Driverless cars could lead auto insurers to total extinction, says KPMG
04 July 2017
Finance giant KPMG has warned that the core business models for traditional auto insurers are ‘under the threat of obsolescence’ in the incoming era of autonomous cars, with OEMs themselves becoming viable alternatives to cover driving risk. Autonomous vehicles promise a dramatic reduction of 90% of all accidents by 2050, according to its report, dramatically lowering the driving risk to be insured. In addition, with the car driving rather than the human, it says that ‘culpability arising from accidents will most likely move from the consumer and arrive at the doorsteps of the auto manufacturers,’ further reducing the need for traditional insurers.
In its foreboding report, The Chaotic Middle, KPMG’s insurance task force warns that ‘the effects of autonomous technology on insurance are likely broader and deeper’ than they outlined in their previous report only 18 months ago, due to rapidly developing new changes in the market – particularly due to the increasing role of OEM-startup collaborations (venture capital firms) accelerating the rollout of autonomous vehicles to market.
Three key disruptors form the centre of these shifts. Firstly autonomous technologies are making vehicles safer, and secondly OEMs are expected to assume more of the driving risk (as more responsibility is taken over from the driver by autonomous systems installed by the OEM), and therefore the associated insurance liability. This will also give OEMs new opportunities to provide insurance products themselves to car buyers, in part since the expected drastic reduction in accidents will make insurance premiums lower and affordable for OEMs to manage. This will as a result take market share away from traditional insurance providers.
Principal in KPMG's Actuarial and Insurance Risk practice Jerry Albright said: ‘Insurance companies will have to make important strategic and tactical changes sooner than anticipated to navigate through this turbulent transformation of the industry.
‘New business models [will] bring about a decade or so of a 'chaotic middle', as insurers adjust their strategies and operations as autonomous vehicle technologies significantly deplete the need for personal auto insurance.’
The third disruptor is this increasing need for new types of insurance products as need and demand for traditional personal ones falls. The expensive new technologies required in cars to facilitate autonomy and connected vehicles (and electrification) means, as KPMG forecasts, that by 2050 there will be a ‘significant increase’ in products liability insurance, to 57% of total auto insurance ‘losses’ (damages sustained). This is countered by the ‘considerable decrease’ in personal auto insurance, due to accident reduction, to 22% of total auto losses.
Moreover, the rapid adoption of mobility services such as ridesharing providers like Uber, Car2Go and Zipcar further contributes to this decrease in the need for personal auto insurance coverage (particularly strongly driving this fall before the autonomous revolution occurs), which will also result in an increase in the need for commercial auto insurance for fleets providing these mobility services.
Another principal in KPMG's Actuarial and Insurance Risk practice, Chris Nyce, said: [Due to the reduction in accidents] the share of accident claims funded by personal auto policies will contract. Partially offsetting this, average repair costs will continue to increase at a higher rate than overall inflation as new technologies in future cars become more expensive to repair.’
Heavy expected use of ridesharing and autonomous vehicles also increases the likelihood of equipment getting worn out, and the potential for the need to make insurance claims as a result.
Many auto insurance companies, in response to these threats that will result in major decline in their core businesses, will branch out and diversify into other new insurance fields, such as home-related products including the smart connected home. These are intelligent appliances such as smart kettles you can boil with an app before you arrive home, or a smart meter to use energy efficiently – which can all be communicated with from your smart connected car.
KPMG Corporate Finance LLC managing director Joe Schneider said: ‘Insurance companies are varied in their level of preparedness for this disruption and many have taken limited action to face this challenge.’
KPMG predicts that by 2035, on-demand mobility services such as ridesharing will be ‘the new normal’ in city and surrounding suburban transportation, and that in only seven years by 2024, ‘the majority of travel within cities and surrounding suburbs is expected to be on-demand rather than with a personal vehicle.’
Therefore, new types of insurance including products liability coverage (coverage for the new expensive tech) ‘are expected to pay a greater share of claims resulting from roadway accidents.’ Autonomous cars are not completely absolved from risk however, with cyber security (hacking of vehicles or virus infection) one key area that will grow in the era of autonomous cars, with the resulting insurance products required to minimise potential damages for the affected party.
It is important to note, however, that despite insurers having to move into new markets in response to these expected changes in the industry, a massive reduction in the number of accidents and millions of fatalities globally, as autonomous technology promises, is obviously an infinitely positive and welcome revolution for the industry.
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