Smart Cities Development: What is the Role of Insurance?

As a first-of-its kind innovation accelerator, UI LABS works on the front-lines with universities, national laboratories, and industry representatives to catalyze digital manufacturing and speed the development of smart cities. We are constantly reminded in our daily work of how nascent the digital revolution really is, in that traditional industry sectors are only beginning to feel its impact.

While the technology and its promise to improve lives never ceases to dazzle people and grab media headlines, the messy business of forging new industries with capable personnel to operate, manage and protect them is the difficult work that goes on in the trenches around the world, quite often behind-the-scenes. In many ways, this is also the reality of a handful of industry players that have proven to be the most essential to major industrial transitions; namely, the insurance industry and standards and codes development organizations.

The general public is content in the knowledge these organizations exist and serve their respective purposes, but rarely do people seek to understand how they actually work, in complementary ways, to support the development and adoption of new technologies and the growth of new industries. These organizations promote economic expansion, in general, by providing the essential information and feedback loops the market needs for trust and confidence to multiply within business communities.

The opportunity that insurers have when they lean-in to consortia efforts that are on-going within the UI LABS context and others worldwide is two-fold: they gain a better sense of risk profiles for infrastructure and how those are changing as digital technologies are adopted, and they gain insights regarding the creation of new, digital asset classes and related insurance products that can be created.

A Look Back: Insurance Supports the Industrial Revolution

When one considers the role that insurance played in the Industrial Revolution that first started in Europe in the mid-17th century and the United States in the mid-18th century, it was the realization that aggregating risk, pricing it, and spreading it across many organizations that allowed for coordinated activity to take place in a number of burgeoning “risky” opportunity spaces. Shippers in Great Britain reasoned that if 100 ship owners each chipped in some money, then some of the ships that were damaged or lost in overseas expeditions could be rebuilt with the collected funds. Extreme losses following the Great Fire of London in 1666 led to the creation of the world’s first actual insurance company, The Fire Office. What it did was pool the resources of many firms in order to provide indemnity against losses related to future fires.

By shielding policy holders from some of the significant property losses associated with fires, insurance reduced the risks associated with aggressive economic development. Fire insurance also provided the critical financing to support the development of new infrastructure. The historical role of insurers, and the critical role they still play today, is essentially to price risk, aggregate it, and distribute it so that no individual company or entity has to assume 100% of the exposure to risk. Those who are capable of supporting more risk have always been called upon to do so in insurance schemes.

Standards Development Closes Gaps in Data and Understanding

When one considers the kind of infrastructure investments and technology development that city officials and industrial firms are catalyzing around the world today, in order to make cities more livable, sustainable, and resilient, it becomes easy to identify parallels with the earlier Industrial Revolution. However, there are some key differences that digital technology is introducing, which insurers, standards developers and other stakeholders are currently grappling with.

The biggest challenge in these early days of the digital revolution, from the perspective of insurers, is to evaluate the new risks that “digital connectedness” and the increasing collection of data are posing at both an individual product and a systems level. If the great benefits of digital technology for cities is to capture and better utilize data, then insurers are evaluating the risks involved with amassing data as a new asset class. If another key benefit is to allow for greater connection and interoperability of various commercial and industrial equipment, then insurers are trying to get their arms around the risks to the entire system of highly interconnected infrastructure. Early cyber-attacks have demonstrated what insurers anticipated early-on, which is that the weakest of interconnected links often can be manipulated in ways that threaten the entire system.

In this effort, insurers face a classic problem related to their traditional business model. Kirk Chamberlain, Senior Vice President of Marsh & McLennan Companies, Inc. explains, “Smart cities is an unknown risk area. Insurers can look back 50 years and tell you what the expected risk of something would be, based on what happened in the past. However, when historical data doesn’t exist for a particular risk, they struggle to develop accurate risk models.”

The pervasive blind-spots that exist for insurers in their constant efforts to look back at historical data in order to better forecast future risks often get filled by standards development organizations, making them natural commercial allies. Organizations like UL LLC (formerly Underwriters Laboratories) identify and describe key risks in their standards development processes, which they then use to evaluate products and systems, often before they are installed and utilized in the market. UL was actually born during the public electrification era in the United States, and early standards drafted by the company’s Founder helped the underwriters of the day get comfortable with the new electrical technology and infrastructure that was making its debut.

Today, Rachna Stegall, Director of Connected Technologies for UL, says the company has developed standards they are now using to evaluate the cyber-security of software and communications channels embedded in a variety of commercial and industrial products key to the development of modern smart buildings. They are finding that a significant portion of manufacturers do not have a common, foundational method of assessing or mitigating potential risk associated with software built into a product or system. UL is thus perceiving a security gap in the market overall, and moving in to help, largely through the development of these foundational methods, which UL expects will make it easier for manufacturers to develop safer and more cyber-secure products.

Their efforts are welcomed by insurers, that acknowledge they need more information and data to better evaluate cyber-security risks associated with infrastructure development, but would otherwise have to employ their own researchers to investigate claims made by technology manufacturers. The more that organizations work together to evaluate and share information about the risks and benefits of digital technology, the better the system is able to absorb it and make use of it to society’s best advantage.

Moving Forward: Collaborating with Insurers to Support Smart City Development

Recognizing that stakeholders in the marketplace often lack a neutral platform to collaborate on the massive, systemic issues that smart cities pose, UI LABS was established to help fill the void, getting its start in the Midwest of the United States. City Digital, a UI LABS consortia launched in 2015 with the mission of catalyzing smart cities development, has already been connecting large industrial manufacturers, academics and service providers with city officials to develop and pilot new technology in Chicago. Today, City Digital is focused on bringing insurers, standards and codes developers and product specifiers for buildings, including architects, increasingly into these efforts to ensure that investments in technologies for smart cities will continue and increase over time.

Karen Weigert, former Chief Sustainability Officer for the City of Chicago and currently Senior Fellow on Global Cities for the Chicago Council on Global Affairs, points out that cities are beginning to deploy various aspects of smart cities. “Features like sequenced traffic lights, more advanced streetlights, or more transparency across city infrastructure should lead to a better experience for residents and businesses,” Weigert notes. “In the process, various risks are likely to change. As the way the city performs overall changes, there may be new opportunities for insurers. But we are in the early days.”

In order to answer key questions about shifting risk profiles with digital technology impacting city infrastructure, insurers are seeking out new sources of data that, when combined with their existing, historical data-sets, will provide valuable insights to assist in underwriting new technologies that are being rapidly developed today. Chamberlain predicts the insurance industry will increasingly experiment with acquiring more real-time data feeds moving forward, finding ways to combine them with historical data sets to inform the next generation of insurance models. In some cases, the experimentation has already begun, with auto insurers like Allstate, for instance, developing its Drivewise program and new insurers like Metromile springing up in the market. These companies are collecting real-time data feeds from sensors loaded into cars to provide more personalized insurance rates for drivers, based on individual behaviors and/or driving habits detected and measured by devices.

Real-time insurance models are a clear goal for the industry, which will provide tangible incentives to stakeholders to invest in smarter technologies over time. Machine learning, Artificial Intelligence (AI), neural networks, etc. being developed today are all aimed at improving man’s ability to predict things in the future based on data analysis. In order to reach these goals and realize the promise of data, insurers need good visibility to emerging technologies as they are being developed. Issues like water management, energy management and ensuring the safe and efficient mobility of citizens are pervasive ones for cities that technology proposes to solve. Insurers need access to evaluate these claims in order to do their part in the underwriting and investment process. UI LABS is pleased to be doing its part to bring these critical stakeholders together to address pressing systemic challenges, within the great city of Chicago and beyond.

Picture of John Marwel

John Marwel


Within this program, we can deliver to governments and cities the possibility of implementing Smart City projects from idea (vision) to the final stage of implementation.

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