Financing A Smart Home Is Worth It


Smarthome devices can easily pay for themselves when they prevent damage to a home down the line. For example, reputable insurance industry research firm LexisNexis proved a smart home device that detects water leaks will prevent 95% of water damage incidents not caused by a flood. This is the strongest evidence yet that smart home devices are the most cost effective method of managing a home's risk. Still some in the industry are skeptical. ITL’s Paul Carroll criticized this incredible success as too expensive a proposition for the customer and quipped ‘That math doesn’t work for me.’ This myopia is pervasive in the insurance industry and the reason why modern technology and financing tools are radically changing the property insurance business beneath a blind eye.

Here is the crux of Carroll’s argument: 

“Each device is about an $800 proposition — roughly $500 for the device and $300 to have a plumber install it in a home. Multiply that $800 by 2,306 homes, and it costs you $1.85 million to install the I made a couple of educated guesses and estimated that those $1.85 million of devices saved the 2,306 homeowners and their insurers about $240,000 a year. That would mean it would take a decade to earn back the cost of installation — $1.85 million plus $50,000 a year for 10 years equals $2.35 million, or almost exactly the $240,000 a year of saving times 10. The payback takes longer, of course, if the devices need any maintenance or, heaven forbid, don’t last at least a decade...Some insurers seem to hope that customers will buy the leak detection devices on their own, but that seems unlikely, at least in any numbers...But, if you assume a deductible of $1,000 on a homeowners policy, you’re asking people to spend $800 up front to avoid a one-in-100 annual chance of paying $1,000. That math doesn’t work for me.”


There are two oversights in this argument:

First of all, the vantage point is biased towards an insurer, not a consumer. Insurers care about profits and losses, portfolios and investment theory for insurance companies and anything that can help them more reliably extract as much profit as they can out of consumers. On the other hand, consumers look at insurance as one of a handful of monthly expenses that they see as an unnecessary burden with invisible benefits and a steep cost that they would like nothing more than minimize.

Notably this argument also fails to concede or even mention price deflation from competition in competitive technology markets or the corollary growth curve that accompanies explosive products. Carroll assumes that consumers will always have to pay $800 for this suite of benefits, will always have a $1,000 deductible, and will therefore never want to invest. This is ignorance of technology at its apex. If perhaps any mention of the future - say five to ten years from now - was made, then a concession as to the eventual ubiquity of this as a low cost solution would be made obvious.



What is even worse is that there is no mention at all of bundles, rebates or long term financing for this type of product which is common for all types of smart home devices that fit broadly into the different categories of water, energy and other conservation, which brings us to our second oversight.

Like so many other great smart home technologies that have come before it, there are implicit and explicit benefits that extend beyond the singular benefit that is being evaluated at any given moment. While certain customers that purchase devices like Flo care primarily about insurance savings, it is also true that many care even more about green causes like energy and water consumption. Indeed, this is precisely why Flo and other water hardware companies are partnering with water utilities every bit as much as insurers and builders. Built-in water conservation features are a crucial component of Lennar homes going forward and the builder believes that these features increase the value of the homes by so much more than can be measured in insurance savings alone.

Consumers demand more from their technology providers every day and the Flo device has become the standard for delivering the twin benefits of water conservation and water damage prevention. Water however is but one small piece of an increasingly complex and interwoven circle of home automation and robotics that is changing insurance and everything else about the home in a way that computers revolutionized business and home operations a generation ago and mobile phones have changed all of our lives over the last ten years. The most important response to any such contrived par pro toto argument is to expand the perspective. The insurance community needs to narrow the gap between their understanding of consumers’ hopes for great comprehensive benefits that improve their life and what the carriers themselves want, which according to Carroll is “data generated by Internet of Things (IoT) devices can lead to a more accurate and comprehensive view of risk and improve loss costs.”



The property insurance Internet of Things (IoT) revolution is but a part of a much larger series of IoT disruptions not affecting every other related industry vertical connected to real property. The outcome will be a series of new platforms that combine all of these benefits into seamless digital customer experiences. Insurers need to better incorporate the needs of the consumer and how their roles as both risk managers and risk financiers can better serve their customers by rethinking choice architecture, even if it means radically shifting their approach to home risk financing from indemnity of pure risk to amortization of pure risk control. Once they do that they will open themselves up to the future of growth in this industry and also contribute to so many direct non-insurance benefits to their customers, be that water conservation, energy conservation, health improvement, or any of a dozen other things that their customers actually want, and not what they can take solely for themselves in their current modus operandi. Indeed this will eventually lead to an inversion of the traditional loss ratio and expense ratio which though foreign to property insurance is actually a standard in many other P&C lines of business which therefore is a lens that insurers should be able to see through after all.