Automotive technology is evolving faster than ever before.
Semi- and fully-autonomous vehicles are on the horizon, car-sharing has become the norm, and consumers expect their insurance to be capable of adjusting premiums based on real-time driving feedback. All of these issues are having a fundamental impact on the driving experience and the automotive insurance ecosystem.
The traditional auto insurance model has existed alongside the automotive industry for more than 100 years. This model is characterized by providing insurance for named owner/operator(s) of a vehicle, with premiums determined by the named driver's age, gender, driving record and experience. This “traditional” auto insurance model is in transition as is the traditional owner-operator mind-set. Insurers are closely watching the evolving impact this transition will have and are focusing on seven key areas that are ripe for further discussion, research and analysis:
Non-traditional competitors are becoming more prevalent. Web-based retailers such as Amazon (Amazon Protect) and Walmart (autoinsurance.com); tech companies such as Google (Google Compare in the UK) and start-ups such as Metromile and Cuvva are increasing their mindshare. Cuvva is only available in the UK as of now, but is notable for taking insurance in a different direction — offering car sharing insurance on demand. If you want to borrow a friend's car, take a Lyft or Uber drive, or use a car other than your own, Cuvva can provide comprehensive, collision and liability insurance by the hour. Metromile, currently offered in seven states, is another example of a digitally-based model that provides pay as you go insurance.
Competition isn't just limited to technology companies, however; auto makers such as Toyota and Honda are investing in insurance entities as well. Auto makers are looking for ways to provide enhanced telematics data as part of a bundled insurance package that comes with the vehicle purchase.
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2. Product implications
Emerging areas of auto insurance products include cyber security and liability. The more telematics included in vehicles, the greater the likelihood someone can hack a vehicle and either take control, disable it or use it for their own purposes. Sensors are quickly being incorporated into models at all vehicle price points, including lane-changing, back-up and blind spot sensors.
Similarly, the products must evolve to consider the shifting question of liability. Who is liable for the safety of autonomous vehicles? Is it the driver, the auto manufacturer, the technology firm behind the sensors and software, or the government that built and regulates the smart, sensor-enabled roads?
And last but not least, it is possible that 24x7 policies will emerge as a way to help policyholders package all or most of their insurance needs together, and help ease the burden of comparing insurance policies for coverage and pricing purposes. What is old is new again — 25 years ago the idea of a 24x7 health policy was explored, combining workers’ compensation, group health and accident policies to provide around-the-clock health coverage.
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3. Market segments
The mix between personal auto and commercial auto is heavily weighted towards personal auto. As of 2015, personal auto earned premiums were in the neighborhood of $186 billion and commercial auto was in the area of $31 billion for the same time period.
Based on the emergence of autonomous vehicles, it is possible that mix is going to change, relative to insured vehicles. As ride sharing, car sharing and autonomous vehicles continue to take off, there is the potential for less individual vehicle ownership and increased market share for commercially owned vehicles. Young people in urban areas see less of a need to buy vehicles today because of the myriad of non-ownership options (Uber, Lyft and Zipcar, etc.) available. Because of this, it's likely that the personal auto sector will see decreasing market share as corporate entities provide additional options.
4. Usage-based insurance
The market seems to be experiencing strong adoption of usage-based insurance (UBI) when it is offered; however, it isn't being offered aggressively by auto insurers. A Lexis Nexis study shows that 50 percent of consumers have purchased a UBI-based product when offered, but only one in five have been offered a UBI product. Metromile has been a success, and several prominent auto insurance companies have UBI offerings, but the offering rate is quite low. The increasing sophistication of new vehicle technology will provide more opportunities to leverage UBI insurance.
5. Insurance underwriting
Historically, underwriters have relied upon large-class and vehicle-based (vehicle type, zone, size of vehicle) data to provide initial rates for pricing auto insurance. With the rapid influx of sensor and third-party data, the opportunity to evaluate and price based on real-time data is approaching. Insurers are developing actuarial models around this type of data, increasingly based on individual vs. class and segment data. This is a significant change, and will likely drive additional product changes, as previously discussed.
6. Insurance claims
Claims will be significantly impacted by auto technology. In particular, expect a decrease in claims frequency and severity due to the increased presence of safety-based sensors in new vehicles. Non-collision-related claims (weather, theft, vandalism, etc.) will still occur; however, due to advances in image and video analytics, these claims will be addressed faster. In addition, analytics, coupled with machine learning, can provide the capability to assess and create an estimate for repairing vehicle damage. This capability, which can be enabled directly from images taken at the scene of the accident by the insured, policy or claim adjuster, can significantly decrease the claim adjudication and payment timeframes.
7. Insurance regulation
To date, significant insurance regulation tied to emerging auto technology has been limited. However, with the September 2016 release of the National Highway Traffic Safety Administration (NHTSA) autonomous vehicle regulations, it will accelerate. The NHTSA provides four major sections, including: vehicle performance guidance for autonomous vehicles, model state policy, and regulatory tools that should provide the states with a sufficient starting point to begin addressing the insurance regulation component. Important to the state insurance regulatory process will be the input of the Department of Transportation on cyber liability as it relates to vehicles, and the National Association of Insurance Commissioners (NAIC), who help draft model legislation.
As automotive technology evolves and innovation accelerates, insurers can and should be thinking of these seven areas as key areas for growth and opportunity.
Tom Rubenacker (Thomas.Rubenacker@tcs.com) is the P&C insurance domain consulting lead for North America in the consulting practice of Tata Consultancy Services (TCS). Rubenacker has almost 30 years of insurance company and insurance industry consulting experience and brings a blend of direct industry business experience plus business and technology consulting to the industry.