According to a new report, self-driving cars and ride-sharing services are will make a significant impact on the personal auto insurance market.
Self-driving cars may drive auto insurers out of business — or at least make a big dent on the auto insurance marketplace in the coming decades. A recent analysis by KPMG, “The Chaotic Middle: The Autonomous Vehicle and Disruption in Automobile Insurance,” estimates the sector could see its value diminished by as much as 71%, or $137 billion, by 2050.
Driverless vehicles aren’t the only disruptors the auto insurance industry faces in the not-so-distant future. On-demand ride-sharing services such as Uber and Lyft have made car ownership less of a necessity. As a result, fewer people are purchasing individual policies. In fact, personal lines will likely take the biggest hit, with KPMG predicting a 64% drop in its overall share of the auto insurance market.
Autonomous Cars = Safer Cars
By eliminating the possibility of human error, autonomous cars could spur a 90% reduction in accident frequency by 2050, KPMG projects. That translates into 0.005 crashes per vehicle, compared to the current rate of 0.047.
As accidents decrease, KPMG predicts two scenarios for auto claim payouts. Accounting for inflation and more expensive repairs (due to the complex technology in driverless cars), the average of cost of a claim will skyrocket from about $15,400 today to $39,400 by 2050. However, as these driverless vehicles become safer and repairs less pricey, KPMG forecasts total losses from auto accidents could plunge by as much as $122 billion, or 63%, by 2025. That reduction, of course, means less need for personal auto insurance and therefore, fewer premiums written for what is now a $247-billion market.
What’s more, the way in which these cars are built will also have an effect on rates. Since these cars depend on complex and interconnected tech systems, the original equipment manufacturers (OEMs) will assume more risk and provide insurance directly to the auto buyers through products liability coverage. KPMG predicts product liability insurance will account for up to 57% of total auto losses from autonomous vehicles by 2050.
Even more ominous for insurers, consumers appear willing to buy auto insurance from a non-traditional platforms and/or providers. A survey from Morgan Stanley and Boston Consulting Group found 26% of consumers said they’d purchase auto insurance from Apple, Google, or AT&T. Interestingly, both Apple and Google have launched self-driving car programs.
Ride-sharing Rules the Road
As more consumers would rather summon a vehicle via an app than rev up their own car, ride-sharing services will soon rule the road. KPMG estimates by 2024, the majority of cars maneuvering through cities and surrounding suburbs will be piloted not by a car owner, but a ride-sharing driver. By 2035, “shared mobility,” as KPMG terms it, will become the norm in transportation.
As vehicle owners decide to share their cars, insurers will be tasked to write separate policies to reflect the amount and/or type of use by each party involved. When the car is used for personal reasons, the driver needs personal auto insurance. When being driven for a ride-sharing service, the driver requires commercial auto coverage. Commercial comprehensive insurance also be required to cover autonomous vehicles used for business purposes.
Expand Insurance Lines
To offset the decline in the auto insurance sector, insurers and their agents must offer a variety of new coverage types, the KPMG report suggests. In addition to products liability and commercial auto insurance, homeowners will require expanded insurance coverage to cover smart devices and appliances in their homes.
Autonomous vehicles operate through cloud-based networks, and, therefore, are susceptible to hacking. More than 50% of risk managers pointed to cyber security as the greatest threat to autonomous vehicles, according to a 2016 Munich Re survey. Insurers should emphasize cyber insurance to cover those risks.
KPMG also recommends auto insurers bump up their business owners policies (BOPs) insurance lines. Even though auto insurance may be unprofitable currently, KPMG points out most auto insurers are well capitalized. Leveraging those funds as well as their strong distribution networks and established customer relationships, auto insurers can survive the chaos by diversifying their product mix.