The evolving world of auto insurance
Will auto insurance of the future have more to do with liability than personal insurance? That's certainly the initial direction we're seeing lately with Volvo, Google and Mercedes all stepping up to assume responsibility for accidents related to autonomous technology. Paul Carroll talks about the future of auto insurance in the Beginning of the End for Car Insurance?, his recent post at Insurance Thought Leadership blog.
He makes the case that there will be little effect on insurers in the short term because "... Only a small number of drivers will be operating their cars autonomously and only for a portion of their time on the road." He also works through some of the stages that we will need to go through before the market changes significantly, but also notes that, "the issue about traditional auto insurance is much less about about if it goes away and much more about when." He offers his own thoughts on the time frame:
"When" is a legitimate question. It takes 15 years or more for the full complement of cars on U.S. roads to be replaced, so you could decide that autonomous-car technology won’t really be mature for a few years, then start a clock and count out 15 years to a time when roads will be fully autonomous. That approach takes many people’s calculations to 2030 and beyond — by which time today’s C-suite members will be safely retired.
But many autonomous technologies, such as forward collision avoidance systems and automated braking, can be installed as a retrofit — Autonomoustuff, advised by our friend Guy Fraker, is a notable supplier. And the dynamics of auto accidents and insurance change long before every car becomes autonomous. Many studies say 20% to 25% penetration is plenty to cause major changes.
Meanwhile, at IA Magazine, Jacquelyn Connelly talks about two recent trends that are affecting auto insurance in her article How the Personal Auto Risk Pool is Evolving. She points to lower frequency and higher severity: While safety devices are reducing the number of accidents, expensive electronics make cars more costly to repair. The second trend she discusses is millennial behavior. Between a migration to urban centers and a growing reluctance to commit to ownership, the numbers of cars may dwindle. With car and ride-sharing services growing, we may see a greater increase in as-needed car use over ownership.
For additional reading, see KPMG's report, Automobile insurance in the era of autonomous vehicles. They interviewed senior executives at insurers representing about $85 billion in private and commercial auto premium to find out what they think and how ready they are for the pending market changes. The result is a 52-page PDF report. Here's an excerpt from the introductory page:
The survey found skepticism about the potential transformation. Few carriers have taken action—not due to doubts about the possible ramifications, but rather because most believe the change will happen far into the future, if at all. When the transformation starts to take hold, most survey respondents agreed that there will need to be major changes across all the core functions, from underwriting to claims.
The executives surveyed also anticipated a shift in the insurance landscape, with traditional manufacturers and high-tech companies playing significantly bigger roles in the future. The core of this document provides an in-depth look at our full survey results.
The potential effects on the industry could be stark:
The core ingredients are aligning to enable mass change starting in a decade. These components include technology enablement, consumer adoption, and regulatory permission.
A continual decline in the frequency of accidents will drive a drop in industry loss costs and subsequently premium, with a precipitous fall starting as the car stock begins to convert. The mix of insurance will also likely change, as commercial and product liability lines expand. Within 25 years, our models suggest a scenario where the personal automobile insurance sector could shrink to less than 40 percent of its current size.
The elimination of excess underwriting capacity could bring severe market issues, with changing business models and new competitors only adding to the turbulence and speed of change.