INSURANCE IN THE CONNECTED WORLD

Observations on Opportunities and Threats

An SMA Research Report

Hortonworks has been granted distribution

rights to this SMA research report.

SMAResearch

Author: Mark Breading, SMA Partner

Publication Date: February, 2016

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TABLE OF CONTENTS

The Connected World: Today and Tomorrow 3

Major Themes for Insurers to Consider 4

The Role of Emerging Technologies and Data 5

Emerging Technologies and Industry Disruption

Value From the Data and Insights

Key Considerations for Connected World Progress

Implications for Insurers 8

Property/Casualty Personal Lines

Property/Casualty Commercial Lines

Life Insurance
Annuities, Investments, and Retirement

SMA Call to Action 10

About Strategy Meets Action 11

Use of Our Reports

About the Author

About Hortonworks and the Connected World 12

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THE CONNECTED WORLD: TODAY AND TOMORROW

The idea of a connected world has become popularized in the last few years. While
While the the possibilities of digitally connecting anything and everything in a vast web have
possibilities of been envisioned for some time now, the forces to make it a reality have only recently
digitally connecting converged. Estimates of the current number of connected “things” are all over the
anything and map, as are future projections on connected devices. However, a good and reliable
everything in a vast source, The World Economic Forum, projects that by 2020 there will be 5 billion
people and 50 billion things connected to the Internet i. EMC claims that 20 billion
web have been
sensors are already connected to the Internet today ii. Some prognosticators foresee
envisioned for some
a world with trillions of connected things in the not too distant future. The questions
time now, the forces
for insurers to explore are what kinds of things are being connected, and what
to make it a reality are the implications for the insurance industry? Will we engineer away risk? Will
have only recently insurance become embedded in other products and services – invisible to buyers?
converged. Will there be a whole new set of risks that must be managed? These and other
fundamental questions must be addressed.

A good place to start is to investigate the different domains that comprise the connected world. Figure 1 illustrates
many of the key domains that are being connected via embedded chips, sensors, and devices. Others might define
these a bit differently, but the main idea is that practically every living and non-living thing on the planet has the
potential to benefit from monitoring, data analysis, and automated or semi-automated actions. In practice, there
are ecosystems and partnerships of companies, associations, government entities, and others that form around key
domains such as health, transportation, and the others shown in Figure 1.

Figure 1. The Connected World and Emerging Connected Domains

Source: SMA Research, 2016

The pace of advancement will vary significantly by area, and the overlap or interaction between domains will be
complex. But any way you look at it, for every aspect of our lives and society, the possibilities are astounding. A
useful thought comes from William Gibson (the author who coined the term cyberspace):

“The future is already here — it’s just not very evenly distributed iii.”

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MAJOR THEMES FOR INSURERS TO CONSIDER

The 2016 CES (Consumer Electronics Show) in Las Vegas was evidence of how fast new products and new companies
are emerging in various connected spaces. Literally thousands of companies are developing and offering connected
products and services, including many well-known players as well as a flurry of startups. The race for leadership
in the connected world is a bit like the Wild West. There will be those that strike gold, or at least, find success in
their own space, but there will be many land grabs, shootouts, and casualties too. Surveying the field of companies
and products yields a number of important considerations as insurers and others try to make sense of the chaos.

Industry boundaries
are disappearing
and new industries
are emerging.
Success in the
connected world
will require active
involvement in
various ecosystems
and a flexible
partnering strategy.
Value propositions need more work. Many of the products available on the
market now are narrow use, high price point items that work in isolation. Some
of these will find a ready market lacking and will have to enrich their product,
lower the price, and/or embed their product as part of a larger offering.
Customer experience is still king. Products must be easy to install, easy
to use, and engaging. Progress is certainly being made here, especially among
wearables, but some of the smart home/car products need to take the experience
to the next level to get beyond the early adopters.
Platforms and standards progress are required. Competing platforms
for smart home hubs, connected car capabilities, intelligent infrastructure, and
other areas may impede adoption. The competitive environment is healthy, but
widespread adoption will require more interoperability standards and a shakeout
of players.

New ecosystems and partnerships are rapidly evolving. Industry boundaries are disappearing, and new
industries are emerging. Success in the connected world will require active involvement in various ecosystems
and a flexible partnering strategy.

Analytics and cognitive computing will be the differentiators. Embedding chips, sensors, and devices
into everything is creating vast oceans of data. The value will be increasingly based not on owning proprietary
data, but on the ability to gain actionable insights. Cognitive computing goes even further by automating real-
time learning, reasoning, and recommendations.

It is important to put these themes in context. They may seem daunting, and the impression might be that
these will serve as inhibitors and slow down the advancement of the connected world. While there are certainly
challenges, the financial rewards for the winners and the benefits to society at large are so great that the already
rapid pace is likely to accelerate. One way to understand the pace is to evaluate the major emerging technologies
that are driving much of the change.

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THE ROLE OF EMERGING TECHNOLOGIES AND DATA

Many pundits are saying that 2015 was the year that technology began to dominate the conversation at the senior
executive level in insurance. Maturing technologies such as mobile, cloud, and analytics are an important part of
that discussion and continue to be leveraged and extended in many insurance enterprises. However, most of the
disruption that is generating the strategy discussions revolves around how emerging technologies are changing
our world. SMA tracks twelve key emerging technologies that are having or will have a significant impact on the
insurance industry. Six are mostly oriented in the physical domain, and six are mostly oriented in the virtual domain,
as shown in Figure 2.

Figure 2. Emerging Technologies and the Connected World

Source: SMA Research, 2016

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Emerging Technologies and Industry Disruption

Industry executives believe that the tipping point for many of these technologies in insurance is within the next five
years, with all twelve exerting influence on the industry within ten years. It is easy to get caught up in the amazing
advances in many of these technology areas, but the main focus for insurers should be to understand the potential
to disrupt three main dimensions of insurance: the customer experience, products (and associated risks), and
operations. Figure 3 maps the potential disruption, based on responses from industry professionals.

Figure 3. Potential for Insurance Disruption of Emerging Technologies by 2020

Disruption Key

Very High
High
Medium
Low

Customer
Emerging Technology Product Operations
Experience
Autonomous / Driverless
Wearables
Artificial Intelligence
Internet of Things
Semantic / Cognitive
Drones
New Payment Tech
Robotics
Biotech
Augmented / Virtual Reality
Gamification
3D Printing
Source: SMA Research, Innovation and Emerging Technologies in Insurance 2015, n=147

Figure 3 visually represents the high levels of disruption possible by 2020. The very high and high especially
show that the customer experience is the most likely to be disrupted, as many emerging technologies directly
affect the needs and interactions of individuals and businesses. Products and operations also have some disruptive
technologies ranked as high. What is perhaps most important in this analysis is that the areas indicating medium
disruption are widespread. Taken together, all of these technologies are seen as creating disruption to insurance.

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Value From the Data and Insights

The new value that will be created and the resulting disruption does not come from
The new value that the “things” or the technology by itself. The winning value propositions will be those
will be created, based on new, actionable insights gleaned from the massive amounts of new data
and the resulting being collected and analyzed. The data becoming increasingly available falls into three
disruption does main categories:
not come from the Simple sense and respond data: Many of the IoT devices for smart homes
“things” or the and smart buildings continuously monitor activities and things, but collect/
technology by itself. analyze data in a very narrow band. A small set of structured data fields are
The winning value analyzed, chiefly to identify exception conditions or trigger alerts.
propositions will
Real-time structured data: Real-time data collected from connected
be those based on
cars, wearables, and other connected devices is sent as a steady stream of
new, actionable structured data to collection points, which can be used for simple alerts but
insights gleaned is also available for big data analysis to uncover new insights. Telematics is
from the massive an early example of this, with massive amounts of structured data collected
amounts of new and the potential to build many new offerings and services from the insights
data being collected gained.
and analyzed.
Unstructured data sources: Images, video, audio, voice, and unstructured
text are now being collected and analyzed from drones, robots, autonomous
vehicles, and other emerging technologies.

Insurers must build strong enterprise-wide data management and analytics capabilities to be in a position to
capitalize on the new data sources from emerging technologies. These initiatives have been underway at many
companies with new roles, new organizational units, and BI/analytics technologies to support enterprise data and
analytics. To date, the primary focus has been on leveraging existing data within the enterprise, but this now needs
to be extended to consider the data in the connected world.

Along with the new sources of data come some new and major issues – ownership, usage, and the security of the
data – especially the sensitive data related to specific individuals or businesses. There is great debate over these
data issues, and it is one that the insurance industry must be actively involved in through influence on regulators
and legislation. At the same time, they must see to the provision of more insurance products to protect against
cyber risk.

Key Considerations for Connected World Progress

In addition to the important considerations regarding the technologies and the data just described, there are
two other important aspects that must be addressed for connected world opportunities to evolve. The first is the
dependence on new communications technologies. Data flows, types, and volumes are changing dramatically with
connected devices. Current networks and protocols will be challenged just to keep up with the capacity demands
of mobile devices over the next decade. Add in structured and unstructured data from new connected sources, the
requirements of local networks such as the hub-based communication in a smart home, and machine-to-machine
communications, and the need for new technologies is apparent. Fortunately, there are candidates on the horizon
such as Ultra Narrow Band (UNB) technology, Low-Power Wide-Area Networks (LPWAN), and a variety of short-
range communications technologies. It will be important to follow the development of standards and the adoption
of the new communications technologies.

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The second additional area to consider is the need for more private/public partnerships. Government entities have
a significant role to play in fostering standards, evolving the legal environment, and encouraging investment. In the
various ecosystems that are emerging, government bodies are already participating. But there is a need for even
more cooperation between industry and government in order to realize the opportunities of the connected world,
spur economic growth, and protect the rights of citizens and businesses.

IMPLICATIONS FOR INSURERS

On one level the
implications for On one level, the implications for all insurers are similar: new risks will be introduced,
all insurers are traditional risks can be reduced, new services may increase loyalty and create new
similar: new risks revenue streams, and new partnerships will support new offerings and business
models. But to truly grasp the implications, it is necessary to look at individual lines
will be introduced,
of business. A few examples will serve to illustrate how the connected world is likely
traditional risks
to impact key lines.
can be reduced,
new services
may increase Property/Casualty Personal Lines
loyalty and create
Much of the discussion for personal lines is related to connected cars and smart
new revenue homes. As progress is made in each of these areas, the impact on the customer
streams, and experience is increased. If the industry does nothing, the long-term prospects for
new partnerships auto and home are dim. A future of driverless vehicles and fully connected homes
will support new could mean that exposures are very limited, to the extent that there is no insurance
offerings and needed or the manufacturers of the products hold the liability.
business models.
A more optimistic picture emerges if insurers work to actively shape the connected
But to truly grasp
future for consumers. Partnering with providers of smart home devices and
the implications,
auto manufacturers, introducing new service-based offerings, and maintaining
it is necessary to communication with policyholders will enable insurers to be important players in the
look at individual new ecosystems and discover new business models that leverage the core expertise
lines of business. of the industry. Actively participating in the rapidly growing sharing economy will
also be critical for personal lines insurers. Asset ownership is shifting and requiring a
different approach for managing and protecting the assets.

Drones, augmented reality, and artificial intelligence all have promise in improving operations, especially in the
underwriting and claims arenas.

Property/Casualty Commercial Lines

Although the excitement of the connected world is often associated with consumers in the form of smart homes,
connected cars, wearable devices, etc., the potential implications for commercial lines are just as great or even
greater. The IoT provides many opportunities to enhance loss control for commercial properties while fleets will
benefit from the same autonomous vehicle technologies and intelligent transportation options that are available
for autos. Some commercial fleets are already deploying significant technologies such as telematics, event data
recording, and advanced driver assistance system (ADAS) technologies.

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Workers’ comp has tremendous opportunities to deploy wearables, smart home, and connected health capabilities to
improve treatment plans and return-to-work options. In addition, semantic/cognitive technologies will increasingly
help in diagnosis and the management of treatment plans. Specialty lines insurers will find innovative ways to
gather information from the specific businesses they insure. This will allow them to create new products and offer
proactive advice based on new insights into the unique exposures of these businesses.

Commercial lines also have opportunities similar to personal lines to deploy a range of technologies operationally to
better understand risks, improve efficiencies, and service policyholders.

Life Insurance
Wearable devices
are a true game Wearable devices are a true game changer for life insurance. Life companies
changer for everywhere are taking notice of the John Hancock Vitality program – not as much
life insurance. for the product itself as for the implications over time for the industry. Wearables,
Life companies along with other technologies to manage both wellness and sickness, provide the
everywhere are opportunity for the industry to actually focus more on life than on death. Partnering
taking notice of with policyholders by offering wearable health monitoring and fitness devices (or
discounts for those devices), paired with incentives via gamification technologies and
the John Hancock
the insurers’ timely advice on healthy living options, creates a win-win scenario.
Vitality program –
not as much for the In addition, a host of technologies offer promise for insurers offering disability
product itself as insurance, long-term care, and supplemental health insurance products. Some see
for the implications a day when real-time monitoring of the disabled or elderly, along with advances in
over time for the robotics and smart home technology will allow individuals to live longer lives with a
industry. better quality of life, while reducing the need for expensive care facilities and home
health care professionals.

Advances in artificial intelligence will provide more impetus to automate the new business/underwriting process,
leveraging the expertise of underwriters for complex and unique situations.

Annuities, Investments, and Retirement

Artificial intelligence is already being employed in robo-advisors to assist individuals in assessing their financial needs,
selecting the appropriate products, and managing their investments. While few see financial advisors disappearing
in the near-term, the trend toward more self-service is evident and will be aided by increasingly sophisticated AI
and cognitive computing capabilities.

New payment technologies, including mobile payments and Internet-based payment systems, will provide more
options for the premium payments or benefit payouts. In addition, the blockchain technology underpinning bitcoin
(or other distributed ledger technologies) will likely gain steam as mechanisms for exchanging sensitive financial
documents or conducting investment and financial transactions.

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SMA CALL TO ACTION

It is one thing to identify the potential implications for insurers but quite another to put together strategies and
plans that will lead to transformation and success. There is a lot for every insurer to absorb and follow, let alone
fashion into unique strategies that will transform the company and lead to future financial success. Every company’s
journey will be different, but the following are useful ways to think about accelerating that journey.

Participate: It is not enough to track and monitor emerging technologies and trends that are shaping the
connected world. Active involvement is required, via investments in startups, pilots with new technologies,
and partnerships with companies outside the insurance industry.

Innovate: Establish the leadership, culture, and tools to generate new ideas and see them through to
execution. Rethink the business in the context of the four main dimensions of the Next-Gen Insurer: customer,
products and services, technology and data, and business models. Reimagining these areas by considering
the implications of the connected world will result in a future vision for the company.

Formulate: Build actionable and achievable plans. Make sure that the key enabling elements of the business
are in place – modern core systems and a digital foundation. Ensure that optimum leverage is gained through
existing, proven technologies such as mobile, cloud, collaboration technologies, and analytics. Then create
the plan to capitalize on the connected world and move the company toward the Next-Gen Insurer vision.

The insurance industry will be disrupted and transformed by the development related to the connected world.
Individual companies may choose to be active participants and shapers of the connected world or try to ride out
the change. Watching and waiting was probably good enough in another era when the pace was slower and it was
easier to catch up to the mainstream. But that is no longer the case – and no longer an option.

Insurers of all sizes and lines must be aggressively thinking about their future in light of these developments and
be willing to take bold action to position for success. The good news is that insurers have the opportunity to elevate
the industry mission to aid customers in better managing and protecting their assets, health, and wealth.

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ABOUT STRATEGY MEETS ACTION

Strategy Meets Action (SMA) is dedicated to helping the business of insurance modernize, optimize, and
innovate for competitive advantage. Exclusively serving the insurance industry, SMA blends unbiased research
findings with expertise and experience to deliver business and technology insights, research, and advice
to insurers and IT solution providers. By leveraging best practices from both the management consulting and
research advisory disciplines, we take a unique approach – offering an unrivaled set of services, including
retainers, research, consulting, events, and innovation offerings. Additional information on SMA can be found at
www.strategymeetsaction.com.

Use of Our Reports

The entire content and context of this research report is subject to copyright protection, with all rights reserved.
Reproduction or distribution of the report, in whole or in part, without written permission, is not allowed. The
material and observations contained in this publication have been developed from sources believed to be reliable.
SMA shall have no liability for omissions or errors and no obligation to revise or update any data or conclusions
should new information become available or future events occur. The opinions expressed in this report are subject
to change without notice.

About the Author

Mark Breading, SMA Partner, is a recognized expert in advanced technologies and their implications for the
insurance industry. He has exceptional knowledge of data and analytics, customer experience and customer
communications in insurance, digital content management, and emerging technologies.

Contact Mark at mbreading@strategymeetsaction.com or 1.614.562.8310.

Follow Mark at @BreadingSMA on Twitter.

© 2016 Smallwood Maike & Associates, Inc. USA. May not be reproduced by any means without express written
permission. All rights reserved.

i “Internet of Things Market Statistics – 2015.” March 5, 2015.

http://www.ironpaper.com/webintel/articles/internet-things-market-statistics-2015/#.VqZ_a1nEIfE

ii “The Internet of Things Data from Embedded Systems Will Account for 10% of the Digital Universe
by 2020.” April 2014.
http://www.emc.com/leadership/digital-universe/2014iview/internet-of-things.htm

iii “The future is already here — it’s just not very evenly distributed.”
http://quoteinvestigator.com/2012/01/24/future-has-arrived/

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ABOUT HORTONWORKS AND THE CONNECTED WORLD

Company Overview
Hortonworks®, founded in 2011, has grown rapidly to become a predominant force
in the big data arena. The company leverages a business model based on open source communities such as
Apache™ Hadoop®, Apache™ NiFi, and Apache™ Spark®, as well as a network of over 1600 partners worldwide
to provide open and connected data platforms designed for enterprise use. Hortonworks solutions and capabilities
enable customers to build data-driven applications that maximize the value of all data, including data-at-rest and
data-in-motion. Ultimately, this provides the expertise, training, and services that allow their customers to unlock
transformational value for their organizations across any line of business. Hortonworks has a strong and growing
footprint in the insurance industry that includes key implementations by leading industry innovators.

Connected World Offering

Hortonworks two foundational offerings: Hortonworks Data Platform (HDP®) and Hortonworks DataFlow (HDF®).
They are, by design, connected data platforms built to manage and analyze the massive volumes of data from both
new and traditional sources. The HDP, powered by Apache Hadoop, addresses the full needs of data-at-rest (data
stored in digital form in a physical location such as a database or data warehouse). HDF is an integrated platform
that securely collects, curates, and analyzes real-time data-in-motion. Combining HDP and HDF enables companies
to gain new insights that are differentiating, actionable, and timely.

Implications for Insurers

Insurers will find it very difficult, if not impossible, to compete in the connected world without a robust, comprehensive,
and secure enterprise big data platform. Every line of business has a strong dependency on the ability to collect,
organize, and analyze the data streaming in from every person and thing that the insurance industry insures. This
report has highlighted just a few of the many potential business uses for emerging technologies and the related
connected world data. To realize the power of these new uses, a platform is required that can handle the massive
amounts and variety of data that are being generated, converting the data to significant business value.

SMA Insights
Hortonworks was born in and for the connected world. As more things in the world become connected, business
and society are being transformed. The real-time collection of data from the billions of connected things presents
great challenges but also offers great opportunities. The volume and variety of data is already staggering, and we
are just in the early stages of a truly connected world. Amid the flurry of big data technology products and solutions
that have been introduced to collect, organize, manage, and analyze data, Hortonworks offers a comprehensive
platform to address this complete set of capabilities for all types of data formats and business uses cases. Leading
insurers are already leveraging Hortonworks for applications that are providing transformative insights for various
lines of business and functional areas.

Hortonworks, the Hortonworks logo, HDP, HDF, SmartSense, Cloudbreak, and Powering the Future of Data are registered trademarks or
trademarks of Hortonworks, Inc. and/or its subsidiaries in the United States and/or other countries.

Apache, Apache Hadoop, Apache Spark and Apache NiFi are either registered trademarks or trademarks of The Apache Software Foundation in
the US and/or other countries. No endorsement by The Apache Software Foundation is implied by the use of these marks.

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