be invaluable to homeown-ers carriers. The partnerships a carrier forms with these entities will determine the extent to which they can collaborate and share data. For starters, data from smart home devices and sensors can be utilized in numerous ways, and impact the selling and servicing of homeowners insurance. But before this happens, carriers must assess and address issues such as data ownership and privacy regarding individual stakeholders and customers, and establish partnerships and protocols that will enable them to source and utilize this information appropriately.

Business Implications for Homeowners Insurance CarriersAs smart home technology moves into the mainstream, it presents a number of opportunities for homeowners carriers. The proliferation of data produced by smart home devices and sensors has the potential to change the way carriers sell and service homeowners insurance products. Moreover, the selling proposition will shift to how losses can be prevented, or at least mitigated. This includes risk analysis based on real-time risk information delivered by instrumented home devices, as opposed to today’s proxy risk indicators (e.g., credit scores, year of construction, age of roof). Data from smart homes will provide important insights into the cause of loss, which in turn will aid insurance claims investigations. In addition, the ability to monitor virtually every aspect of an insured’s home remotely — and in real time — will make these properties a preferable risk for any carrier.

We believe smart home technology will also have a tremendous impact on insurance underwriting, loss prevention and claims functions, some of which are outlined in Figure 3 below.

Impact of Smart Homes Across the Insurance Value Chain

Figure 3

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These examples clearly demonstrate the impact of smart homes on homeowners carriers and the insured across business functions. We believe that the availability of new data, advancements in video, image and data analytics, and the proliferation of sensor technologies will empower carriers to improve their profitability in today’s intensely competitive market, similar to how other industries have realized benefits through advancements in analytics.11 Figure 4 illustrates foundational thinking that can be applied by carriers to determine and estimate the business benefits of the smart homes market.

The Smart Homes Maturity Spectrum

Smart homes technology is evolving at a rapid pace, and is being increasingly adopted across the U.S. The extent of this phenomenon varies by region and home type. Devices range from simple stand-alone sensors for detecting changes in water levels in basements, to highly sophisticated technologies for managing all home appliances and devices. The latter are embedded with self-learning capabili-ties and artificial intelligence that share data via the Internet Protocol, and can be controlled from anywhere in the world.

Advances in smart home technology have already caught the attention of homeowners insurance carriers, some of whom are evaluating how best to use the data generated from smart home devices. The ability to access data, along with advancements in video, image and data analytics, will be a major impetus for carriers to support this growing market. We believe that the maturity level of the marketplace will evolve, and that the investments made today will pay off down the road. Figure 5 on the next page illustrates a maturity framework, its key character-istics, the levels of customer engagement, and the outcomes that can be attained at each stage.

The selling proposition will shift to how losses can be prevented,

or at least mitigated. This includes risk analysis based

on real-time risk information delivered by instrumented home

devices, as opposed to today’s proxy risk indicators.

Targeted Offerings• Number of customized offerings

and yields.• Discounts on premiums.

Savings from Loss Prevention• Number of hazards identified.• Reduction in potential claims.

Reduced Claims Costs• Reduction in claims leakage.• Operational expense savings

(ALAE and ULAE).

Better Risk Selection• Improvement in loss ratio.• Increase in new business.

The Business Benefits of Smart Homes

Figure 4

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 9

• In the elementary stages of maturity carriers can provide discounts to insureds who have installed smart appliances or home security solutions. These products can have a positive impact on both claims frequency and severity — making these risks safer than the average risks in the same class. For instance, installing home monitoring solutions will decrease the frequency of burglary and theft-related claims. Along similar lines, installing smart smoke detectors will reduce the severity of fire-related claims, since homeowners and nearby fire stations can be alerted immediately. Carriers should also partner with service providers and target select homeowners insurance prospects with a superior risk profile.

• In the intermediate stages of maturity carriers should be more ingrained in the smart home ecosystem, and establish commercial partnerships with service and integration-framework providers. These relationships can offer carriers detailed information from users of smart home services who opt to share the data. Carriers can formulate hypotheses on the data and its impact on key business processes (e.g., product and service design, underwriting, pricing, loss prevention, claims). An example of such an hypothesis could pertain to water pipes that serve water to the washing machine from external mains that have shown a significantly higher probability to leak after eight years — leading to substantial claims payouts. This scenario could be evaluated with data collected from washer maintenance records and sensors in an IoT-instrumented washing machine. With this information, carriers can then devise strategies to prevent

The Smart Homes Maturity Framework: A Carrier’s View

Figure 5

Elementary• Discounts for homeowners who

use sensors, home security or automation devices/services.

• Source homeowners insurance leads through service providers.

• Customer education on benefits of sharing data.

Intermediate• Partnerships with smart

homes device/services providers to source data.

• Leverage sensor data for loss prevention, under-writing and pricing.

Advanced• Tailored insurance

products and services for customer acquisition and retention (e.g., monitoring services).

• Complementary partner-ships with device/service providers to install smart home solutions.

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and mitigate claims from washer pipe leaks, which could be as simple as sending new connection pipes to the insured every eight years, or partnering with service providers and local contractors to conduct routine service and maintenance. This could help mitigate and reduce claims at an exceptionally low cost, which could lead to improved combined ratios. Advanced analytics using data from sensors will allow carriers to improve risk selection and pricing accuracy, and more effectively manage losses and claims

• In the advanced stages of maturity carriers can partner with service providers to explore the rollout of smart home solutions. Similar to data-capture devices used in usage-based auto insurance, these solutions can become a hub for collecting a large set of data on smart homes. The volumes of data collected directly by carriers or sourced via an ecosystem of partners can equip these companies with the information they need to design new products and services. For example, carriers can proactively monitor the data from sensors and, based on various thresholds that are pre-defined, take different actions, such as notify the insured, initiate claims first notice of loss (FNOL) and start replacement services — all in a seamless manner.

For the most part, the insurance industry is in the early stages of maturity. Some carriers already offer discounts for homes that are protected by security systems. Home-security solution providers are also partnering with carriers to promote their products to policyholders. For example, home security solution provider ADT12 has joined with State Farm to offer a home-monitoring technology, ADT Pulse, to State Farm’s policyholders. Customers who sign up for the service are eligible for discounted installation, lower monthly service fees and more competitive insurance premiums. Allied Insurance13 provides premium discounts if insureds’ homes have a professionally installed alarm system. Microsoft and American Family14 Insurance are jointly exploring investment opportunities in startups focused on the smart homes space.

Although carriers have not reached the stage where they can capture and analyze the data from smart home devices, the possibility might not be far away, as evidenced by USAA’s15 patent for a data device that records information such as temperature, wind speed and humidity. Carriers are taking steps to support smart homes through partnerships with various types of service providers (e.g., ADT, Leak Defense) and move up the maturity curve.

Overcoming the Challenges of Smart Homes The adoption of smart homes will likely be disruptive for carriers and insureds; change comes with its own set of unique challenges. Overcoming concerns around privacy; managing cyber-security issues; controlling adoption costs; addressing fears about premium increases, and tackling data-collection problems through common connectivity standards are among the key obstacles carriers will need to surmount.

• Privacy and security: Among the major challenges carriers face is privacy; specifically, regarding access to and usage of smart home data. Personal lines auto carriers experienced similar challenges during the rollout of usage-based insurance programs. (For more insights, read our white paper “The New Auto Insurance Ecosystem: Telematics, Mobility and the Connected Car.”) Due to its

Although carriers have not reached the stage where

they can capture and analyze the data from smart home

devices, the possibility might not be far away.

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 11

close proximity to consumers’ lives, smart home data (e.g., in-home security and perimeter security camera footage) will face more scrutiny. A related but sepa-rate concern is cyber theft of the data from smart homes, and taking measures to protect that information. Carriers will also be challenged to educate the cus-tomer, and clearly articulate the value proposition and incentives for insureds to participate.

• Adoption costs: As carriers prepare to roll out homeowners insurance products that leverage data from smart devices, the cost to replace existing devices with smart sensors must be considered. Although smart devices have proliferated across nearly every aspect of our professional and personal lives, their cost-ef-fectiveness is still in question. For instance, the unit cost for a typical non-pro-grammable thermostat (around $25) is still significantly lower when compared with the cost of a smart thermostat (around $250). Over time, this delta will narrow, but for now, insureds may have to pay a significant amount of money to convert to smart devices, which are essential to reaping the benefits of the smart home. Carriers will be challenged to share in some of these conversion costs, or demonstrate how the costs of conversion can be recouped in the long run through insurance discounts and better pricing.

• Premium increases: Customers understand that homeowners carriers will initially provide discounts for installing smart home devices. However, as carriers begin analyzing the data, customer concerns will turn to long-term premium increases. This challenge can be addressed through customer education and communi-cation. Carriers need to emphasize that by leveraging data for accurate pricing and loss prevention, custom-ers would not be hit with premium increases over time, but with premiums commensurate with risks.

• Interconnectivity and data standardization: Carriers will also face obstacles when gathering and analyzing information generated by smart devices. The emerging smart devices ecosystem is characterized by a number of manufactur-ers and a lack of standardized communication protocols, similar to the issues surrounding the IoT.16 This is further complicated by the fact that a number of other players, such as telecom operators, utilities management companies and technology providers operate within this environment. The absence of a commer-cial relationship between these players could lead to a situation where standard mechanisms for gathering data from a wide variety of smart devices is highly inefficient, cost-wise. As a result, carriers could be challenged to maintain a viable business model that leverages data from smart devices (i.e., carriers would need to partner with all stakeholders in the ecosystem to obtain smart home data, and cultivate the ability to analyze data across different standards and formats). In addition, they would have to consider the required regulatory approvals before gathering and analyzing data from smart homes.

Commercial Implications for Homeowners Insurance Carriers As the adoption of smart homes grows, we believe it will have an impact on the loss ratio for homeowners policies. Based on 2013 data for homeowners’ policies,17 roughly 90% of losses are caused by fire and lightening, wind and hail, water damage and freezing and theft (see Figure 6, next page). Data obtained from smart home devices can help predict these events and either prevent them from happening or reduce their impact when a loss occurs. We believe that with the

Carriers need to emphasize that by leveraging data for accurate pricing and loss prevention, customers would not be hit with premium increases over time, but with premiums commensurate with risks.

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availability of real-time sensor information and advanced analytics, a large number of homeowners’ claims, such as those related to water damage, freezing pipes bursting and roof damage from snow accumulation can be averted or mitigated. In the long run, assuming a reduction of ~5% in loss ratio could be achieved with data from smart homes, homeowners carriers could improve their overall bottom line by around $4 billion.18

In a highly competitive industry where it is tough to grow profitably, the ability to improve loss ratios offers carriers an incentive to invest and promote the adoption of smart homes. Carriers can market their smart home solutions by offering discounts; however, as more real-time information becomes available, the long-term focus should shift to improving pricing accuracy and preventing losses.

We also believe that smart homes will open new avenues for premium growth. At the same time, product liability and cyber-security risks associated with smart home devices will increase along with the number of smart homes. Accordingly, we believe this will drive carriers to develop innovative products and services to address and mitigate these risks.

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Fire &Lightening

Wind &Hail

Water &Freezing

Theft Bodily Injury/Death

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Causes of Homeowners’ Losses

Figure 6

We believe that with the availability of real-time sensor information and advanced analytics, a large number of homeowners’ claims, such as those related to water damage, freezing pipes bursting and roof damage from snow accumulation, can be averted or mitigated.

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 13

In today’s highly commoditized insurance market, where competition for market share is intense, a smart home strategy can help carriers gain market share by offering preferred pricing commensurate with the risks of each customer — helping to improve customer retention and acquisition. Early movers with the right part-nership, the right infrastructure, and the right tools and techniques will gain con-siderable advantage over others.

Moving Forward: An Action Plan for Homeowners Insurance CarriersSmart home devices and services have the potential to vastly alter the way traditional carriers operate. Once the challenges around standardized communication, privacy and data security breaches are overcome, we expect more carriers to participate in the smart homes movement. We believe that this is the time for insurance carriers to start thinking, strategizing and preparing for the evolution of smart homes. We recommend a three-phase adoption process that carriers should follow (see Figure 7).

• Examine: Carriers need to study the smart home ecosystem and develop a viable go-to-market strat-egy. The various partnerships required with device manufacturers, service organizations and integra-tion framework providers should be established (e.g., ADT’s partnership with State Farm to offer State Farm’s customers deals on home automation and security services, as well as homeowners’ policy discounts) along with necessary regulatory approvals to leverage the data collected from sensors. In addition, car-riers should formulate hypotheses for the pilot strategy to enable the gathering and analysis of data. The formal-ization of the strategy — beginning with regulatory filings and a robust business case and implementation roadmap based on pilot findings — are critical in this phase.

• Enter: In this stage, carriers need to define and implement the target operating model by introduc-ing smart homes as part of their digital strategy. The operating model’s components — people, processes, technologies and partners — need to be assessed. In addition, new roles must be defined, existing processes (e.g., product management, underwriting, risk assessment, loss prevention and claims) reengi-neered; core application capabilities and infrastructure enhanced (to extract, transform, store and analyze huge amounts of data in varying formats), and partnerships with various stakeholders in the ecosystem legally set in place. Before entering the market, carriers need to ensure that guidelines on the use of smart home data are well defined. Consideration must also be given to warranty provisions that insureds need to adhere to, as well as the regularity of data collection.

• Enhance: As part of this phase, carriers need to continually monitor the state of their smart homes strategy, and design an appropriate change- management framework to incorporate any modifications. Carriers must also develop and roll out educational material for prospects and the insured. This

Figure 7

Examine

Enter

Enhance

1

2

3

• Define smart home strategy. • Identify potential partners.• Design pilot products/services

strategy.• Develop business case and

implementation roadmap. • Define pilot phase rollout.

• Develop underwriting and pricing guidelines.

• Formulate partnership.• Define target operating model.• Institutionalize target

operating model changes.

• Analyze and continuously improvise strategy and business case.

• Define change management strategy.

• Educate prospects/insured on benefits of participation through multiple channels (e.g., agent/direct).

The Smart Home Adoption Process

14 KEEP CHALLENGING July 2015

should include the benefits of participation, as well as how products and services differ from current offerings. Given the challenges associated with adopting us-age-based insurance initiatives in personal auto, articulating and communicating a smart homes-based insurance value proposition and revitalizing the defined strategy is critical.

The increasing technological intensity of business is driving significant acceptance of the Internet of Things in general and smart homes in particular. Underpinning this trend is an information-rich ecosystem that homeowners carriers can leverage for risk-selection, pricing and loss-control initiatives. Commercially, this approach presents opportunities for reducing loss-related costs, as well as developing product and service innovations that can support and improve customer retention and acquisition. As carriers begin this journey and tackle the associated challenges, they need to remember that early adoption will be key, and that those who best articulate the benefits to customers stand to win in the long run.

Note: All company names, trademarks, copyrights and products referenced in this white paper are the property of their respective owners. No company referenced in this white paper sponsored this white paper or the contents thereof.

Footnotes1 “Before the iPad, There Was the Honeywell Kitchen Computer,” wired.com, November, 2012. http://www.wired.com/2012/11/kitch-

en-computer/.

2 Press Release: “Smart Home Revenues to reach $71 billion by 2018, Juniper Research Finds,” Juniper Research, February, 2014. http://www.juniperresearch.com/viewpressrelease.php?pr=429.

3 “Vision of Smart Home: The Role of Mobile in the Home of the Future,” GSMA, March, 2012. http://www.gsma.com/connectedliv-ing/wp-content/uploads/2012/03/vision20of20smart20home20report.pdf.

4 Press Release: “Apple Releases iOS 8 SDK With Over 4,000 New APIs,” Apple, June, 2014. http://www.apple.com/pr/library/2014/06/02Apple-Releases-iOS-8-SDK-With-Over-4-000-New-APIs.html.

5 “Google Unveils Brillo, Its Answer for Smartifying Your Home,” wired.com, May, 2015. http://www.wired.com/2015/05/google-unveils-brillo-answer-smartifying-home/.

6 “Google Acquires Smart Thermostat Maker Nest for $3.2 Billion,” Forbes, January, 2014. http://www.forbes.com/sites/aarontil-ley/2014/01/13/google-acquires-nest-for-3-2-billion/.

7 “Microsoft’s Cortana can now control Insteon smart home devices,” digitaltrends.com, September, 2014. http://www.digitaltrends.com/home/microsoft-cortana-insteon-smart-home/#ixzz3O6TD0KTK.

8 “Microsoft stores now stocking Insteon home-automation kits,” zdnet.com, June, 2014. http://www.zdnet.com/article/microsoft-stores-now-stocking-insteon-home-automation-kits/.

9 “SAMSUNG to Acquire SmartThings, Leading Open Platform for the Internet of Things,” samsung.com, August, 2014. http://www.samsung.com/us/news/23607/.

10 “DIRECTV gets into security, acquires LifeShield,” securitysystemsnews.com, June, 2013. http://www.securitysystemsnews.com/article/directv-gets-security-acquires-lifeshield/.

11 “Big Data: The Management Revolution.” hbr.org, October, 2012. https://hbr.org/2012/10/big-data-the-management-revolution/ar/1/.

12 “ADT partners with State Farm to Promote Pulse,” securitysystemsnews.com, December, 2013. http://www.securitysystemsnews.com/blog/adt-partners-state-farm-promote-pulse.

13 “Home Security Systems from Allied Insurance,” Allied Insurance. https://www.alliedinsurance.com/home-security-system.jsp.

14 Press Release: “Microsoft and American Family Insurance launch startup accelerator focused on home automation,” Microsoft, June, 2014. http://news.microsoft.com/2014/06/17/microsoft-and-american-family-insurance-launch-startup-accelerator-focused- on-home-automation/.

NEXT-GENERATION INSURANCE: TAPPING INTO THE INTELLIGENCE OF SMART HOMES 15

15 “First vehicle-monitoring devices, now this.” Insure.com, December, 2012. http://www.insure.com/home-insurance/usaa-house-monitoring-device.html.

16 “Poll: Standardization Biggest Challenge in IoT,” lightreading.com, February, 2015. http://www.lightread-ing.com/iot/iot-strategies/poll-standardization-biggest-challenge-in-iot/a/d-id/714062.

17 “Homeowners and Renters Insurance,” iii.org. http://www.iii.org/fact-statistic/homeowners-and-renters-insurance.

18 “NAIC Report,” naic.org, August, 2014. http://www.naic.org/state_report_cards/report_card_us.pdf.

About the AuthorsAgil Francis is a Principal/Director with Cognizant Business Consulting’s Insurance Practice. Agil has 10-plus years of management consulting experience in the insurance industry, where he has advised senior client executives on strategy, operations and technology issues across sales/marketing, distribution, underwrit-ing and claims. Agil can be reached at Agil.Francis@cognizant.com | LinkedIn: http://www.linkedin.com/pub/agil-francis/37/225/863.

Gauthaman Krishnamurthy is a Manager within Cognizant Business Consulting’s Insurance Practice. Gauthaman specializes in the P&C industry, and has nine years of business consulting and program management experience, during which he has advised clients on operations and technology issues across distribution, under-writing and policy administration. Gauthaman can be reached at Gauthaman.Krishnamurthy@cognizant.com | LinkedIn: https://www.linkedin.com/pub/gautha-man-krishnamurthy-ains-api/4/1b/b83.

Manish Kumar is a Manager within Cognizant Business Consulting’s Insurance Practice. He has nine years of business consulting and program management experience in the insurance industry. Manish specializes in P&C insurance and can be reached at Manish.Kumar9@cognizant.com | LinkedIn: https://www.linkedin.com/pub/manish-kumar/4/216/89a.

Aniket Kute, CPCU, AU, API, AINS is a Senior Consultant within Cognizant Business Consulting’s Insurance Practice. He has seven years of business consulting experience, advising clients in North America, the UK and Asia-Pacific geographies. Aniket specializes in P&C insurance, and can be reached at Aniket.Kute@cognizant.com | LinkedIn: https://www.linkedin.com/in/AniketKute.

Sumeet Kaul is a Senior Consultant within Cognizant Business Consulting’s Insurance Practice. He has nine years of experience in diverse consulting, advisory and sales roles. He has executed multiple consulting engagements and successfully pursued several strategic sales opportunities in the U.S., the UK and Asia-Pacific regions. He can be reached at Sumeet.Kaul@cognizant.com | LinkedIn: https://www.linkedin.com/in/sumeetkaul.

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About Cognizant’s Insurance Business Group

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About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing ser-vices, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 217,700 employees as of March 31, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing compa-nies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.