Autonomous Vehicles- Impact on the Insurance Industry
Personal Auto insurance is among the best known insurance product types which is generating billions of dollars in annual revenue and supporting thousands of jobs. Therefore, the disruption anticipated by autonomous cars is a genuine concern for the insurance industry. According to updated research by KPMG, Autonomous vehicle technology, a rise in on-demand transportation and a shifting of liability to manufacturers will shrink the auto insurance sector by more than 70 percent or $137 billion by 2050.
Tesla is the first automaker to really show as how the insurance industry is bound to change when self-driving cars hit the road. It has quietly been selling car insurance with its vehicles in Asia as part of its vision to one day include insurance in the final price of its vehicles. It has resulted from the fact that Autopilot makes Tesla cars much safer than traditional ones on the road today. Furthermore, Google and Ford are pursuing fully self-driving cars. Ford actually plans to roll out a fleet of driverless cars without a steering wheel or pedals in three year time by 2021.
These self-driving cars are anticipated to disrupt the insurance industry in following ways:
Reduction in number of claims: Almost 90% of road accidents arise from the human errors. Driverless cars will potentially remove this human error risk and could intensely improve the road safety. The domino impact could be that the need for third-party damage insurance will almost disappear and tumbling premiums could spells doom for many insurers.
Increase in claim size - Even if the frequency of accidents goes down, their severity will go up due to the higher cost to re-fix cars with all the sensors, radars, etc. Although the technology would become cheaper over a period of time, these costs and the expensive equipment and software may inflate premiums
Underwriting Impact: Due to the removal of human error risk, the driverless technology will make underwriting less important. The basis of competition will shift to other aspects of the business, such as customer relationships, claims processing, expense management and distribution.
Terrorism and Cyber risks - Driverless cars may rely on internet connectivity with inevitable risk of disruption. ‘Spam jams’, hacker created congestion or clogged up roads could become prevalent. These autonomous cars would also be a perfect target for criminals. Moreover, the FBI recently pointed out that driverless cars could potentially be a threat as terrorists could gain control of vehicles for attacks.
Fraud reduction - The increased quantity and availability of real time data could be beneficial in accurately assessing the risk of policyholders and reducing fraudulent claims. Claimants will no longer be able to exaggerate and lie about the cause of an accident, reducing the amount insurers pay out unnecessarily on fraudulent claims and eliminating ‘crash-for-cash’ scams
In future, accidents caused by a car that’s driving itself will likely become the responsibility of the technology company or car manufacturer, and claims will be made through the company’s product liability insurance. This shift from personal lines motor insurance to product liability insurance could introduce big aggregation risk caused by a system failure affecting multiple vehicles at once. Another issue is that product liability insurance policies are not currently fit for purpose; insurers will need to design an entirely new product and motor insurers should be at the forefront of any such efforts.
Meanwhile, Big Venture start-ups might accelerate the emergence of car-sharing fleets, thereby significantly lowering the need for personal insurance coverage. Or, in classic innovator's dilemma fashion, start-ups like mileage-based insurer MetroMile might eat away at the edges of the market and be best prepared to take advantage as the disruption grows. Therefore, the insurance companies need to adapt from being an insurer of the mass market of drivers, to offering policies protecting against other issues involving driverless cars, such as cyber risk and overall product liability.
Overall, there is a growing consensus that a future contraction in the motor insurance industry is inevitable as premiums fall in line with a decrease in accident frequency. However, autonomous cars will still require driverless car insurance and it will be important for motor insurers to position themselves to underwrite this, and not let it fall to the manufacturers. Competition in this arena is likely to be fierce and insurers will need to be at the forefront of creating innovative new products for customers with autonomous cars.