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The Internet of Things (“IoT”); it’s going to change the world. But what is it? Well, it’s a computing concept that describes a future where every day physical objects will be connected to the Internet allowing them to network, communicate and store information then automatically act on it.

Take a refrigerator that will order a new carton of milk once you have used the last bit.  A coffee machine that can be programmed to prepare your morning cup once the alarm clock rings.  Or a car that immediately calls emergency services after being involved in a collision.  All of these are examples of the new internet revolution that is the IoT. While these inventions sound great initially, as the IoT continues to gain investment and popularity, it is also attracting increased scrutiny from organisations and individuals who are concerned about a host of issues, including cyber security, privacy and potential liability.

Governments Racing to Invest

Some believe the IoT has already arrived, while others believe it is still in its early stages of development.  What is clear, however, is that many governments have recognised its vast potential and are angling to be on the forefront of IoT investment and innovation.

The United Kingdom and Germany have both been trying to gain an early advantage in their adoption of the IoT by increasing funding available to technology companies working in the space.  At the recent opening of the 2014 CeBIT technology show in Hanover, Germany, Prime Minister David Cameron announced that the UK government would commit another £45 million in funding for IoT research on top of the £28 million that had previously been allocated.  In his address, Mr. Cameron asserted that the IoT would be, “a huge transformative development -- a way of boosting productivity, of keeping us healthier, making transport more efficient, reducing energy needs, tackling climate change." Indeed, a strong endorsement.

New Opportunities, New Risks

So while it’s clear that the IoT has broad support, the inevitable next question is how will it be regulated?

Regulators around the world are grappling with how to protect all data that flows over the internet.  According to the technology market intelligence company ABI research, more than 30 billion devices will have wireless connectivity by 2020.  Such a wide network will no doubt be particularly attractive to hackers and those sending out viruses.  With the IoT’s rapid growth and recent hacking attacks on the worlds’ largest internet companies making headlines across the globe, the pressure is on the regulators to issue clear guidelines that will ensure data protection.

The other lingering issue is consumer privacy.  In essence, the IoT aspires to monitor and track consumers’ every move. While the added convenience and other benefits of these technological breakthroughs are clear, consumer watchdogs have expressed grave concerns about corporations having  unrestricted access to this “big data” – much of which even the most sophisticated consumer is unaware is being collected.

The Insurance Industry Responds

Companies around the world are increasingly turning to the insurance industry as they search for better ways to manage and reduce potential disruptions and losses from issues related to the IoT.  Since the IoT risks aren’t siloed, insurance companies cannot manage them as such.

Let’s take for example the medical device world; increasingly products are being developed that monitor your health and send data back to health  professionals, allowing them to remotely monitor your physical condition. Should a part of this system fail it could be difficult to pinpoint who or what is liable. User error?  Manufacturing fault? Internet provider systems failure?  All of these kinds of questions quickly come into play in any IoT insurance claim.

Because most traditional insurance products such as property and  general liability do not cover claims stemming from cyber events such as IoT claims – cyber liability insurance  was created to respond to cyber perils.  That was a good start, but is not enough.  As technology becomes more and more prevalent in our everyday lives, it is becoming increasingly important that underwriters across the entire organisation understand technological risks and foster cross-functional dialogue in order to find innovative and current solutions for their clients.  The most successful insurance companies will continue to evolve by identifying integrated products  across lines that cover a wide array of the IoT-related exposures involving privacy, hackers, viruses, network disruptions and business interruption.  The ones who fail will be the ones who are too slow to adapt to this new internet-driven paradigm.

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