Why Insurance Companies Want to Subsidize Your Smart Home

los angeles smart home insurance

Linking doorbells and thermostats to the Internet can cut the chance of expensive surprises.

From MIT Technology Review, by Stacey Higginbotham, October 12, 2016:

Insurers such USAA and American Family have lately begun offering to strike a high-tech bargain: wire your home with Internet-connected devices such as a new thermostat, and get a discount on your home insurance policy in return.

Offers like that could speed up the adoption of smart gadgets, revamp the insurance business, and transform how we manage our homes. In the future, your insurer might call a plumber before a pipe bursts, for example. But the data needed to help prevent leaks or burglaries will also introduce new risks, such as vulnerabilities to data loss or ransomware.

Insurers across the U.S. are offering incentives to install one of half a dozen connected devices, ranging from moisture sensors to video doorbells. State Farm offers a discount on your home policy for installing a Canary home security monitor, for example. Liberty Mutual will send you a Nest Protect smoke detector, worth $99, free of charge and cut the cost of fire coverage. 

Some insurers want to go further. They think that urging us to wire our homes with Internet-connected devices will open up a flood of lucrative new data that can make their existing business of handling claims more efficient while creating a new relationship with the customer. With a feed of data from your home, an insurer could help you prioritize maintenance tasks and fix problems such as leaky pipes before they caused major damage.

Jon-Michael Kowall, assistant vice president of innovation at USAA, says he’s aiming to create something like a “check-engine light for the home.” For example, an insurer might be able to warn someone with moisture sensors installed that a pipe is likely to fail soon, or even deliver notifications about whether or not a child made it home from school on time. 

“In the near future, you’ll give us a mailing address and we will send a box of technology to you,” says Kowall. “What’s in the box will prevent claims and also offer a better service to policy holders.” 

In Madison, Wisconsin, insurer American Family has a 600-square-foot model home, complete with furniture, where it is testing out water sensors, cameras, and other devices. The company already offers a discount for customers who install the Ring video doorbell, because it acts as a deterrent to burglary. Sarah Petit, a director of business development, says that the company wants to expand the number of smart home devices it supports.

So far, insurers’ dreams of rewiring how we look after our homes have been hampered by questions about privacy and security, as well as by incompatibilities between smart devices from different companies. Petit says the head of the Illinois Department of Insurance recently told her of concerns that data collected from consumers’ homes could be misused. And defining what counts as misuse can be difficult. 

For example, the same data that allows a company to prevent damage from water leaks might also be used to profile some customers as being more likely to engage in risky behavior, and their premiums might quietly be raised. Both American Family and USAA say they communicate clearly with policy holders and make sure that they understand the exact type of data collected and what the firm plans to do with it.

USAA’s Kowall says the savings insurers realize by preventing common disasters could help pay for the technology required to prevent them. So fewer payouts for leaks mean that insurance firms can subsidize more water sensors.

But John Cusano, senior managing director and global head of insurance at Accenture, says that moving to turn customers’ homes into data spigots will also increase the risk of data breaches. For example, data from smart home devices can show whether you are home or not, aiding burglaries. Perhaps more likely, ransomware could attack a particular device—for example, turning off the heat until a homeowner paid up.

Cusano expects that underwriting will change to reflect those new risks. Insurers might end up paying out much less for leaks, but they’d have to cover ransomware too. The hope is that, on balance, the benefits insurers and homeowners gain from smart home devices will far outweigh any drawbacks.