Library: Intelligent AI – Transforming commercial property risk with the internet of things

March 2022 featured report:

Just as the rest of the insurance industry needs a technology overhaul, commercial property insurance is long overdue a refurbishment. And it’s going to take more than a lick of paint to set this house in order, say the authors of this report.

IoT will revolutionise commercial property cover 

Loss costs and expenses are too high. Between 2016 and 2019, Lloyd’s commercial property insurance showed losses of £2.6 billion. This figure is only going to increase as both man made and natural hazards cause losses.

Arcane practices need to change

Insurers are working hard to improve their performance, but within an outdated and inefficient structure. A lack of digitalisation results in customers losing out, often paying more than 30% of premium and non-risk bearing activities.

Inefficient operation, artificially high costs and commissions and the lack of digitalisation result in hiked premiums and restrictions on coverage and capacity, says the report.

Digitalisation would greatly Improve matters, but is not enough on its own, as the commercial property underwriting model “suffers from inertia and trapped inefficiencies”. There’s little transparency in how what data available is shared and far too much time is spent on administration than understanding risk and managing it, says the report. This needs to change.

Data is the key to unlocking this particular conundrum. It’s not economically viable to send risk engineers to more than a handful of insured locations, the vast majority of properties are not visited. The vast majority of statistical models used to predict risks of locations that haven’t been visited will be inaccurate, resulting in unknown exposure and the potential for large unexpected losses.

Even when visits are made, they tend to be done infrequently and the whole process is riven with inconsistencies. This makes it difficult for both underwriters and customers to improve the situation to mitigate risk.

Embrace digital, but not in insolation

However, buildings are increasingly connected, either to, or through, the internet of things (IoT). The IoT is not only disruptive of real estate management practices. It will also disrupt traditional insurance underwriting practices by assisting in the development of data-driven real time risk management – if we let it.

IoT technologies have been adopted slowly, but customers now see the benefits of having technology that can identify equipment failures that could lead to potential risks. Sensors monitor tiny changes in water use that may indicate a leak, unauthorised use of a closed building or even imminent mechanical failure of safety equipment, such as sprinkler system pumps. But the range of applications is broad, from lighting and humidity levels, through to access and security cameras.

Monitoring can avoid the kinds of problems that result in business interruption, damage and costs.

The underwriting process is not fit for purpose, relying on the interaction of underwriter, pricing actuary, risk engineer and claims expert. It remains largely manual and as we have discussed, is founded on a lack of appropriate data.

The report says that digital twins of risk can help solve this type of problem. The trouble with that is, the more data you bring in from outside to complement existing data, may make your analytics more granular to direct risk management, but it can slow the analysis process down.

There needs to be greater collaboration across the market to develop leaders who really understand the opportunities AI present, and then collaborate across industries to learn from the data in order to develop best practice. Those are the challenges.

The benefits will be improved service, reduced costs and the liberation of human capital from manual work to be put to use elsewhere.

New risks must be mitigated

The authors say the benefits of real time data “can drive proactive risk management, prevent the losses and enable the competitive pricing of known risks moving away from a system based on incomplete and historic data.

It goes as far to say that if real time accurate data on risks had been fed into mitigation processes, it may have helped to prevent a catastrophic incident like the 2017 Grenfell Tower fire in London that killed 72 residents.

Anthony Peake, CEO of intelligent AI is quoted as saying: Customers already using IoT and property know there are immediate financial returns and quantifiable benefits based on energy savings, sustainability and asset optimisation.”

He adds: “Research suggests that the use of AI digital twins and IoT can help save the commercial property sector over £500 million pounds a year. At the same time, customers will benefit from mitigated health and safety risks, lower premiums and greater business resilience,”

The commercial property sector needs to set its house in order. The vast majority of stock has an embedded carbon score that will become increasingly difficult for asset owners and insurers to ignore as environmental, social and governance (ESG) concerns are increasingly identified as financial risks. As the commercial real estate sector catches up, so must insurers, by integrating the data that many of their customers are already generating into their underwriting and risk management processes.

For more, see the full report.

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