IoT is the biggest since the industrial revolution and it will have a deep and profound effect on the way every company in every industry does business

For commercial risk managers to understand the Internet of Things (IoT) as a phenomenon that exclusively affects consumer products is to underestimate its promise and its impact. Indeed, much of the press focuses on consumer applications of connected devices: smartwatches and Internet-enabled homes, but industrial risk managers, brokers, and insurers should take a moment to appreciate how IoT could change the businesses they serve as well.

The financial impact of IoT cannot be ignored. McKinsey released a report which estimated IoT’s economic impact to be between $3.9 and 11.1 Trillion a year by 2025. At the top end, RAND Europe estimated that IoT’s full global economic potential across all affected sectors could reach $14.4 trillion or roughly the size of the European Union GDP by 2020.

The truth is that this technological revolution — the biggest since the industrial revolution — will have a deep and profound effect on the way every company in every industry does business. We explore how it could change 9 industries in a new whitepaper, “The Internet of Things: Evolution or Revolution.”

Part of the problem stems from ubiquitous terminology about ‘connected devices’. The term suggests a library of independent devices that draw upon Internet capabilities to collect and provide information. This is an understatement that misses the IoT’s true potential. Companies should instead consider the IoT as a series of connected machines within a new industrial ecosystem, with a special emphasis on the connections and control.

Look no further than the growth in research-and-development spending on IoT for evidence of a massive transformation already underway. Last year, Intel opened four European “innovation centers” — one each in the UK, Stockholm, Munich and Istanbul — that will focus on the Iot. In March 2015, IBM announced it would invest $3 billion in a new division focused specifically on the IoT. The German government is investing €200 million and engaging companies such as Siemens, Deutsche Telekom and SAP in its “Industry 4.0” smart manufacturing initiative.

Many large industrial firms are already realizing the benefits. For example, Swiss power and technology-automation company ABB is incorporating IoT technologies into its services to increase efficiency and reduce risk. Sensors embedded in tunnels to drill for mining are designed to alert the operator if the device is likely to fail. In one instance, based on the alert, the operator spent 30 minutes cleaning a dust filter during the drill’s next planned outage. This intervention allowed crews to prevent unscheduled downtime, avoided a riskier repair operation, and saved over 1M Euro in costs that would have resulted from a breakdown.

Similar technology is being used in the food-transportation and logistics industry to notify truck drivers that a freezer unit is failing, allowing for emergency repairs to be made before food spoils, rather than after. While the world buzzes about the prospect of driverless cars that may be road-ready in five years or less, German-owned Daimler Trucks North America in May announced it is ready to test driverless Freightliner Inspiration trucks on U.S. roads. At the production end of the food spectrum, farmers are embedding sensors in their fields to monitor water usage and sunlight to increase efficiency and ensure healthy crops. Driverless tractors are coming soon, too.

There are many applications for virtually every industry related to construction and real estate, from telecom to energy. Many of these applications are designed not just for convenience, but also for safety. For example, electrical systems can be equipped with sensors that detect wiring failures, warning technicians of fire hazards before the fire can occur.

All of these examples, and the countless others that make up the IoT revolution, create tremendous opportunities. They also pose new challenges for risk managers. As companies of all kinds pour more funding into R&D with a focus on incorporating IoT capabilities into their products and processes, risk managers need to be connected with R&D departments like never before so that they can be aware of what is coming and prepare to mitigate and insure risk appropriately.

As R&D spending in Europe rises, much of it earmarked for IoT, industrial risk managers might wonder whether their R&D departments are part of this trend – or ahead of it? The European Commission’s Joint Research Center reported that for 2014, the world’s top 2,500 R&D investors grew their investments by 4.9 percent, far outpacing their 2.7 percent growth of net sales. The International Data Corporation projects that spending tied to the Internet of Things will exceed $1.7 trillion worldwide in 2015, a 14 percent increase from 2014. By 2020, IDC estimates, spending will reach $3 trillion.

All IoT pioneers must grapple with well-known concerns over privacy — how to balance expectations of privacy with the inherent need to collect and analyze data in ways that harness the true power of the IoT. The biggest risks for the insurance industry, however, center on increasingly complex questions about liability and cybersecurity. If a hacker prevents a sensor from detecting a potential problem in a machine, who is at fault? If a sensor fails to detect a potential problem in a machine? If a semi-autonomous truck is involved in an accident, who is responsible? With so much data collected and shared across a host of machines, who is accountable for accuracy and security? Now that everything can be monitored, could there be a new risk of failing to monitor?

The IoT revolution is much more profound than what we read about in daily newspapers and online. The possibilities extend so far beyond the consumer products dominating today’s discussions that in five years, it will be difficult to find an industry that hasn’t experienced dramatic transformation. There has never in our lifetimes been a more exciting time to be in the risk-management business. The challenges we face are unlike any we have before, and so are the opportunities.

This article was written by Nicolas Berg head of casualty for AIG EMEA