January 08, 2013

State of the art technologies such as automatic braking, telematics, location awareness, vehicle-to-vehicle (V2V) communications, improved stability control for large commercial vehicles, and driverless cars promise considerable reductions in the frequency and severity of auto collisions. This could significantly reduce auto insurance premiums – in fact, the ongoing evolution of previously unavailable technologies is causing many to wonder if auto insurance will go the way of the Edsel.

Marik Brockman
Marik Brockman, PwC

At least for the foreseeable future, we think that business will continue more or less as normal for the industry. Better vehicle design, anti-lock breaking, stability control, airbags, back-up cameras, and other features are now common throughout model lines, yet the cost of auto insurance held steady with inflation in the U.S. for the decade leading up to 2009. While telematics have the potential to reduce premiums for some drivers – early adopters in particular are likely to be less risky customers and receive the greatest discounts – they actually may help the industry price policies more effectively overall.

[For another perspective, see Prepare for Deep Auto Insurance Premium Drop Scenario, Celent Report Advises.]

A series of cost factors and adoption resistance will continue to buoy premiums: high repair costs for increasingly complex vehicles, increasing medical costs for injuries, more frequent and devastating natural disasters, consumer advocates resisting potential privacy risks, and electronic malfunctions that fail to reduce accidents. Moreover, customers take time to adopt new technologies as they evolve due to lack of total understanding, high purchase costs, or the natural inertia of wanting to fully utilize durable products for much of their lengthy lifecycle. In fact, the age of American cars and trucks on the road has reached a record high of 10.8 years.

This is not to say that there will not ultimately be a significant reduction in driver premiums, but significant environmental forces and natural inertia mean that they will not occur overnight.

Future Scenarios

However, there are strong forces that do stand to reshape the sector. These include shifts to new types of coverage, alternative distribution channels, and redefined customer segments.

Anand Rao
Anand Rao, PwC, co-author

We envision three highly possible evolutionary changes to the personal auto insurance industry's products, distribution, and customers, as well as one more truly transformative change that, if it occurs, would significantly affect the shape and size of the industry as we know it.

1. Risk Shifting - Advanced automotive technologies that reduce collisions, such as location awareness and automatic breaking, will increasingly shift the risk of driver error to the risk of mechanical malfunction. This would shift driver liability to manufacturers and result in a new form of auto insurance that could be packaged with cars that rely on these technologies. In turn, this would shift the key buyer from the end-consumer to the manufacturer, and fundamentally change the entire value chain, from product definition to pricing, marketing, distribution, underwriting, service, and claims. If carriers decide to market this coverage to consumers, then they would do so either at the point of sale, or perhaps try to increase market share by co-marketing with the manufacturer and/or dealer.

2. Risk Sharing - Including smartphone apps, social networking has already started to play a role in collision reduction. In addition, the dramatic rise in social networking has enabled individuals to develop new affinities wherein people with similar attitudes, interests, and behaviors can pool resources to share risk and lower overall costs. For example, there are new carriers that combine social networking with insurance by connecting customers to form insurance networks that promise significantly lower premiums. These carriers claim that their models allow insurers to access new customers virally, decrease process costs, and reduce claim ratios. While, on the one hand, this represents the potential for lower rates for more groups, on the other hand, it also could make insurance more affordable for some and therefore lead to premium growth.

3. Risk Slicing - Urban living and the increasing availability of automotive time-sharing suggests a future in which premiums move from 24-hour asset coverage to a pay-per-use model. Over 80 percent of the U.S. and over 50 percent of the global population is considered urban; understandably, car sharing is rapidly growing. According to a Frost & Sullivan research estimate that Forbes reported in March 2012, the global car sharing market could exceed $10 billion by 2020, and the North American car sharing market alone could surpass 4.4 million members and $3 billion by 2016. As a result, an increasing number of low-frequency drivers is likely to mean at least some reduction in individual premiums.

However, this scenario does not necessarily represent only lost premiums. Most of the people do not choose to own cars will need to rent them at least occasionally; accordingly, car sharing can expand the market for alternative buyers of insurance.

4. Risk Reduction - Unlike the above scenarios that represent significant change but not necessarily extreme disruption to the insurance industry, driverless cars equipped with the latest awareness technologies could completely change the industry as we know it. Google, Inc.'s auto research investments are hastening the eventual, widespread availability of driverless cars. Google’s driverless, laser-equipped vehicles have logged over 300,000 miles without an accident; moreover, the company has begun investing in the research and development that initially sets and then drives down the costs of new technologies. Driverless cars are now legal on California roadways, and Google’s U.S. spending on advocacy of driverless vehicles exceeded $9 million in just the first half of 2012.

Moreover, in March 2012, J.D. Power and Associates found 37 percent of U.S. consumers were interested in autonomous driving technology. More impressively, the first phase of the NHTSA's Safety Pilot revealed that 9 out of 10 drivers who experienced V2V technology "have a highly favorable opinion of its safety benefits and would [value] V2V safety features on their personal vehicle."

Whatever the future holds, the automotive insurance business is going to change. Despite some doomsday predictions for the industry, there are opportunities for insurers to develop innovative new products, alternative distribution approaches, and new customer segments which can help them thrive, not just survive. The carriers that can think creatively about new markets and potentially drastic changes to automotive technology and ownership will be the ones who are most likely to successfully navigate the path to the future.

[For related news, see Rapid Emergence of Driverless Cars Demands Creation of Legal Infrastructure, Stanford Scholar Says .]