A decline in accident frequency due to safer vehicles and theadoption of autonomous vehicles could shrink the U.S. personal autoinsurance sector by 60% within 25 years, according to a newresearch report, titled "Marketplace of Change: Automobile Insurance in theEra of Autonomous Vehicles," from KPMG LLP, the U.S. audit,tax, and advisory services firm.

KPMG's Insurance practice estimates an 80% potential reductionin accident frequency by 2040. This is expected to result in apotentially drastic reduction in loss costs and premiums, thoughKPMG estimates that accident expense could increase from almost$14,000 currently to about $35,000.

"Autonomous vehicles are poised to completely transform the autoinsurance industry, and underlying market forces, includingtechnology enablement, consumer adoption, and regulatorypermission, are already aligning to enable mass change," said JerryAlbright, principal in KPMG's Actuarial and Insurance Riskpractice. "The risk profile of vehicles is changing daily, and thesubsequent drop in industry loss costs would reduce the size of theauto insurance market, trigger consolidation in the personal linesspace, attract new competitors, and force dramatic operationalchanges within carriers."

Albright says that nearly accident-free vehicles could be herebefore autonomous vehicles, and "while a shift in business strategycould take years, insurers must act now to differentiate themselvesand gain a first-mover advantage."

Changing mix of insurance lines

As the size of the automobile insurance pie shrinks, theallocation of the slices across personal auto, commercial auto, andproducts liability could also change, according to KPMG'sanalysis.

"Commercial lines could take a larger share, as the marketplacemoves towards car sharing and mobility on demand services," saidAlex Bell, managing director in KPMG's CIO Advisory practice. "Asthe vehicle makes more decisions, the potential liability of thesoftware developer and manufacturer will increase too. In addition,losses covered by products liability policies will most likelyincrease because the sophisticated technology that underpinsdriverless vehicles will also need to be insured."

Added Chris Nyce, principal in KPMG's Actuarial and InsuranceRisk practice: "The personal auto lines sector will likely bear thebrunt of the transformation, as it will hold a smaller share of asmaller market. By 2040, we believe this sector will cover lessthan $50 billion in loss costs in nominal dollars, compared withthe current $125 billion, with premiums moving nearly proportional.The shrinkage in real terms may be even greater."

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(Photo: AP/Paul Sancya. Pedestrian crossing in front ofself-driving car at test facility.)

Change to usher in large-scaleconsolidation

KPMG anticipates severe implications of a contracting premiumenvironment, especially given that the insurance industry as awhole has not generated an underwriting profit in personal orcommercial auto for several years in a "normal" market environment.Joe Schneider, managing director at KPMG Corporate Finance LLC,says the continued proliferation of automated vehicles will putconsiderable strain on carriers.

"Many insurers don't have a profitability cushion to erode andlack the structural agility to shed costs quickly in an environmentof rapid change," Schneider said. "Once the massive marketdisruption begins and traditional insurance business models areflipped upside down, we expect significant turmoil across theindustry."

Staying relevant in the new marketlandscape

KPMG has identified possible business strategies forinsurers:

• Consolidate: For those existing carriers withscale, consider acquisition opportunities to leverage largeexisting platforms.
• Diversify: Move into other products that couldpotentially shield the company from challenges across the personaland commercial auto lines of business.
• Innovate: With new areas of risk, identify newareas to provide insurance protection and launch new products tomeet needs.
• Partner and ally: Consider new businessmodels, which will likely require partnering with others, in whichinsurance could be embedded into the cost of a vehicle or part ofusage fees.

For the results of KPMG's survey, see "AutomobileInsurance in the Era of Autonomous Vehicles Survey"

University of Michigan builds test facility

To a certain extent most manufacturers include some elements ofa self-driving car in current models. Think about cruise controlfor highway driving as well as cars that park themselves. To helptest new technologies in a realistic off-roadwayenvironment, University of Michigan (UM) researchers, workingwith the Michigan Department of Transportation, have designedMcity, a unique test facility for evaluatingthe capabilities of connected and automated vehicles and systems.Spreading over 32 acres at UM's North Campus Research Complex,Mcity is designed to simulate the broad range of complexitiesvehicles encounter in urban and suburban environments. It includesapproximately five lane-miles of roads with intersections, trafficsigns and signals, sidewalks, benches, simulated buildings, streetlights, and obstacles such as construction barriers.

The ultimate in luxury for many people is a chauffeur-drivenlimousine. Passengers often have the experience if they take a carservice to the airport, and we're getting closer with Uber, Lyftand other similar services. With autonomous vehicles, the feelingof being chauffeured may become more commonplace. Let us know whatyou think about autonomous vehicles in the comment section.

Related: Taking a gamble, Nevada licenses first autonomous commercial truckin the U.S.