The connected home – a challenge or game-changer for the insurance industry?

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The rise of smart home

According to Gartner, there will be 26 billion connected devices in people’s homes by 2020. By then, the connected devices manufacturers will generate additional revenue of $300 billion, leading to approximately $1.9 trillion in global economic value-add.

Smart home is not just about letting our home appliances talk to each other; it offers a lot more than that. It offers comfort, security, and risks control to homeowners and tenants. Long before “smart home” became a tech category, intelligent home security cameras and burglar alarms have been providing homeowners and tenants a peace of mind when they are not at home. Since 2011, when Nest launched their first generation of smart home devices, they have revolutionised people’s perception of connected homes as there came a whole new range of devices which did more than what we were used to. The world was introduced to the concept that they could remotely control what happens at home, or the devices would adjust the home conditions for them by learning about their behaviour. It helped us save on energy bills, get water leak alerts, and more. Ever since then, we see a boom of smart home devices and platforms in the market.

Today, over 26% of US households are connected. The way the devices interact with humans keeps evolving as more data is collected. Voice assistants such as Google Home can now tell users what their insurance gap is, and Amazon Echo can soon be able to deliver some level of social care to elderly and disabled people at home.

With the fast-growing development in the smart home industry, would there be a space for insurance companies to play a role? Definitely. In this issue of Swiss Re TDI China in Focus, we explore the topic in both the China market and beyond.

Smart home in China

The exponential growth and development of smart home is now noticeable in Asia, especially in China. Household penetration is at 4.9% in 2018, and is expected to hit 21.2% by 2022. Similarly, revenue in the Smart Home market amounts to $6.5 billion in 2018 with an annual growth rate of 39.3%, the market volume is expected to be at $24.5 billion in 2022. This is partly due to the rise of middle class and their spending power, and China being a hyper-connected economy.

Like the rest of the world, smart home devices in China are much diversified (from security to smart kitchen), and more importantly, the manufacturing cost is relatively low. These products are supported by other players in the value chain such as hardware/software platforms, and smart home apps. While there are various players in the smart home market, the most noticeable are usually manufactured by the tech giants. Xiaomi, for instance, provides a variety of smart home kits at affordable prices. Xiaomi’s door/window sensor can be as cheap as 69 yuan. Huawei, on the other hand, focuses more on smart home connected platforms. Through working with more than 80 smart home brands in China, they are looking to build a strong, flexible ecosystem that is tailored to consumers’ preference and needs.

Even though smart home devices may be cheap and affordable, for consumers to install an end-to-end smart home, the price for full coverage averages at 100,000 yuan, which is still quite expensive. The only places where a full suite of smart home devices would exist seem to be pre-installed at high-end housing developments in China as a mean to differentiate and attract homebuyers. In addition, the home insurance market is very competitive both in terms of premium and product design. Would it be possible to bring smart home insurance products to the mass market in China in this challenging environment?

To do this, we need to first understand the potential benefits of smart home integration to insurers. Other than mitigation of claims, smart homes bring the possibility of creating positive interactions with customers by preventing risk. Integrating insurance into smart home provides long term savings for customers, and more importantly provides safety protection against the risk. As risk experts, insurers can have a leading role in this connected ecosystem in order to make people safer at home. Customers will probably be willing to pay higher premiums for greater security and greater ability to anticipate and mitigate unavoidable risks.

With this knowledge, smart home insurance propositions for the mass population in China would likely to come in small steps. US is an example where insurers have been taking small steps in integrating smart home devices into their insurance products, and it dates all the way back from as early as 2013. Both American Family Insurance and Liberty Mutual are offering discounts for home insurance to the owners of Nest Protect smoke detectors. American Family Insurance has also partnered with Ring (smart doorbell producer) to decrease deductibles in case of burglary/theft. Interestingly, the prevention of risks could also apply to life and health insurance. Taking mould detection as an example, humidity and heat sensors would be able to show the presence and growth of mould in the house. This will not only help with the property’s valuation, but also help lower the health deterioration risk of the homeowners and/or tenants. Although we can learn from the examples above, it is important to note the differences between the US and China markets. For example, the exposure to flood, wind and fire for homeowners in the US is much higher than those in China, where home security is a major concern in comparison. On another hand, utility savings could be attractive to customers in Europe whilst it might not be the case in China. Moreover, as ageing population is becoming a problem for China in the next few decades, it is inevitable that smart home product designs should increasingly take into account the health and safety of its users as well.

Conclusion

While the US insurance market already shows significant smart home integration, smart home development in China is at its infant stage comparatively (US smart home market is more than 18 times bigger than China’s right now) where insurance can be more actively integrated. However, as illustrated above, through taking small steps, the challenges faced by insurers can potentially be turned into a game-changing situation. By closely analysing the China smart home market, thinking about how to address some of the important issues currently in this space, and leveraging Swiss Re’s existing solutions, we have been working on possible solutions and models for China and worldwide, reach out to us if you want to learn more.