Wi-Fi-Linked Home-Security Gadgets Aren't Lowering Insurance Premiums

Originally posted at Morningstar News

By Nicole Friedman

Americans are snapping up millions of new security cameras and smoke detectors connected to their Wi-Fi networks. But insurers aren't yet persuaded the devices will make homes any safer.

The average cost of insuring a home was expected to rise this year despite the gadgets that pledge to prevent billions of dollars in damage. The $84.9 billion U.S. home-insurance industry is resisting widespread price reductions because insurers say little data exists to show the devices can improve security or prompt homeowners to be more active in securing their homes.

The home-insurance industry could see billions in revenue evaporate if the new technology dramatically improves home safety over time, potentially outpacing the costs insurers would save from paying out less in claims.

Some consumers say internet-connected devices make them feel more safe and that insurance companies should encourage their use.

"The insurance companies should provide an incentive," said Tony Bacon, who outfitted his four-bedroom Chatham, N.J., home with internet-connected security cameras, thermostats and lights. Only his security-alarm system qualifies for an insurance reduction.

For some years, insurance companies have lowered home premiums for homeowners that use basic security devices. The question is whether the internet-connected versions of this equipment will be even more effective than their analog counterparts.

Internet-connected devices include those that alert homeowners when their smoke-detector batteries run low, route doorbell-mounted video to their phones, and detect leaky water pipes. Technology research firm ABI Research expects 360 million shipments of so-called smart-home devices in 2020, up from 79 million shipments this year and 40 million last year.

Some home insurers are offering small discounts for such devices while they test their effectiveness, but the reductions aren't yet big enough to reduce average premiums. The average U.S. home premium is forecast to rise to $1,293 this year, up 5.5% from 2015 and up 61% from 2006, according to trade group Insurance Information Institute.

A 2014 study from Morgan Stanley and Boston Consulting Group estimated that smart-home devices could cut potential losses by 40% to 60% and reduce premiums globally by between $32 billion to $47 billion over the next 10 years. Global home-insurance premiums were $160.8 billion in 2013, the study estimates.

Connected-home technology "changes the underlying need to have insurance, " said Sean O'Neill, a partner at consultant Bain & Co. "If you take down severity and frequency of losses, that's basically what premium dollars support. So the question is, at some point do premium dollars fall significantly?"

Analysts say home insurance can't be replaced completely because houses are still vulnerable to hurricanes and other disasters. One in every 30 insured homes has a property-damage claim due to wind or hail each year, according to the Insurance Information Institute.

The push to gather more data from homeowners follows similar efforts by auto-insurance providers. For about a decade, auto insurers have been installing devices to monitor how far people drive and how often they slam on the brakes -- and using that information to adjust pricing. Drivers can get discounts of as much as 30% if they agree to use the tools. Auto premiums have continued to rise on average in recent years, as increased driving and more distractions have led to more accidents.

Experts say it could take years to amass enough data about smart-home devices to offer equivalent home-insurance savings.

State Farm, the nation's largest home insurer, provides a 15% reduction attached to certain internet-connected home security systems, said Dar Hakimi, director of innovation. Mr. Hakimi said such devices are preferable to traditional smoke detectors or security systems because it is easier to verify that they are installed and working properly.

Other insurers say they are encouraging consumers to buy connected-home products, especially if the homeowners agree to share data with insurance companies. Boston-based Liberty Mutual Insurance offers discounts in 38 states for customers that use connected security devices or smoke alarms. If the customers allow Liberty Mutual to verify that the devices are working correctly, they can get a larger price cut.

American Family Insurance in Madison, Wis, is discounting the cost of Ring Video Doorbells, which have motions sensors, cameras and microphones so users can remotely see and speak to visitors. It also is offering to reimburse the insurance deductibles of customers with the doorbells who are burglarized. Those deductibles are usually between $600 and $800, American Family said.

A study that Ring worked on with the Los Angeles Police Department suggests the doorbells reduce crime, but more comprehensive data will take years to gather, said Jamie Siminoff, Ring's founder. "Insurance needs 10 years of data," he said. "You don't know what happens until you wait."

American Family has installed more than 100 connected devices in a one-bedroom house it uses as a training center for claims adjusters. A few employees also test products in their own homes to determine which ones could qualify for discounts in the future.

But so far only a few, including Ring, have passed the test. Some devices, like indoor cameras, were judged a bad fit for American Family due to privacy concerns, said Ryan Rist, the company's innovation director. Others didn't work as well as advertised.

Write to Nicole Friedman at nicole.friedman@wsj.com

Date : 12/22/2016