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

by Donald Light, March 8, 2016
Industry Trends


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].

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Table of Contents

Executive Summary



Key Research Questions




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



What Is the Internet of Things?



Apparent Causes and Root Causes


The Current Insurance Model Has Significant Fixed Costs


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



Premiums Are Highly Concentrated in Just Six Lines



Those Six Lines Have Material Fixed Costs


The Squeeze


Hard Choices




Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


Related Celent Research


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