Smart home insurance: Collaboration and pricing

Abstract

A product marketed as smart home insurance combines home insurance and “smart” home products, at an attractive price, so that customers are better protected from hazards and hence the insurance company suffers fewer losses. Our study analyzes two policies offered by insurers to promote the adoption of smart products: a discount on insurance either with or without offering a free smart product to customers. We examine the insurer’s preferences with regard to these two policies for two types of interactions with the smart product manufacturer (SPM): the no-contract setting and the wholesale-price contract setting. A Nash model allows us to compare the players’ pricing decisions regarding both types of policies and different interactions. For the wholesale-price contract, we find that the insurer always prefers the free smart product policy (the insurer incurs the cost of the smart product). In the no-contract setting, the insurer prefers the free smart product unless the product development cost coefficient is high. We observe that the change in an insurer’s decisions—namely, those that are affected by hazard and customer characteristics—varies with the type of interaction. Finally, when an SPM is the market leader, we find that insurers are indifferent between the two promotional policies because the same profit results in both cases.