The document discusses how insurance may become the natural business model for the Internet of Things (IoT), similar to how advertising became the model for the internet. It provides examples of how auto insurance has already started utilizing IoT data through telematics to better assess risk and pricing. The author argues this model could transfer to other types of insurance by using data from smart home devices and health trackers. For insurance to fully capitalize on the IoT, it would need to shift from reactive risk rectification to preventative risk management and continuous policyholder engagement.

1. What’s the natural business model for the Internet of things?
The Internet has been the largest transforming force that most of us have faced in our lives. Starting
with email and e-Commerce in the late 1990’s and leading to Social media and SMS in the 2000s, digital
has transformed almost every aspect of our lives – at work, home and increasingly with the places in
between.
The Internet has expanded to the Internet of things
Many of these new places involve “things” with connectivity being made to link things to other things
(otherwise known as Machine to machine or M2M technology) or things - and particularly computers -
to people (often referred to as Human to computer interaction or HMI).
Finding the key business model for the Internet – advertising.
As the Internet became main-stream in the mid 1990s, there were few ideas on how to pay for the
service to make it sustainable. The thinking of this “Dot-com” era was to attract audiences first and then
find a way to make money.

2. Some of the early success stories of the Internet era involved e-Commerce. eStores such as Amazon and
eBay found business models based on selling online. But many others, including search engines such as
Alta Vista, Excite, Infoseek (remember these firms?) and Yahoo! and subsequently the Social media
companies such as Facebook, Friendster, MySpace and Six Degrees, did not immediately find a business
model. A number of these firms simply went bust without being able to generate enough revenue to
cover their costs. This became known as the Dot.com bust.
The turning point came for the Internet when advertising emerged the core business model. Advertising
quickly became the driving force behind Overture, Facebook, Google and most other search and social
companies around the world. Now advertising is recognized as the core business model that powers
much of the Internet, as depicted in the following schematic:
What will be the key business model for the Internet of things (IoT)?
Just as it was difficult to initially see the natural business model for the internet while it was developing,
it’s difficult to currently imagine the natural business model for the IoT as it is develops. One key reason
for this is that there
are just so many
categories of “things”
as seen in the
following chart from
Beecham Research:

3. That said, there are a number of business models evolving from successful deployments of the IoT that
show promise to become the key business driver.
Tim O’Reilly and the natural business model for the Internet of things.
At O’Reilly Media’s Solid Conference in San Francisco in May 2014, Founder and CEO Tim O’Reilly
postulated an idea for what could well become the natural business model for the IoT. In comparing the
Internet to the IoT he said:
“You know the way advertising turned out to be the native business model for the Internet? I
think that insurance is going to be the native business model for the Internet of things”.
In reading this quote the penny really dropped for
me. I realized that the business that I’ve been
working with for the past four years – delivering
end-to-end telematics programs for insurance
companies – supported Tim O’Reilly’s great
observation.
In fact, in thinking more about how one can
extend this thinking across the many verticals of
insurance – Property, Casualty, Life and Travel - I’m
increasingly convinced this will be the case.
Permit me to explain how this works with
Automotive insurance and then to show how it can
be extended to other forms of insurance.
Auto insurance and the Internet of cars.
Automotive Telematics is an early success story for
the Internet of things and could highlight the way
the entire insurance industry will evolve.
Telematics is the process of collecting real time data from vehicles to understand driver behaviour in
order to better assess risk, price insurance, engage in a relationship to change driver behaviour, reduce
claims costs and to potentially sell value added services. The process works by using a range of in-
vehicle enablers (some bolted to the chassis, others plugged into the OBDII port, a few available through
the vehicle’s own embedded system and via smart-phones).

4. This derived data from this Internet of cars, includes speed, distance, time of day, location, acceleration,
braking and cornering information which is sent to a back-end, compared to a peer group or overall
population and then a
driving score or Key
driving indicators (KDIs)
are produced ranking a
driver versus others.
A sample of the consumer
view of this data can be
seen in the screenshot of
the PC portal for IMS UBI
Intelligence.
Insurance telematics, also
known as Pay as you drive
(PAYD), Pay how you drive
(PHYD) or Usage based
insurance (UBI) has the
advantage of being
grounded in real time
data from actual driving
behaviour versus the
traditional proxies that insurance companies have employed to calculate risk.
Source: IMS
These traditional rating variables are based on such proxies as length of time driving, type of vehicle,
location where the vehicle is parked, these can be supplemented, or in some rare cases replaced, with
actual driving behaviour using directly measured variables (actual data) such as distance traveled, speed
driver, time of day, as well as aggressiveness and anticipation derived from actual driving data. The first
result of this is that telematics can provide much greater transparency into risk.
The business model for insurance telematics is funded by insurance companies that pay for the devices
and the monthly costs (wireless transmission, data management and customer support) to secure the
telematics data. With this IoT data insurance companies can better price risk, intervene when they see
risky behaviour and can increase the number of touch-points with their policyholders to up-sell them on
services.

5. Moving from auto insurance to other forms of insurance.
The auto insurance telematics model has direct implications for other forms of insurance. To start,
some of the variables collected in auto insurance can be used for other forms of insurance. For
example, if a vehicle is parked next to a residence then it should lower the risk to the residence because
it’s very likely people are there who can react to an unforeseen event such as break-in, fire or flood.
Further the speeding data collected from automotive telematics can be interesting for a life insurer. But
more important, the entire auto insurance model can be transferred to other forms of insurance.
For example, if we take smart home monitoring – also made possible by the Internet of things - then a
Property insurance company can better price risk and interact with its policyholders through products
like Nest. Similarly, if we take health tracking devices this data can be worked over by actuaries and
underwriters to help better price risk of a life insurance policy.
The following diagram indicates how insurance, from a macro perspective, could become the nature
business model for the Internet of things:
A new insurance model
For the insurance industry to become the natural business model for the IoT will require a large
transformation in the way it does business. First, insurance companies will need to shift their cultural
focus from being a financial institution to more of a service model than is based more on preventing
risks than rectifying risks. This will be a difficult transition because the insurance industry have
functioned successfully for hundreds of years and so far it has weathered the digital disruption that has
transformed many industries. The disruption from telematics in auto insurance could well be a
bellwether for other forms of digitally driven change.

6. Second, it will
need to find
ways to
engage on a
continuous
basis with its
policyholders
rather than
once a year
(to renew a
policy) or
twice a year
(to also
address a
claim).
Third, it will need to move from a company that uses proxy data to one that increasingly incorporates
real and contextual data.
That said, if digital disruption accelerates the entire insurance industry will have to change its ways. If
then insurance moves to become the business model for the internet of things, it will have to change
the way it operates based on a model similar to the one outlined below:
Parallel paths
Auto insurance clearly supports the idea of insurance could be the ultimate business model for the
Internet of things. Time will tell whether other forms of insurance – offices, home, life, travel – become
the driving forces in other IoT verticals. That said I’d like to close this post with the thought that
insurance and the IoT follow similar paths. Both start with high value goods and move to goods of lower
value. It makes sense to monitor high value goods to track the changing risks they face.

7. So to a certain extent insurance will become increasingly linked to the IoT.
My bet is that this link will transform both industries.
The Rising Sun
June 25, 2015