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.

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:

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).

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.

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.

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.

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