The Internet of Things for Cars: What Will it Mean for Insurance?

the internet of things
The interwebs.

Wifi-ready car or not, you can still find a better car insurance rate for you →

Imagine, for a moment, a world in which vending machines restock themselves. A world in which your wallet, via a Bluetooth signal, beeps at your phone if you leave it behind at a restaurant. What if you never had to tell the barista at Starbucks your order again, because a machine has your preferences stored and ready to prep for you?

What is the Internet of Things?

This is a world made possible by the Internet of Things, and it’s not a matter of if, but when, our devices will become as connected as we already are to one another. Forbes has a graceful definition of the Internet of Things: “Simply put this is the concept of basically connecting any device with an on and off switch to the Internet (and/or to each other). This includes everything from cell phones, coffee makers, washing machines, headphones, lamps, wearable devices and almost anything else you can think of. This also applies to components of machines, for example a jet engine of an airplane or the drill of an oil rig. As I mentioned, if it has an on and off switch then chances are it can be a part of the IoT.”

(IoT, that’s Internet of Things—not to be confused, of course, with GoT.)

How—and why—is this happening now? Forbes has some insight there too: “Broadband Internet is becoming more widely available, the cost of connecting is decreasing, more devices are being created with WiFi capabilities and censors built into them, technology costs are going down, and smart phone penetration is sky-rocketing. All of these things are creating a “perfect storm” for the IoT.”

A little frame of reference: In 2012, there were somewhere around 12.5 billion connected devices. According to estimates from experts at Cisco’s Internet Business Solutions Group (IBSG), some 25 billion devices will be connected by 2015, and 50 billion by 2020.

Still not convinced of the scope of the Internet of Things? Check out this infographic from Cisco:

crazy, huh?
Crazy, huh?

Kind of nutty, right?

Now, being that we live and breathe car insurance at The Zebra, we started wondering what kind of effect this IoT will have on car insurance, for companies and consumers alike. Could insurers start relying more heavily on actual data from the car, instead of rating factors like credit or age? Might premiums be lower for self-driving cars—and if so, how will the industry respond? As usual, we did a little digging so you don’t have to.

Connected Car Insurance

Gettin' connected.
Gettin’ connected.

In a way, the IoT has already come to car insurance, via programs the industry calls “telematics.” Forbes wrote about the trend, explaining that telematics devices like Progressive’s Snapshot operate much the same way an airplane’s black box does. “The gadget gathers second-by-second data about the car’s operation and allows an insurance company to offer lower prices for safe drivers,” explains contributor Adam Tanner.

All fine and good if you always play by the rules, right? But what if you are a speed demon, or a hard braker? It used to be that drivers who adopted telematics devices wouldn’t be punished, no matter how not-insurance-friendly their driving habits were. But that will change soon, at least for Progressive customers. And this makes sense—if everyone used the device, and no one’s premium increased, how could the company afford to offer discounts?

Despite these potential downfalls, 1.4 million Progressive customers have tried the monitoring program, and roughly one-third of new customers opt in. Both State Farm and All State also have usage-based insurance programs in place.

The Internet of Things has already come to car insurance.

But industry experts say that we’re still a ways out usage-based programs being commonplace. “Out of 100 percent of drivers, just one, maybe two percent have gone down the path of telematics,” explains Michael Barry, VP of Media Relations for the Insurance Information Institute. “While it’s growing, it’s a very small percentage of the total insured drivers in the country.”

There are other implications for car insurance from the IoT—if cars truly do all carry a type of black box, insurers may be able to significantly change the way they handle the claims process after an accident. Plus, usage-based insurance could offer insurance companies a truly mind-boggling amount of primary data that they could then use to mitigate potential losses. The options seem endless—you know, kinda like the internet.