Can a Fixed Cost Property/Casualty Industry Survive the Internet of Things?

by Donald Light, March 8, 2016
Industry Trends
Global

Abstract

Celent looks at the potential negative impact on a largely fixed cost property/casualty industry of the Internet of Things reducing losses and then premiums. The report identifies five strategies property/casualty insurers could pursue to mitigate these issues.

 

For all lines of insurance, persistent declines (or increases) in loss experience will over time lead to lower (or higher) premiums being charged for apparently similar risks. Usually these decreases and increases are relatively small and lead to a new equilibrium for pricing algorithms and premiums.

But what would happen if there was a sustained trend of decreased losses for several lines of insurance over several years? Once established, the initial equilibrium would be replaced by a lower equilibrium, and the process could repeat itself until more stable equilibria are reached.

This report examines the short-term to midterm consequences for insurers, assuming that the Internet of Things (IoT) substantially reduces losses (and premiums) in several lines of insurance.

“Assuming that insurers want to maintain revenue or profitability, or in most cases both, none of the choices facing property/casualty insurers are easy or guaranteed to succeed,” says Donald Light, Director of Celent’s North America Property/Casualty practice and author of the report. “The choices are to stay big through acquisitions, go small, go mostly variable, go totally variable, or Insurance Plus IoT-enabled safe and secure policyholders. The choices are to stay big through acquisitions, go small, go mostly variable, go totally variable, or bundle Insurance plus IoT-enabled safe and secure policyholders.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

 

Key Research Questions

1

Introduction

2

Networked Sensors, Feedback Control, and the Root Causes of Losses

3

 

What Is the Internet of Things?

3

 

Apparent Causes and Root Causes

4

The Current Insurance Model Has Significant Fixed Costs

5

Financial Results in Major Lines of Business Are Vulnerable to IoT Disruption

6

 

Premiums Are Highly Concentrated in Just Six Lines

6

 

Those Six Lines Have Material Fixed Costs

7

The Squeeze

9

Hard Choices

11

Conclusions

14

Leveraging Celent’s Expertise

15

 

Support for Financial Institutions

15

 

Support for Vendors

15

Related Celent Research

16

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