Flipped Upside Down

By | November 2, 2015

A rise in on-demand car services and the adoption of autonomous vehicles will be contributing factors to a huge reduction in the size of the auto insurance market, according to a report by the consulting firm KPMG.

In its report, “Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles,” KPMG says that within 25 years, the private passenger auto insurance industry will shrink by as much as 60 percent.

Accident frequency could also decline by 80 percent by 2040 – when millennials will be ages 44 to 58 – mainly due to safer cars and more human-free driving.

While cost per accident may rise substantially because new cars and their parts will be more expensive, frequency decline will 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.

Autonomous vehicles are poised to completely transform the auto insurance industry.

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. Albright said the drop in industry loss costs would trigger consolidation in the personal lines space, attract new competitors, and force operational changes within carriers.

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.

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 proliferation of automated vehicles will strain 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, adding that he expects “significant turmoil.”

About Andrea Wells

Andrea Wells is a veteran insurance editor and Editor-in-Chef of Insurance Journal Magazine. More from Andrea Wells

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Insurance Journal West November 2, 2015
November 2, 2015
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