By the time today’s millennial insurance professionals are its top executives, the U.S. personal auto insurance industry will be a skeleton of its current self.
Within 25 years, the private passenger automobile insurance industry will shrink by as much as 60 percent, according to a report by the consulting firm KPMG.
That’s the bad news.
The good news is it will be smaller because there will be fewer car accidents and fatalities largely thanks to “radically safer” vehicles, according to KPMG in its report, “Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles.”
A rise in on-demand car services and the adoption of autonomous vehicles will also reduce the need for auto insurance, KPMG says.
According to KPMG, accident frequency could decline by 80 percent by the year 2040 — when millennials will be ages 44 to 58— mainly due to safer cars and more human-free driving.
While the cost per accident may rise substantially because the new cars and their parts will be more expensive, the frequency decline will be dramatic and result in sizable reductions in loss costs and premiums, the report says. More than 90 percent of accidents each year are caused by driver error, according to the report.
Combining the accident frequency and severity assumptions, the personal auto sector will cover less than $50 billion in loss costs by 2040, a 60 percent drop from its current $125 billion in loss costs, says the KPMG report.
Also, according to the report, the downward frequency trend already underway with safer cars will accelerate sooner than many in the industry expect with the growth in on-demand and car-sharing services and the introduction of driverless cars.
“Autonomous vehicles are poised to completely transform the auto insurance industry, and underlying market forces, including technology enablement, consumer adoption, and regulatory permission, are already aligning to enable mass change,” said Jerry Albright, principal in KPMG’s Actuarial and Insurance Risk practice. “The risk profile of vehicles is changing daily, and the subsequent drop in industry loss costs would reduce the size of the auto insurance market, trigger consolidation in the personal lines space, attract new competitors, and force dramatic operational changes within carriers.”
The personal auto insurance landscape is already feeling the effects of safe car technology with the growing popularity of accident-prevention features such as traffic jam assistance and lane departure warnings that partially remove the human element from driving.
The report cites David Zuby, executive vice president and chief research officer of the industry-supported Insurance Institute for Highway Safety, who points to research showing that vehicles equipped with front crash prevention technology have a 7–15 percent lower claim frequency under property damage liability coverage than comparable vehicles without it.
“Further automation, if successful, could lead to even further reduction of insurance claims,” says Zuby.
Bodily injury liability claims frequency fell nationally by 14.5 percent from 2005 to 2013, the Insurance Research Council (IRC) recently reported. However, the IRC also found that while frequency has been going down, the average cost of an auto injury claim has been going up— more than 30 percent.
KPMG estimates that severity incurred in each accident is likely to rise considerably— from almost $14,000 to roughly $35,000 by 2040 — given higher-priced vehicles with more costly technology. But KPMG contends that this claims severity will be far outpaced by the decline accident frequency.
There will still be auto accidents because of weather, road conditions and animal collisions. Also, technology failures will cause problems. The authors also note that drivers will likely have the option to turn off the safety technology at times and drive manually instead.
Other experts and consultants have also weighed in on the effect of safer cars, car-sharing and autonomous cars on the insurance business.
A report early this year by PwC was less aggressive in its estimates than KPMG’s. It predicted that auto insurance losses would drop by 10 percent by 2025 and 20 percent by 2035, mainly due to safe driving technology in cars. It was more conservative in its estimate of how quickly autonomous driving would be adopted on a widespread basis.
In a recent interview by Claims Journal with Tom Kavanaugh, the PwC partner said that insurers might actually see a benefit in the short-term as premiums hold up even as frequency declines but eventually they will lose premiums and have to find other sources of revenue. “The unknown portion of the equation is around accident severity,” Kavanaugh said. “One would anticipate that things like repair costs would increase due to the complex nature of the technology within the vehicles; the question then becomes where is that intersection of decreased frequency and increased severity and/or repair costs?”
In previous research, the IIHS estimated that if all cars had forward collision warning, lane departure warning, blind spot detection and other safety systems, then one in three fatal crashes and one in five accidents with injuries could be prevented.
A recent survey by the University of Iowa Public Policy Center’s Transportation and Vehicle Safety program noted that just because cars have technology features doesn’t mean drivers are aware of them or know how to use them. Adaptive cruise control has been an option on some cars for almost a decade but 65 percent of drivers don’t know what it is, the survey found. The university and the National Safety Council have launched a campaign — MyCarDoes What.com — to educate drivers on the safety features.
Other reports suggest the insurance industry will be hurt because there could be fewer cars on the road to insure. A Barclays report estimated that driverless and shared cars could cut U.S. auto sales in half by 2040. Other researchers have said while there may be fewer cars, the number of miles driven could increase with driverless cars.
The KPMG report acknowledges some of these and related trends but suggests that they do not override the effects of “better and faster driving decisions” being made by vehicles rather than by humans, and concludes that the frequency of accidents will still decline dramatically.
As the auto losses fall by as much as 60 percent, Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice, sees personal auto premiums shrinking proportionally. “The shrinkage in real terms may be even greater,” he says.
While millennial insurance executives may see their personal lines market slip way over the next few decades, not all is lost. Personal lines’ loss may, in fact, be commercial lines’ gain.
“Commercial lines could take a larger share, as the marketplace moves towards car sharing and mobility on demand services,” said Alex Bell, managing director in KPMG’s CIO Advisory practice. “As the vehicle makes more decisions, the potential liability of the software developer and manufacturer will increase too. In addition, losses covered by products liability policies will most likely increase because the sophisticated technology that underpins driverless vehicles will also need to be insured.”
Other have suggested there could be gains in other commercial lines areas, too. In a discussion this May, experts at a RIMS (Risk and Insurance Management Society) conference suggested the shift could also affect coverage of directors and officers of corporations that make, service or supply parts for the cars. In addition, computer liability could be triggered for providers of the systems that provide connectivity between the vehicles and the traffic-control infrastructure.
Malicious interference with vehicle operating systems or a breach of personal data connected with the vehicles could further the appetite for cyber liability insurance, Michael Stankard, managing director of the automotive practice with Aon Risk Solutions, said at the RIMS meeting. And every entity involved in producing driverless cars could face some type of reputational risk.
Implications for Insurers
The implications for the auto insurance industry are enormous, according to the KPMG report authors, who predict extensive consolidation among insurers and sweeping changes in how auto insurers operate.
KPMG anticipates “severe implications” of an environment of shrinking personal auto premiums, especially given that the insurance industry as a whole has not generated an underwriting profit in personal or commercial auto for several years in a “normal” market environment.
Joe Schneider, managing director at KPMG Corporate Finance, believes the continued proliferation of automated vehicles will put considerable strain on carriers. “Many insurers don’t have a profitability cushion to erode and lack the structural agility to shed costs quickly in an environment of rapid change,” Schneider said. “Once the massive market disruption begins and traditional insurance business models are flipped upside down, we expect significant turmoil.”
KPMG surveyed insurance executives to gauge their awareness of industry issues around autonomous vehicles and concluded that the industry is not prepared for what’s coming. More than half of respondents (55 percent) told KPMG they believe that regulators will impede the adoption of autonomous vehicles.
The KPMG report identifies four possible business strategies for insurers looking to address the changes it says are coming:
- Consolidate: For those existing carriers with scale, consider acquisition opportunities to leverage large existing platforms.
- Diversify: Move into other products that could potentially shield from challenges across the personal and commercial auto lines of business.
- Innovate: With new areas of risk, identify new areas to provide insurance protection and launch new products to meet needs.
- Partner and ally: Consider new business models, which will likely require partnering with others, where insurance could be embedded into the cost of a vehicle or part of usage fees.
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- RIMS: Preparing for Risk Transfer Driven by Autonomous Vehicles
- Video: Driverless Vehicle Impact on Auto Insurance Industry