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A number of social, economic and technological trends are working together to disrupt mobility. The automotive industry, in particular, is experiencing a massive amount of change. In the not-too-distant future, fully autonomous vehicles will be the norm rather than the exception, redefining urban mobility as we know it — and they will be shared, connected and green. Perhaps the most complex challenges will be faced by the global auto insurance market which is valued at an estimated US$700b.
An evolving competitive environment
All major car manufacturers are active in this space, with new partnerships continuously being announced. Most automakers are racing to differentiate their premium models with intelligent driver-assist functions, such as smart cruise control, accident avoidance, and crash monitoring and reporting. These efforts will hasten consumer trust in driverless technology and accelerate the proliferation of the technology for all car models.
Some players have deep pockets that they might use to offer cheaper insurance or increased warranties, to hasten adoption and to grab market share.
A long-term game with short-term implications
Despite this high level of interest and investment, widespread adoption of completely autonomous vehicles is not expected to take place before 2030. Part of the challenge is related to regulation, with regulators likely demanding a large amount of statistical data to demonstrate increased safety. Additional challenges include the need for modern infrastructure that sensors can reliably read, security concerns, including cybersecurity, and, of course, the cost implications.
Furthermore, the expectation is that these vehicles will initially be introduced in closed ecosystems, such as city centers or dedicated highway lanes, and integration with “traditional” vehicles will occur only when safety has been thoroughly demonstrated.
While the road to completely autonomous vehicles is still long, there are several markets where uptake is expected to be faster. Over the short term, the expectation is that commercial vehicles will lead the way, specifically trucks on highways and other off-road vehicles for mining and construction. Ride-hailing companies are another niche for experimentation, as this will significantly reduce their cost base.
Incremental automation is changing the rules of the game
Certain assisted driving systems pertaining to low levels of automation are already in place; for example, lane keeping, self-parking functionalities and autonomous emergency braking (AEB). In particular, AEB – which stops the car before it hits an obstacle if the driver does not respond in time – has been proven to reduce low-speed accidents by 20%.
Other systems have also reduced accidents. Even a relatively modest adoption of incremental advanced driver assistance technology, such as smart cruise control and crash avoidance, would significantly relieve congestion and reduce the number of congestion-related accidents.
Not only are the different levels and systems important because they make driving a car safer, but also they change the risk profile of the car. The expectation is that fewer accidents lead to lower premiums and, if this is not the case, manufacturers may take things into their own hands.
Long-term implications for the automotive and insurance industries
Overall, the expectation is that the effect of this revolution will result in reduced growth in the number of vehicles on the road, particularly in developed markets and some developing ones, such as China. In addition, the emergence of car-sharing fleets will further reduce the total number of vehicles. The combined effect will be a decline in the need for personal insurance coverage.
Over the long term, these changes and the reduction of risk profiles and accidents are likely to be massive. Widespread adoption of self-driving cars will eliminate a substantial number of automobile accidents, although this will likely be accompanied by an increase in severity of these accidents.
Because premiums lag actuarial data, insurers will face strategic choices. Forward-looking insurers are starting to prepare for the future. Innovators experimenting with usage (or mileage-based insurers) might create a stronghold around connected data and autonomous vehicles, nibble at the edges of the market and be best prepared to take advantage as the disruption grows.
Although driverless cars will become mainstream in more than a decade, there are certain considerations that insurance executives should start thinking about now. In our view, insurers will face these five key challenges.
Challenge 1: What risks will remain – and will new ones arise?
A primary aim of autonomous technology is to reduce the number of traffic accidents, and the public and regulators’ expectations in this area will be very high. At the same time, new risks will emerge, such as cyber attacks, software bugs and control failures. What will the exposure to systemic risks mean for insurability?
Challenge 2: Who is the customer, and how will we do business with them?
Who is liable for risk will be the key question, especially if a high proportion of remaining accidents will be attributable to failures in control software and systems. Whatever the outcome, the current insurer-consumer relationship – along with marketing, sales and distribution methods – will be fundamentally altered. Retaining control over this relationship will be essential if insurers are to avoid becoming redundant or marginalized by other players.
Challenge 3: How will the insurance product have to change?
Changes in liability and use will necessitate major revisions to the insurance products to meet the market’s needs. How will autonomous products be developed and configured to cover grey areas of liability and negligence resulting from the overlap between human and computer control? Would product tiers correspond to the “one-to-five” scale of the vehicle’s automation capability? Pay-per-use (versus “blanket” cover) could imply that short-term rather than annual renewable policies would become the norm – and lessons learned from current ride-sharing products could be employed. How will regulation affect or keep pace with the new products? Considerations for commercial lines might be significantly different when the rate of adoption is expected to increase the fastest and different technologies and enhanced safety overrides could be economical to deploy.
Challenge 4: How will we price it – and can it still be profitable?
The relative importance of different rating factors in pricing will change markedly. First, analysis of risk would depend primarily on the degree of self-driving versus manual control. For autonomous operation, pricing would be based on assessing the vehicle’s level of automation in terms of its technology, quality of implementation and anticipated types of driving. There are nuances between manufacturers even for relatively basic, standardized technologies, such as AEB. For example, fuller automation capability may vary depending on the original equipment manufacturer (OEM), sensor quality and software used. How would data on the technical capability and usage statistics be collected? Could this be centralized in some way and retrieved transparently by insurers, rather than having to be disclosed?
The economics of the product will also be very different given a much reduced number of claims. Key questions will be to what extent this might be offset by increased overall demand for transportation, given the surge in accessibility of car transportation combined with the anticipated benefits to congestion. Could any alternative, discretionary coverages become more relevant?
Challenge 5: What influence will legislators have?
A large number of agencies are managing pilot programs and their policies will have a major influence by encouraging or inhibiting adoption in each different country. How is legislation likely to guide the cover and scope of autonomous insurance products in the future and the likely compulsory minimum cover requirements?
Autonomous vehicles will revolutionize mobility and inevitably automobile insurance. While we cannot predict the pace of these changes, we encourage insurers to prepare accordingly.
The lessons from other industries are stark. Companies content to wait and see, or worse – are oblivious to the threat until it is too late – could share the familiar fate of other household names that have been left behind by a wave of new technology.
In considering the next steps, insurers should analyze their business portfolios and strategies to understand their exposure to these changes. They should conduct what-if scenario analysis to model potential effect and evaluate what actions will be required to transform their organizations in parallel with various levels of car automation.
Early innovators are likely to generate substantial benefit for their businesses. To be successful in this space, insurers will need to aim for agile innovation and improve the way they use increasing volumes of data. They should also explore new collaborative models to shape a connected automotive ecosystem that will include insurers, auto manufacturers, technology companies and regulators.
EY Legal Services Contacts:
Zhong Lin – Automotive Sector Law Leader
Kiran Desai – EU Competition Law Leader
Peter Katko – Global Digital Law Leader
Also see our entry, ‘Connected cars: Navigating the competition law implications’.