Any significant change to the automobile insurance market has adramatic impact on the insurance industry as a whole. In mostmature markets, automobile insurance is the single largest line ofbusiness, representing 42 percent of gross written premium in theU.S., according to a Best's Special Report on the property andcasualty market, where liability (including commercial auto)represents 26 percent of the overall market.

At one point, it was believed that telematics usage-basedpricing was going to change the face of auto insurance but really,telematics is the Betamax of insurance in a digital world: aninteresting footnote that will soon be irrelevant. The real seismicevent in the industry will be the emergence of the autonomouscar.

Multiple sources believe that autonomous vehicles will be on theroad by 2020, with semi-autonomous driving already a reality. Noone knows for certain how this will impact the insurance marketexcept that it will. Chances are, how it impacts the industry mayvary by regulatory market.

The recent crash of a Tesla Model S on autopilot that resultedin the first death associated with assisted, semi-autonomousdriving has brought up many questions about how the industry needsto respond to new technological advancements in a shifting market.The Tesla accident is currently under review by both the police andthe National Highway Traffic Safety Administration (NHTSA) todetermine cause and fault.

While the car was on autopilot when the accident occurred,autopilot is not considered true autonomous technology — drivererror on the part of the Tesla driver and/or the driver of thetruck it collided with may have played a role in the accident, yetto be determined. While this is not a fully autonomous carfatality, it's close enough that this may be the first event thatstarts to address shifting liability issues, ultimately impactinghow coverage evolves.

One of the first things insurers need to take into account astrue, autonomous cars hit the market is that the nature of carownership may change, affecting the potential client base (numberof car owners). Toyota has invested in Uber, General Motors inLyft, and Volkswagen in Gett, which signals that the availabilityof alternate transportation options will change people's viewstoward car ownership. As autonomous vehicles become available,these services, plus others such as ZipCar's car-sharing programs,will be able to deploy resources to underserved markets.

Impacts will be significant on costlier insurance markets, suchas urban areas, as there will be noticeable decreases in full-timecar ownership. This will also have similar, but likely smaller,impacts to existing markets in less densely populated suburbanareas. With the availability of reliable and affordable alternateautonomous private car services, a two-car household may reduce toa single-car household augmented with ride-sharing or car-sharingservices, for example.

As autonomous cars become reality, liability may shift from thedriver, which will result in multiple changes to insuranceproducts. Multiple automakers, with Volvo leading the charge, havestated they will accept the liability for their cars while inautonomous mode. Volvo's statement was the most sweeping, acceptingfull liability for autonomous mode driving, while Mercedes andGoogle will accept liability when their technology is at fault;these two liability assumptions may sound similar, but theMercedes/Google assumption of liability is narrower and open tointerpretation, unlike the Volvo assumption which calls forassuming "all liability." This indicates that, to a certain extent,the liability portion of the auto policy will become more of awarrantee issue.

If liability is not assumed under warrantee, loss may become aproduct liability issue. Injured parties, or insurers throughsubrogation, may seek damages directly from automakers/technologyprovider, which would most likely trigger a product liabilityclaim. The impact on insurance products (and associatedlegislation) is far from decided. Insurers can expect to see somemajor changes in the following product areas:

• Liability issues will dramatically change the exposure, whichwill lead to changes in underlying auto liability coverage. Howmuch is shifted to warrantee/product liability remains to be seen,and the role of legislation will be significant. In the beginning,expect the status quo, but insurers should be prepared to change ona dime. Personal lines insurers may decide to venture intoquasi-commercial coverages to support the emerging market, andcommercial lines insurers will at a minimum need to identify newexposures under traditional products (product liability) or createnew products (product liability and warrantee).

• Comprehensive/collision coverage impacts would be minimal, withthese products staying relatively similar. Frequency and severityof losses should go down, along with premiums, as cars themselvesbecome safer and losses will be due more to environmental damagessuch as severe weather (hail) or falling objects (tree limbs).

• Subrogation will be an interesting topic to watch as liabilityissues work themselves out in the market. Eventually, standardsubrogation norms will be established, and insurers should beprepared to optimize their subrogation processes throughout thematuration of the new auto market. This will include takingadvantage of market confusion as the autonomous car emerges.

• Micro insurance products may see a surge, covering aspects ofauto usage with regard to usage of car share and autonomous carprograms. These products would be point of sale transactions, tiedto a rental or account usage.

• Pricing will significantly drop for auto insurance, insurersmust be prepared to respond to this change from both a product andan operations perspective. Elements used for pricing products today(such as driver criteria) will change tremendously. This soundslike a small issue, but most insurers would have a hard timechanging pricing models today.

With this in mind and autonomous cars just over the horizon,what do insurers need to do to get ready? The answer lies in fivekey areas:

Related: BMW to deploy fleet of self-driving 7-Series onroads this year

 The self-driving Tesla Model S sedan. (Photo:P.Harman/Claims magazine)

Model trending on current safetyimprovements

Every model year release includes new safety features that makecars safer. These innovations aren't a progression toward theemergence of the autonomous car, but they do provide data pointsand trends that insurers should be monitoring and leveraging inpricing models for future autonomous car insurance pricing. Keepingin mind that this pricing evolution will be a step-by-step process,but by monitoring the emerging frequency and severity trendsassociated with emerging safety technology, insurers should be ableto model future pricing much better than starting from scratch whenthe new market emerges.

Strategic scenario planning

How the insurance market, product, pricing and regulations forautonomous auto insurance will change and develop is up in the airright now. Additionally, autonomous auto efficacy and adoption isstill unknown. With all this uncertainty, insurers should adopt ascenario-based strategy process for responding to the market.Leveraging scenarios based on different market outcomes, insurerscan have operational, product and IT strategies in place, ready toexecute based upon market characteristics as they develop.

Flexible product environment

In standard markets that are not prone to huge shifts, insurersfind getting new products to market quickly and effectively a majorhurdle to their business success. This hurdle is magnified in aredefined and shifting market. Insurers need to invest in systemsthat will enable them to get new products institutionalizedquickly. This doesn't mean just filing with insurance regulators,but being able to update underwriting, rating, quoting,front-office systems, and policy administration systems quickly andeasily.

Most insurers don't have the time or the investment appetite todo wholescale replacement of systems. Instead, a wrap and renewprocess, where a service layer that supports users but separatesthe underlying legacy systems, will work in creating a responsiveenvironment, in essence a bi-modal IT environment.

Flexible operational environment

Getting a new product filed is one thing. Selling and servicingit is a completely different issue. Insurers need to be able toprovide user platforms (direct sales, captive and independentagency sales, as well as service) that will enable them to sell andservice the client without disruption as products, underwriting,and processing changes. This includes pushing information to theagents and customer service representatives on how to position newproducts effectively without taking them away from their work totrain them every time a change comes about.

An insurer should have two goals when preparing for the new automarket: minimize the disruption for the user on the sales andservice side, and automate processes as much as possible. With theexpected lower premium base and uncertain results, processingexpenses need to be kept to a minimum with straight throughprocessing as the norm wherever possible.

Actionable analytics

This may be the most important point. Insurers will needanalytics to help them drive their strategy and reaction to themarket as it develops. Winners in the upheaval produced byautonomous cars will not be the first insurers with a tailoredproduct to market, but the insurers able to monitor the developmentof this reformed market and respond quickly and effectively to howit develops. This means tying analytics directly to underwritingand claims operations, watching how loss and expense ratiosdevelop, and being able to change the go to market strategyimmediately.

This could entail changing pricing, underwriting guidelines,claims processes, market segmentation, and more as results develop.Implementing actionable analytics will provide insurers withinsight into how the business develops and the ability to pinpointwhere results are not meeting expectations, highlighting wherechanges needs to be made. Analytics should be tied very tightly toscenario-based planning, leveraging established plans preparedbefore the market shifts, instead of having to respond on thefly.

To paraphrase Louis Pasteur, fortune favors the prepared. Thereis no doubt there will be upheaval in the auto insurance market.How much change and how intense it will be remains to be seen.Being early to the market with prepared products will always givean insurer first mover advantage. However, the ultimate winners inthe marketplace will be the insurers that plan strategically andhave nimble, efficient operations that can respond quickly andeffectively to market changes.

Tom King is the senior director and industry principal ofinsurance at Pegasystems (www.pega.com). King has more than 25years of experience in the insurance industry, and much of hiscareer has been dedicated to helping insurers leverage technologyin conjunction with defining business strategy.