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Innovation and Insurance Report

By Michael Giusti

As technology permeates everything around us, much of it also needs to be insured. And at the same time, technology is also changing the way insurance companies do their business.

From crypto to green infrastructure to AI and even to networked smart devices, technology is quickly changing the relationship between the insurer and the policy holder.

But even as these new technologies take hold, there are still some tried-and-true principles that drive risk, and one of the tools we use to mitigate that risk — insurance.

Insuring Web 3.0

The latest iteration of the internet has facets ready made for insurance, but that doesn’t mean policies that cater to those areas have been fully rolled out just yet.

Web 3.0 is shorthand to describe many of the decentralized technologies that drive much of today’s online experience. From cryptocurrency to NFTs, and all things blockchain, and even the metaverse, there are plenty of places insurers have been testing the Web 3.0 waters.

Even despite its dramatic collapse in value, cryptocurrency still has its passionate believers, and they still hold up the virtual currency as the future of finance. Believers tout crypto because of its independence from centralized control — namely governmental control. But that independence has a risky side. While dollar deposits in traditional banks are insured by the Federal Deposit Insurance Corp., there is no such federal backstop for crypto coins.

If a crypto company closes up shop leaving coin holders with steep losses, many are left asking what recourse they may have.

There are a few companies that currently offer insurance policies for cryptocurrency.

Typical crypto policies protect a few broad categories: theft, loss of access, business risk, and decentralized finance risk — or so called DeFi risk.

Theft insurance covers the risk of a hacker gaining access to a coin holder’s wallet and stealing the coin. Loss of access coverage protects people who might have lost access to their wallet or personal key, and no longer have access to their crypto holdings — a more common problem than many people realize.

Business insurance protects crypto companies from traditional business risks, such as professional indemnity and director’s and officer’s coverage.

And DeFi lines help ensure the underlying blockchain and crypto technology itself will deliver on its promises.

One high-profile blockchain application has gotten a lot of press regarding its underlying risk — NFTs. These Nonfungible Tokens are essentially certificates of ownership. NFTs often prove someone owns a digital asset — say a JPG of a surly primate. But NFTs can prove ownership of just about anything — including real-world assets.

Because they are housed on blockchains, NFTs can be independently verified by anyone with a computer and internet connection.

The risk with NFTs is that they are essentially digital deeds — pieces of code saying someone owns something. There is nothing to stop a bad actor from minting a false NFT claiming ownership of something that never belonged to them in the first place, much as there is nothing stopping a criminal from printing out a fake deed to a property they don’t own, or a fake title to a car they never bought.

The risk comes when those bad actors then go sell those bogus NFTs. Who is the victim? Obviously the person who bought the worthless code is a victim, but since the code doesn’t reproduce the digital art, the artist doesn’t necessarily have a copyright claim against that original criminal. A lot of people end up angry, but it is not always crystal clear who victimized whom.

There are a handful of insurance policies available for NFT’s, but because they are so new, many of those details still need to be worked out.

The metaverse is another emerging area with rich insurance questions.

As companies flock to the virtual worlds, they are facing risks ranging from hackers taking control of their meta real estate to defamation claims emerging from their online activities.

Individual users have metaverse risks, too, largely involving their avatars’ inventories and access to their online personas.

These risks can be covered by traditional insurance policies, but few are yet including language specific to the metaverse, particularly what constitutes property (is an NFT for a video game weapon property?), and what constitutes damage (is defacing a digital storefront the same as spray painting a shop on Main Street?).

There are also questions about what qualifies as a relevant coverage area. Would an offshore server housing a virtual world be covered by a U.S.-based policy?

There are even some emerging uses for blockchain technology that raise novel insurance implications.

Some large industrial players are talking about using blockchain to potentially track inventory — especially for commodities that have the potential to be tainted by conflict zones or child labor. For example, if a company wants to prove to its investors that it is adhering to Environmental, Social Governance principles, it could commit to only purchasing cobalt from ethically extracted mines — and then track that particular mineral across its supply chain using blockchain.

But what if something goes wrong? Who is underwriting those promises? Having an insurance policy backstopping that commitment may be attractive.

And while the virtual world seems like it lives somewhere in the clouds or ether, the reality is that they live in huge data centers and server farms. And increasingly, business insurers are paying attention to the risks inherent in those physical spaces — particularly fire risk and risk from natural disasters, making redundancy, physical security, and backups a top priority.

Green Energy & Insurance

One of the fastest growing areas of technological innovation is green energy.

Rooftop solar continues to be a huge issue in the homeowners’ world. Increasingly, utility scale solar is finding its way into communities, especially along the desert southwest and the deep south. And anyone who has driven through the nation’s heartland has seen the army of wind turbines that have popped up along the Great Planes and throughout the Midwest.

Each of those energy-creating assets needs to be insured.

Insurers are working to get their heads around the utility-scale installations, which stand to be a growth market for many companies.

When it comes to rooftop solar, the answer typically is a homeowner’s insurance policy.

By default, rooftop solar would typically be handled like any other permanent addition to a home — be it a new roof, a bathroom remodel, or a new patio.

Because solar panels are permanently affixed to the home, they are generally considered part of the home, and so fall under a typical policy.

The biggest concern in this case is to ensure the policy properly covers the increased value of the home, after the added value of the solar installation — often $15,000 to $20,000.

There is a big “but,” however. And that is that increasingly many homeowner’s policies are specifically excluding solar installations. The worry seems to be that the panels may create a risk of blowing off in a windstorm, or getting smashed in a hailstorm, for example. Anyone looking to install solar should first check to make sure it isn’t specifically excluded by their homeowner’s policy.

Solar arrays installed on separate structures, such as a carport or detached garage also need to pay attention, because they wouldn’t necessarily be added to the insured value of the home because they would be considered separate structures, so they may need a separate rider, or even potentially an add-on policy.

One way around a solar exclusion is for the homeowner to lease the panels, rather than buy them outright. Many lease deals shift the burden of insuring the installation to the company that holds the lease, rather than the homeowner. That means that if a solar array gets ripped off during a hurricane, the leasing company would be obligated to replace it at no further cost. Obviously, though, the fine print matters, so homeowners shouldn’t just make assumptions here.

Another emerging area of at-home green power is battery backups.

A few companies are marketing lithium-ion battery packs as an alternative to whole-house generators. But just as with solar panels, homeowners need to make sure that the added value of the battery array is accounted for in the coverage limits, and they need to make sure they aren’t excluded in the policy.

When it comes to electric vehicles, those are covered by typical auto policies, but they can tend to cost more to insure, simply because of their higher sticker price and because they require more specialized parts to repair. Their chargers would be covered by a homeowner’s policy, provided it was permanently affixed to the home.

An emerging area of home-based green tech is the area of home-based hydrogen generators and fuel cells. While there aren’t a lot of commercially available examples yet, the technology allowing for home-based green hydrogen could emerge as an area homeowners could embrace, prompting insurers to ensure they are properly accounted for in traditional policies.

AI and Automation in Insurance

Insurers are increasingly turning to artificial intelligence and machine learning to help with their day-to-day functions.

One area where AI and machine learning stands to benefit insurers is in the area of underwriting. Increasingly, policyholders are wanting to get instant quotes online, eliminating the human touch for many standard policies.

The only way these instantaneous quotes can be possible is through computerized automation. And while quick quotes have been an option for the most standard, vanilla policies, increasingly sophisticated tools, such as geospatial imaging paired with AI analysis, are making instantaneous underwriting of things like business property insurance, or higher-risk home owner’s insurance policies possible.

These satellite and aerial photographs can gather images of things like a roof’s condition, or the vegetation surrounding a property, or even the amount of debris in the area around a building, and translate that into a risk rating.

In the same way, these AI/geospatial tools can help speed up the claims process following disasters, such as floods or fires.

AI is also a useful tool once the policies are in place, enabling things like sophisticated chat bots that answer policy questions at all hours of the day.

Allowing the machines to answer the routine questions means that the human agents can step in for the more nuanced or complex questions.

AI can also look at data sets and anticipate potential risks, allowing the agents to step in and contact a policy holder before a potential loss even happens and alert them to a risk so that a claim never has to be made in the first place.

AI could even potentially compare data sets to help root out fraud in ways that an agent’s intuition just may not pick up on.

One source of automated data point is so-called telematics devices. These have been used for years in auto policies, tracking driver behavior to offer customized policies based on each driver’s habits and risk profiles.

But other devices could play a similar role — whether it is networked devices in the home monitoring things like fires, floods, or freezes, or for health and life insurance policies, monitoring things like blood pressure and heart activity through wearable devices.

As those devices collect and share more information, privacy questions are going to emerge, and insurers are going to have to be increasingly transparent about what data is collected, how it is being used, and what choices policy holders have in limiting all of that or opting out altogether.

Policyholder advocates are particularly worried that artificial intelligence tools may offer a smoke screen for otherwise illegal discrimination, allowing for policies that offer different prices to different groups based on illegal parameters, such as race or religion.

Experts warn that algorithms are only as good as the data and people who made them, so as the industry moves more toward a reliance on AI, many state regulators will be sure to pay careful attention to ensure those protected groups aren’t discriminated against inadvertently.

Social media and insurance

Social media can play a role both of opening up people to insurance claims, and as a tool to help insurers investigate and underwrite policies.

From the risk end, anyone who posts on social media needs to be aware of the risk they face in the area of defamation. Whether it is making negative remarks about a coworker or posting a bad review of the local pizza joint, publishing a post on social media is the same as printing it in a magazine. If a post is false and damaging, it might open that poster up to being sued for libel.

Typical homeowner’s policies and renter’s policies do protect policyholders from these risks. If they are sued, the insurer will pay for a lawyer to defend the policyholder, and even pay a settlement — up to policy limits, if it turns out the post was, in fact, defamation.

Another risky area of social media is when it comes to so-called influencers. These are people with huge followings who often promote products on behalf of companies.

What many influencers may not know, however, is that if they do promote something on behalf of a company, the Federal Trade Commission requires that that they disclose that they are being compensated for that post.

If an influencer was to run afoul of the FTC, their personal insurance may not protect them, because homeowner’s and renter’s policies typically exclude commercial activity. So, it is a good idea for anyone who makes money through their social media presence to consider purchasing a business owner’s policy, which would offer some protection from these types of enforcement actions.

Another area in the social media sphere policyholders need to be aware of is that it is perfectly legal for an insurance company to read social media posts.

For most people, that isn’t an issue. But if someone is trying to pull something over on an insurance company, their social media may be inadvertently giving their subterfuge away. It is easy to fall into the TMI category through otherwise innocuous posts.

Say someone is applying for a life insurance policy and says they are a nonsmoker, but there are photos online tagging them with a cigarette in their hands — that could be grounds for a policy to be canceled.

Or if someone filed a worker’s compensation or disability claim — that photo of them water skiing would likely torpedo their claim — and likely lead to criminal charges of fraud.

The Future of Insurance

As technology continues to push forward, policyholders should stay current on what those innovations mean for risk.

For example, in today’s app-based world, many people may be surprised how those innovations may have shifted liability.

Anyone driving for a ride sharing company probably knows that their company covers them — but they may not realize how limited that coverage is, and what it does not cover. For example, many of those companies cover the driver while they are actively carrying a passenger, but once the ride is over, and even as the passenger is stepping out of the car, the driver may be on the hook if anything goes wrong, like if they are rear ended by a bus, or the rider trips and falls out of the car.

And in that case, the driver may be left holding the liability by themselves, because a typical auto insurance policy excludes commercial activities, unless the driver purchases a separate rider or commercial auto policy.

The same goes for pool sharing or home sharing apps. The companies may have some coverage, but when it comes to loopholes, policyholders can’t count on their homeowner’s policy to be there as a backstop for their commercial activity.

Users also need to beware of loopholes when they are using the apps themselves. For example, many people who hop on a rented electric scooter don’t realize that their homeowner’s policy excludes any liability claims because the scooter is motorized, and in most cases, their auto policy excludes the scooter, because it is two wheeled and they don’t have a motorcycle endorsement on the policy. So, if someone loses control of that rented scooter and crashes into a fruit stand, there may be some serious liability issues ahead.

Innovation is only going to move faster in the coming years. One example is the push to move ride sharing into the realm of autonomous drivers — and even into the skies.

As those technologies emerge, it is going to be important to know who holds the risk if there is a crash. Is it the fault of the driver (if there is even one behind the wheel)? Or is it the fault of the auto maker? Or the fault of the software company? The old rules need to be adapted to the new technologies so everybody is on the same page.

These questions are going to be important to be worked out, because if one thing is certain, it is that innovation and technology will keep pushing the boundaries.

Michael Giusti, MBA, is senior writer and analyst for InsuranceQuotes.com