Putting the ‘auto’ into automobiles
Aon’s Global Insurance Market Opportunities report for 2016 takes a look at a wide range of potential challenges for the market as a whole. One of those challenges is a topic that has recently started to get a lot of people in the insurance industry talking. Driverless cars that rely on software instead of primarily a driver have become something for insurers to look at.
The Aon report claims that autonomous vehicles—including driverless cars—are perhaps the ultimate technological challenge, and represent a significant threat to the insurance industry specifically.
According to the report: “As we discussed in 2014, motor insurance provides 47 percent of global property-casualty premium, and generally provides a capital ballast to other lines. We estimate insurers’ loss ratio volatility in the US would increase by 40 percent if motor lines were removed from the results. Driverless cars have the potential to increase insurance costs across all other lines of business if they effectively remove the implicit capital subsidy that stable motor results provide the industry.”
Aon claims that for the insurance industry these risks also present opportunities for growth if the right combination of capital plus data and analytics can be brought to bear. Autonomous vehicles may even have an insurance upside, as the decline in personal motor premiums could be partially offset by a rise in premiums for the car manufacturers and the technology companies on whose networks the driverless vehicles operate.
Admittedly, this would not happen all at once, and Aon does not anticipate that personal motor premium will ever go away completely. However, the report suggests looking at things in more detail.
Frequency and severity
According to the report, research from experts in the field suggests that in an autonomous vehicle world, accident frequency will decrease sharply while severity increases modestly.
Claims frequency is expected to fall, as experts predict connected car technology will address 81 percent of all vehicle crashes, saving many of the 1.2 million lives lost in car accidents and hundreds of billions of dollars of economic losses each year.
"We also assume an 81 percent reduction in frequency, an increase in severity due to sensor costs, and increased cost of handling product liability claims."
Severity is likely to rise because of the increased sensor costs on autonomous vehicles; current designs put these sensors on vehicle bumpers, which means they would be the first to get damaged in the event of an accident.
Severity will also increase because of the increased cost of handling product liability claims, if we assume that accident liability will shift from the vehicle driver today to the future operator of the autonomous vehicle fleet.
Collectively, these changes will reduce pure premiums and put pressure on the insurance market to replace revenue.
Quantifying the impact
The Aon report concludes by stating that the overall impact will also vary on how fast things move in this area.
“With the first commercially-available technology predicted for 2018 a final question remains: how quickly will self-driving technologies be adopted by consumers? Here, we look to history for guidance. Cars took approximately 80 years from the date of first commercial availability to reach 90 percent adoption, air travel took approximately 60 years, mobile phones 30 years while smart phones have taken only 10 years,” says the report.
“We take a middle-of-the-road approach—30 years to reach full adoption—which is consistent with the historical propagation of safety features in personal vehicles. We also assume an 81 percent reduction in frequency, an increase in severity due to sensor costs, and increased cost of handling product liability claims.
“With these assumptions, we can project the proportion of cars on the road that will be self-driving, as well as the impact to pure premium. Figure 1 illustrates our findings. At this pace of adoption, industry pure premiums will fall 20 percent below their 2015 levels by the year 2035, and fall by more than 40 percent by the time that autonomous vehicles reach full adoption by 2050.”
The report does add a caveat, stating that adoption will of course be affected by many variables such as regulatory challenges, cost to the consumer, safety, vehicle ownership preferences, and the technology itself—and may occur faster or slower than Aon has modelled in its report.
Note however that this model masks a more significant industry shift as premium moves from the personal motor insurer to the commercial fleet insurer. Aon points out that diversified multi-line insurers will likely be able to take this change in their stride, as premium shifts from one business unit to another.
Personal lines-concentrated insurers may have a greater challenge to replace their premium base, will likely see greater volatility in overall performance, and may require changes in strategy in order to adapt successfully to an autonomous vehicle world.