The rapid emergence of autonomous vehicles — with Stevens Institute of Technology predicting that as many as 23 million fully autonomous vehicles will be traveling U.S. highways by 2035 — has the automobile insurance industry worried.
But recent analysis from Accenture indicates that the switch to autonomous vehicles presents the auto insurance industry with a significant $81 billion opportunity between 2020 and 2025. Converting this opportunity will not be easy, but insurers taking action now may have an important first mover advantage over other insurers as well as other disruptors such as automotive manufacturers and over-the-top (OTT) players providing Internet content and services.
There is little doubt that the shift to autonomous vehicles will cause dramatic changes in how insurance premiums are generated. With most autonomous vehicles likely to be owned by original equipment manufacturers (OEMs), OTT players, and other service providers such as ride-sharing companies, the number of individual policies will decline, along with revenues from premiums generated by these policies. And, since autonomous vehicles will be considerably safer than vehicles driven by humans, there will be fewer road accidents, leading to reduced pricing for insurance policies. Claim frequency could drop significantly when compared to claims for vehicles driven by humans. While insurers of autonomous vehicles will make fewer payouts for claims, this will not compensate them for lost policy revenues.
Traditional boundaries are already blurring within the automobile insurance industry. Automakers, for example, are experimenting with packages that offer insurance was well as maintenance services to prospective buyers, potentially taking market share from industry players. At present, however, while the automakers are acting as an insurance distribution channel, the actual policies are written by insurance companies working in partnership with the OEMs.
For auto insurers, the big opportunity in autonomous vehicles takes place in the next decade. It totals as much as $81 billion by 2025 and, although insurers will start to see auto insurance premiums drop after 2026, the accumulated premium loss will not surpass the forecast gains until 2050. To seize this opportunity, insurers will need to change and adapt their business models, and do so quickly. Insurers that come to term with marketplace realities and pivot in the right direction have a much better chance of enjoying long-term success than those that adopt a "wait and see" posture, hoping that the pace of change will be slower than anticipated.
There is little doubt that the shift to autonomous vehicles will cause dramatic changes in how insurance premiums are generated. (Photo: iStock)
Where to strike
The opportunities as we see them are concentrated in three key areas:
1. Cybersecurity. This includes protecting against vehicle theft, unauthorized vehicle entry, and the use of "ransomware" to hold vehicles hostage until payments are made to unlock software controls. Insurers will also be writing policies to protect against criminal or terrorist hijacking of vehicle controls through hacking. And, with many cares serving as connected devices, insurers will offer protection against identity theft, privacy invasion, and the theft or misuse of personal information. We estimate potential annual revenues of $12 billion in this area.
2. Product liability. Insurers will write policies to cover manufacturers’ liability for communication or Internet connection failure as well as for the potential failure of software — including software bugs, memory overflow, and algorithm defects — as well as for hardware failures such as sensory circuit failure, camera vision loss, and radar and lidar (light detection and ranging) failures. Liability coverage will be needed not only by OEMs but by their Tier 1 and Tier 2 suppliers. Our estimate for annual revenues in this area is $2.5 billion.
3. Infrastructure. Autonomous vehicle manufacturers and/or service providers will need to take responsibility for the infrastructure put in place to control vehicle movements and traffic flow. This will include cloud server systems (which can malfunction, become overloaded or suffer interruptions from outside factors); failure of external sensors and signals; and communication problems originating at the system level. This is a smaller and more specialized area of opportunity, which we estimate at $500 million per year.
Autonomous vehicles and related technologies such as vehicle telematics will generate vast quantities of proprietary driver data. As OEMs and technology companies explore the vehicle insurance market, they will also be looking for opportunities to control and monetize this data in the development of analytics and highly personalized offerings made directly to customers through built-in vehicle communications channels.
The threat posed to traditional automobile insurers by the rapid evolution of autonomous vehicles is real, but so is the opportunity presented by new forms of cyber, product liability and infrastructure insurance. The advantage will go to insurers getting a jump on actuarial modeling, the development of new product offerings, the creation of new distribution channels and the formation of partnerships with new premium payers. Among other things, these insurers will need to:
— Develop needed expertise in big data and analytics. Market participants with the ability to collect, organize and analyze new data sources will have inherent advantages over those with less developed capabilities.
— Begin the actuarial and modeling process. Insurers should adapt current actuarial and modeling techniques to be ready as vehicles add more and more autonomous features.
— Explore the partner ecosystem. To participate effectively in the autonomous vehicle environment, insurers will need to collaborate with OEMs, providers of communication and software systems, governments at multiple levels, and many other entities.
— Think about new business models. Depending upon the opportunities pursued, insurers whose revenues derive primarily from personal automobile policies may have to transform themselves into large commercial insurers writing policies on a small number of very large risks. Over time, thousands of auto insurers will be replaced by a much smaller number of commercial carriers.
For automobile insurers, taking advantage of the shift to autonomous vehicles will require a major cultural adjustment as well as close interaction with regulators and other policymakers. The rate of adoption may be debated, but there is little doubt that big changes are taking place. Insurers taking preemptive steps now to convert the significant near to mid-term opportunity in cyber and product liability insurance will be in a much better position to succeed as the autonomous vehicle revolution continues.
John Cusano is Accenture’s senior managing director of Global Insurance. He can be reached at firstname.lastname@example.org.