Until recently, it could be said of the Insurance industry, that it was not the quickest to embrace technology even among the financial services sector. That can no longer be held true considering what has emerged on the insurance industry landscape – from wearable technology, telematics and internet of things, to cloud computing, advanced analytics, and blockchain etc. This is true in case of personal lines industry. One can now compare products, by offerings and price and buy a policy, and even go through the entire policy life cycle without the need to interact with a human.
The pace and scale of technology adoption varies with the disruption largely coming in form new digital players with their low-cost technology platforms and business models. With large traditional insurers playing catch up, the future of auto insurance could become unrecognizable from what it is today. For example, with the advances in AI, IoT, and blockchain, the entire process of insuring vehicles and handling claims can become automatic. Imagine embedded devices that signal the occurrence of a claimable event for which claims can be made. Smart contracts could then ensure a near simultaneous pay out on standard claims. So, while all this looks exciting as well as achievable there are also certain aspects to the advancements in technology that pose challenges to the existing auto insurance industry.
Manufacturers becoming the new insurers
The growing prevalence of embedded software technology in cars has also made the cost of insuring them that much higher. Between backup cameras, auto-braking systems, lane departure warnings and other technologies, the auto industry has seen technology in cars skyrocket over the past few years. Car manufacturers are not only focused on an easier driving experience, but more importantly, driver safety and accident avoidance. While that may reduce the frequency of accidents, all the new technology is driving up the cost of repairs, a reality that auto insurers will have to account for while pricing policies and taking on new risk. Some analysts even predict that the rising costs of insurance can limit the extent to which new technology is adopted in cars. But that is where vehicle manufacturers are beginning to step in to fill the void by offering to club insurance with the sticker price.
Tesla for example has already started providing insurance to their cars in California that promises to make the insurance affordable by 20 to 30%. The average monthly insurance rate for a Tesla S through Tesla’s Insurance program compares favourably to rates from other popular insurance companies:
|Company||Tesla Model S Monthly Insurance Rate|
The manufacturers have an inherent advantage as they understand their vehicles, their technology, and their repair costs better, giving them an incentive to start clubbing insurance along with the sale of the vehicles. For the insurers the risk is losing control over the data on which they depend to price risk effectively. Data including statistics on speed, distance between vehicles, response to weather conditions, brake pressure, and driver distractions will be gathered by software embedded in the car that is proprietary to the manufacturer. Automakers will aggregate that data from a vast fleet of connected vehicles. They will thus be in a better position than insurers to understand and price risk.
Changing dynamics in auto insurance:
Manufacturers entering auto insurance isn’t the only threat to auto insurance companies. The increased penetration of smartphones and internet means that the number of users who have opted for ride sharing services have also increased exponentially. The ridesharing market which was estimated at $75Bn at the end of 2019 is expected to reach $200Bn by 2025. This coupled with the increase in cost of owning a personal vehicle because of rising insurance, maintenance costs, and fuel bills etc., has seen a change in peoples’ (read millennials) behaviour and attitudes, who are now ditching costly buys and instead opt for on-demand mobility services. This is reflected in the decrease in new automobile sales. The number of new cars sold in US has been declining since 2015 when 17.5 million cars were sold to just above 15 million in 2019.
This may not be the only example of technology changing consumer behaviour and threatening the auto insurance industry. The expected arrival of automotive transportation in various degrees would push the boundaries of what is being insured. Self-driving cars when they become mainstream would change the characteristic of insurance from driver liability to product liability. It is estimated that the global vehicle automation market size will garner $500 billion by 2030 with 25% miles driven by self-driving electric vehicles.
The expected arrival of vehicle automation in various degrees would push the boundaries of what is being insured. Self-driving cars when they become mainstream would change the characteristic of insurance from Driver liability to Product liability.
With ridesharing, car sharing, and autonomous vehicles increasingly replacing traditional models of automotive transportation, auto insurance companies may have to look at newer business models. Add to these, the improvements in vehicle safety will likely reduce or eliminate a substantial amount of today’s insurance premiums. Over time, several key factors will drive these anticipated changes:
- A reduction in the total number of vehicles, as consumers adopt cars hiring and ride sharing
- A reduction in claim frequency, as vehicles get equipped with better technology to avoid collision and lane assistance etc.
- A shift from personal auto to commercial and product liability-type insurance for shared autonomous vehicles
- Cyber risk will become a real concern for autonomous vehicles and will need to be priced into insurance policies.
What to expect?
Although it’s too early for some of these trends such as self-driving cars, we can expect to see some broad changes in how the auto insurance industry responds or transforms itself to meet these challenges.
- Increased focus on data and analytics: Data will continue to be a key driver of change and disruption, requiring insurers to become data-driven companies. With increased proliferation of IoT and all the data coming from autonomous vehicles, rideshare apps and more, the industry will shift to real-time data and continuous underwriting to provide innovative products than ever.
- Consolidation and product diversification: There could be a degree of consolidation both from within and outside the auto industry and more partnerships with auto manufacturers might happen. Auto insurance companies to stay competitive may offer a suite of insurance products by bundling a variety of risks and push for greater personalization of their services and products to take on manufacturers entering the market. They could also venture into new service lines such as cyber risk insurance, product insurance, commercial lines, etc. to deepen their reach.
So, in addition to the increased adoption of new technology, platforms, and tools, the two focus areas above would be the key differentiator for insurers that would help them to foreground customer centricity and emerge stronger and successful.