Insurance has long been a one-dimensional purchase — you buy it and keep the policy until you need it. The problem is that the interaction is largely one-sided, and most people never actually make a claim or reach out to their insurance company.

However, the way property owners protect their homes is evolving with the onset of smart home technology. According to JD Power, roughly 59% of homeowners are using some form of smart technology to prevent property damage — and many people want a discount for being proactive. One study by NTT DATA found that two out of three homeowners in the United States would change home insurance carriers to get a discount for using smart home technology. Although the retention rate for homeowners insurance policies is almost 92%, that may soon change.

In the same way that auto telematics transformed how we drive, smart home tech is changing how property owners can monitor their assets and detect risks. Take home water damage, for example. According to Forbes, one in 50 homeowners will file a water damage claim in a given year. The cost of water damage can be significant — the average claim is over $11,000. However, most of those costs could be avoided if the leak were caught early enough. Smart home technology offers a range of sensors and cameras that can notify owners of a leak as soon as it starts, helping them act early to avoid costly repairs.

However, the impact of smart home tech doesn’t stop there. It is also influencing insurance providers.

How Insurance Carriers Can Leverage Smart Home Tech

Insurance companies can work with smart home tech — specifically, a subset called “insurtech” — to provide value throughout the insurance experience. From the way they calculate risks and conduct underwriting to the methods they use to collect premiums and process claims, insurance carriers are leveraging smart home tech as a value-add. They are quickly moving away from the models they have used for decades and discovering a variety of benefits.

Loss Reduction

One of the most obvious and significant benefits of the Internet of Things (IoT) and smart home technology is the ability to protect assets and reduce loss. To continue using water damage as an example, smart home tech can notify you when water is detected where it shouldn’t be, regardless of whether that moisture is weather-related (e.g., leaky roof during a storm), stemming from an appliance (e.g., overflowing washing machine), or structural (e.g., a burst pipe).

Depending on the technology, it may even be able to turn off the water, either through automation or via an app on the policyholder’s smartphone. Early detection enables early intervention, which generally means reduced damage. This has practical benefits for the homeowners, but it also means that the insurance provider has a reduced payout. In this sense, home monitoring reduces losses for smart home insurance companies, too.

Reducing loss is critical because the cost of claims is rising. The average number of home insurance claims from 2003 to 2007 was 5.84, and the average value was $7,368. In contrast, the average number of home insurance claims from 2016 to 2020 was roughly the same at 5.79, but the average value was much higher at $13,962 – that’s almost twice as high.

Customer Acquisition

Smart home insurtech can also benefit insurance providers in another way — customer acquisition. Offering innovative technology can be a powerful differentiator, acting as an important customer incentive. Many insurance providers provide policyholders who own DIY monitoring devices with premium discounts — up to 13% according to 2022 research from NerdWallet — but those savings are reserved for customers who already own those devices. Those policyholders won’t see a financial benefit until the cost of their self-monitoring equipment is amortized.

In contrast, some insurance providers have partnered with home insurtech companies to provide customers with DIY monitoring devices for free or at a significantly reduced cost. For many homeowners, this would be a benefit, especially for something like water sensors, which represent a fair number of claims.

For policyholders with fixed incomes or older plumbing, self-monitoring is invaluable. As such, they may choose an insurance provider that empowers them to prevent expensive claims through smart home devices. Research from Parks Associates found that 40% of homes would switch insurance companies if offered smart home products, and some 80% of those would actively seek out DIY monitoring products with prevention features.

Engagement and Retention

Advanced monitoring technology has the added benefit of improving customer engagement and, in turn, retention. Through value-added services, such as enhanced alerts, insurtech-powered insurance providers can offer their policyholders a branded experience that keeps customers choosing them for coverage year after year. This may include integrations through IFTTT or HomeAdvisor that improve daily life and introduce peace of mind, but it can go much further.

The right connected home insurance technology can help insurance companies determine which discounts and incentives they can offer, helping customers save money over time. The data collected through insurtech can also streamline the claims process, enabling verification of use and improving document collection. Finally, insurtech can provide automated property safety recommendations, letting policyholders know when to perform maintenance or replace a component. These features just scratch the surface.

New Revenue Streams

Offering self-monitoring technology to policyholders can introduce new revenue streams aside from the basic options of reselling monitoring equipment or charging for a digital service. Smart home tech may enable insurance companies to develop new ways to earn income that includes dual stream revenue patterns, such as monetizing DIY monitoring subscriptions, physical freemiums, and digital add-ons. For example, think about automated technologies and mobile applications. Smart home insurance providers may also offer home inspection or maintenance services.

Smart home technology can offer indirect revenue streams, too. Insurance companies can use home monitoring to cultivate ecosystem patterns of revenue through complementary offerings.

To continue our example of water leaks, an insurance company may offer water-detection sensors as well as shut-off valves that can be triggered automatically. Expanding on that, some smart home insurance providers may opt to include temperature sensors for the water that help anticipate flooding or flow sensors that manage consumption in addition to possible leaks.

Understand the ROI of Home Insurtech

To understand the true value of connected home insurance technology, let’s look at an example that centers on water damage claims. Taken together, the total annual amount the average insurance company spends on water claims is around $10.2 million across 50,000 policies. When those same insurance providers add a two-sensor smart home monitoring kit to their offering, the total cost for water claims falls to $4.9 million — and that’s with an install rate of just 70%.

While there is a cost to providing insurtech, insurance companies can expect to earn a return on investment (ROI) of $1 million in the first year. By year two, the ROI should top $5.3 million before climbing to $33 million in year seven. You can try the ROI calculator for yourself here.

Partnering With Notion

Insurtech introduces long-term value and new revenue streams for insurance companies, and the potential ROI grows exponentially with the number of devices. Proprietary research by Notion found that insurance providers that offer monitoring with two devices have an install rate of 70% and they can attribute 5% of their income to professional monitoring and home services. Those figures are promising alone, but consider what happens when the number of devices moves to five. The installation rate moves to 80% and the income insurance carriers earn from professional monitoring and home service climbs to 20%.

Trust Notion to help your insurance company do more. We work with primary insurance providers and service agencies to provide smart home technologies to protect assets and introduce important benefits like improved customer retention, ongoing value-added engagement, and data reporting. Learn how a Notion smart monitoring system can transform your insurance company with DIY monitoring solutions.