May 27, 2016

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Will New Era Cars create Blue Ocean for Auto Insurers?

Will New Era Cars Benefit Auto Insurers

Telematics-fitted Cars, Cars with cruise control and emergency automatic braking, Driverless cars and what not… the era of continuous innovation in this industry keeps on permeating our day to-day life. While the underlying theme behind each of these focusses around “reducing the number of accidents and promote comfortable/safe driving on the road”, car manufacturers keep on adding “features” that will transfer operational control of the vehicle significantly from the driver to automated systems. The Car Industry doesn’t preclude a futuristic scenario (though not necessarily in the near future) when we will be travelling in Uber & Lyft without drivers!!

Anyone who is associated with Insurance will find it very interesting to look at how these innovations might impact Car Insurers. In today’s world where the Car Insurance line of business is already stung by shrinking margins (due to competitive pricing on one hand and increasing claims payments on the other), these auto innovations in many of the Insurers’ opinion are bound to further dent the topline in terms of reduced written premiums. As we leverage automation to reduce human driving errors resulting in far fewer accidents, customers are also going to expect car insurance premiums to go down and shop around providers for the cheapest insurance premium rates further triggering price wars.

However this will also mean these innovations are going to impact the car insurance industry in various ways – which might force Insurers to think of newer business models (products, services, partnerships etc.) to sustain and further enhance their market presence. As the focus of Insurance in a driverless car environment shifts from human drivers towards built-in technology that will enable the next generation cars to sense surroundings and accordingly take driving decisions, few key areas within the Insurance value chain that have the potential to alter the future game plan for auto insurance are:

  1. In case of an accident (though expected to be highly improbable) who will assume the liability? Will it be the owner/driver of the car or its manufacturer or the equipment or software manufacturer? How the claims management ecosystem is expected to evolve? Will we need specialized adjusters to handle claims involving damages to the supporting equipment?
  2. Rating and underwriting for car Insurance will more focus on the security and safe functioning of the vehicle along with its set of software and hardware that enable the driverless capabilities – such as onboard software, cameras, radar, altimeters etc. instead of the human driver. Though the frequency of accidents will come down rapidly, the loss expenses per accident is bound to go up due to enhanced cost of the supporting equipment, which needs to be factored in during the rating/underwriting process.
  3. New coverage developments relating to third party collision damage due to high cost of equipment as well as cyber risk to software that governs the driving functions of the next generation cars.
  4. Needless to mention the opportunities around data analytics to harness the huge amount of data made available for better risk analysis & rating, loss development, location analysis etc. which always remains an area of challenge for Insurers.

What these convey to us all in a nutshell? Do the Auto Insurers need to fear that the next generation cars will sound the death knell for their business? Or will they see newer opportunities to engage with their customers and enhance their market share?

Let’s debate more on this – your thoughts and ideas are most welcome.