Written by Helene Stanway
Sense Consortium Article - September 2024
CAN YOU PUT A PRICE ON SOMETHING THAT DIDN’T HAPPEN?
In a world driven by data, the insurance industry should be well positioned to benefit from emerging technologies such as the Internet of Things (IoT) and real-time data (interesting that IoT sensors are still classified as emerging and yet have been around for some 20 years now).
Yet, despite the clear and tangible business benefits of prevention and mitigation of risk, the adoption of IoT produced real-time data in commercial property and real estate insurance has been slow to non-existent…..so why is this?
The SENSE Consortium has undertaken research across the commercial insurance space and uncovered 21 (yes, twenty one) adoption blockers in the use of IoT and real-time data in insurance.
Let’s tackle just one to start….
The paradox is: how do you put a price on something that didn’t happen?
Price being, how can you put a business case together where the deliverable is well… nothing. Something didn’t happen.
And then… how do you add that into an underwriting price?
THE PROMISE OF IOT AND REAL-TIME DATA
IoT and real-time data offers insurers the ability to monitor risk factors continuously, whether it's through smart sensors tracking building integrity, real-time alerts on fire hazards, or water leak detection systems. This constant flow of data has been proven to significantly reduce incidents, can improve response times to incidents, and ultimately minimise claims (both frequency and severity). On paper, the potential to proactively manage risks rather than simply responding to losses is an industry game-changer, at least it should be.
For commercial property and real estate, which has experienced costly claims from fires, water damage, or structural failures, real-time data-driven risk management would lead to substantial savings.
There are additional side-benefits, earlier detection can enable a safer environment for tenants and businesses, while offering real-time visibility into the health of insured building(s).
Based on national regulatory filings, on average, globally, nearly 1 in 10 commercial policyholders claim annually and insurer loss ratios have hovered around 60% ex-cat and are paying our circa $90bn in claims.
The top three causes of loss are escape of water, fire and theft. If IoT and real-time data could reduce this claims value by a hugely conservative 50%, the industry could be looking at a saving of $45bn. Who doesn’t want to achieve that?
So why aren’t insurers putting real-time data as a core strategic pillar within underwriting and/ or claims?
THE INVISIBLE VALUE OF PREVENTION
One of the core challenges in driving the
adoption of IoT and real-time data in
insurance is the difficulty in proving a
return on investment (ROI) for preventing
an incident. The traditional insurance
business model is fundamentally reactive
—loss occurs, it goes over retention and a
claim follows. IoT and real-time data,
however, shifts this paradigm to one where
incidents can be mitigated or avoided
entirely. The value of IoT and real-time
data, therefore, is largely in what doesn’t
happen, and therein lies the business case
dilemma.
How do insurers quantify the value of a fire
that never ignited due to timely
intervention or a flood that never occurred
because of predictive data? In most
business environments, decision-makers
are driven by tangible data—historical
evidence, claim trends, and cost-benefit
analyses. Preventing an incident disrupts
this model, offering no clear metric to base
ROI calculations on.
This difficulty makes building a business case for IoT adoption particularly challenging for underwriters, actuaries, and risk managers, as it requires a mindset shift. Many remain stuck in the old paradigm of proving value only through loss events.
POTENTIAL ANNUAL COST AVOIDANCE
OVERCOMING THE ADOPTION HURDLE
The slow adoption is not purely technical, it is also cultural and financial. Implementing IoT solutions requires upfront investment in infrastructure, staff training, and data & technology integration. And while these costs are often straightforward, it's hard to persuade decision makers to allocate budgets based on the promise of preventing something that may or may not happen.
And, there’s the challenge of creating standardised frameworks for incorporating IoT data into underwriting models. The insurance industry relies heavily on historical data to assess risks. With IoT, the focus shifts to real-time data—information that evolves with every second. Insurers are wary of relying on unproven, non-historical datasets that are difficult to quantify in their traditional risk models.
THE PATH FORWARD: A NEW MINDSET
For the insurance industry to fully embrace IoT and real-time data, there needs to be a shift in thinking from reactive to proactive risk management. This requires a longer-term view on ROI, one that appreciates the value of non-events—incidents that
didn’t occur and could have. The industry must develop models that allow them to quantify preventive measures, perhaps through simulations, predictive modelling, or demonstrating reduced claims frequencies over time in controlled IoT
enabled real-time environments. As IoT and real-time data are foundational capabilities to the creation of
Digital Twins, this is coming more to the forefront.
Partnerships with IoT providers, data analysts, and risk engineers could help insurers navigate this new landscape. By working together, the industry can start
to build more compelling business cases that go beyond hypothetical scenarios and begin to track actual prevention outcomes.
There are also a handful of future thinking insurers that are now collecting use cases that demonstrate the value of risk prevention and mitigation through the use of IoT and real-time data. The SENSE Consortium event on the 7th November will showcase a handful of such use cases. https://www.senseconsortium.com/about-event
PROVING THE UNPROVABLE
The future of commercial property insurance lies in the ability to prevent rather than merely respond to risk. While it’s difficult to put a price on something that didn’t happen, it’s imperative for insurers to recognise that the true value of IoT and real-time lies in the unseen, the unmeasurable—yet ultimately invaluable—prevention of loss.
Shifting the mindset from reactive claims processing to proactive risk management is a complex and must-do evolution. The sooner insurers begin to embrace this change, the closer we’ll be to truly harnessing the power of IoT and real-time in commercial property insurance - to everyone’s benefit.
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