An Exploration into the Impact of Autonomous Vehicles on the future of the Auto Insurance Industry.
Abstract:
Introduction:
In recent years, there have been rapid technological advancements in consumer products that affected our daily lives in ways that we could have never imagined. The automobile industry is no exception and the advancements done in this sector during the past few years are outstanding. The greatest disruption to ever face the auto industry since its inception is the introduction of driverless cars. Many big automakers and ridesharing services such as Tesla, Ford, Google Self-Driving Cars and Uber are already heavily investing in autonomous vehicles with Ford for instance, planning to start selling fully driverless cars with no steering wheel or pedals as early as 2021(Uk.business Insider). Furthermore, a study conducted by Accenture shows that there will be more than 23 million fully autonomous cars cruising in the US by the year 2035 (out of 250 million cars which are currently registered in the US) (Accenture). This shows that driverless cars are now a reality that cannot be ignored and is a disruption that is going to have serious impact on other industries as well.
The adoption of autonomous vehicles could have a strong impact on the auto insurance industry. The improved safety of AVs will dramatically decrease the number of accidents caused by human error since no human intervention is needed to drive the car. This will impose a huge risk on the existence and fundamentals of the auto insurance industry. As per Swiss Re, the motor insurance business represents around 42% of the non-life insurance premiums and is the largest single portion of global insurance premiums which shows the level of impact that AVs can have on the entirety of the insurance industry (Ebsco 1). Insurance companies should adapt and change their business model in relation to motor insurance in order to maintain growth and prevent potential losses. This report will explore the impact of autonomous vehicles on the auto insurance industry with an aim to understand how insurance companies should change their business models to embrace this disruption. (main argument).
The first part of the report will…..
The second part of the report will..
Background on Autonomous Vehicles:
Autonomous Vehicles has been a hot topic in recent years and the level of advancement in this area have been growing at an exponential rate. By definition, an Autonomous Vehicle is a car that has the ability to sense its environment and drive the passenger to his/her endpoint with no human interaction at all except choosing the destination (EBSCO 2).
Benefits of AVs
There are huge potential benefits of Autonomous Vehicles on the people using them and the society. Among these benefits are reduced emissions and mobility costs since they won’t require fuel and regular maintenance as traditional cars due to the fact that there will mostly be electric vehicles. Moreover, AVs won’t require human intervention which means less stress and improved productivity on the roads and passengers will be able to finish up work while riding. (REF??)
Cusano and etc of HBR argues that with the introduction of Autonomous Vehicles will not only change the way we drive but the ownership of vehicles where most AVs will be owned by ride sharing services companies and automakers instead of individuals. It is reasonable to believe that ride sharing services companies such as Uber, Lyft, and potentially Google and Apple will play an enormous role in that industry since the technology that comes with AVs permits providing a flawless driverless ride sharing experience. It will be of great importance in cities where traffic congestion and scarce parking spaces are becoming an issue, in addition this initiative can better make use of the vehicle since it will be operated almost 24 hours a day and leads to dividing the cost of ownership on a big base of users.
(diagram or graph for cost)
The most recognizable benefit of AVs is improved safety which leads to a reduction in collisions, injuries and costs resulting from accidents. In fact, according to a study conducted by McKinsey, more than 90% of the accidents are caused by a human error and with the introduction of autonomous vehicles this factor will be eliminated. This fact alone puts the auto insurance industry at risk of losing business since the probability of a car accident will significantly drop and thus the demand for traditional insurance policies will be low.(quantify?) (maybe hbr)
The Levels of Automation for Driverless Cars
According to the National Highway Traffic Safety Administration, there are 6 levels of automation for AVs which range from Level 0 to Level 5.
Most traditional vehicles are considered Level 0 since they have zero autonomy and drivers have to do all the tasks. Level 1, is what major automakers are working towards in their mass-produced cars which is to have some driving assistance but the driver remains the one in charge of controlling the vehicle. The most advance AVs today are somewhere between levels 2 and 3 which is partial autonomous with two or more features such as Cruise Control and Lane Keeping Assist but the driver still has to monitor the vehicle. The most advanced level of autonomy is level 5 which requires no human interaction at all and which means that the vehicle might not have be pedals, steering wheel, etc.. (See Appendix A).
The NHTSA assumes that Level 5 autonomy (fully autonomous vehicles) will be achieved by 2025. Thus, the transition to fully autonomous vehicles will be gradual and there will be enough time for insurers to change their business models and create new product lines to embrace its impact.
Autonomous Vehicles Adoption (to add s shape diffusion curve?)
Auto Insurance and why the current model won’t work (laggards?)
The main purpose of auto insurance is to provide financial protection against material damage and injuries resulting from traffic accidents and also to protect the insured against vehicle theft, natural disasters and other material damage. In addition, auto insurance is the largest single contributor to the global insurance sector in terms of premiums and represents more than 40% of the total non-life insurance premiums (EBSCO 1). In order to understand why auto insurance largely contributes to the total insurance industry we should look at the top factors that drives its demand. First, it is mandatory by law in most countries to have a minimum of third party insurance policy for every car before driving it on the road which serves as a coverage for damages that could occur to any third party in case of an accident. Second, auto insurance policies with more advanced coverages are demanded due to fear of litigation costs and costs of repairs for the vehicle in case of a traffic collision (EBSCO 1).
In both of the top factors that explain the high demand for auto insurance policies, car accidents are the determining cause. However, autonomous vehicles will significantly reduce traffic collisions and in fact according to a research conducted by RAND they are 90% safer than human drivers knowing that more than 90% of accidents are due to human error. This means that when AVs are fully introduced to the market the number of collisions will significantly drop and in turn the demand for auto insurance policies. According to a KPMG report, the auto insurance sector could shrink by approx. $137 Billion or 70% by 2050 due to increased autonomous vehicle adoption. (Accenture approx. is much lower and add graph maybe from new doc UK one).
Add info??
Tesla Insurance Offering Case
Tesla is one of the leading automotive companies in the world that specializes in production of electric vehicles and have included advanced self-driving options in all of their model offerings(TESLA). The National Highway Traffic Safety Administration (2017), released a report showing that the Tesla crash rates have fallen by approximately 40% after the introduction of Auto Steer option in their vehicles in 2015 (See Appendix B).Following the impressive results of Tesla crash rates and the NHTSA report, Tesla have decided to start offering cheaper auto insurance policies named “InsureMyTesla” with every model they sell in Hong Kong and Australia in partnership with AXA General Insurance and QBE Insurance respectively (Business Insider 2) (see Appendix C). This decision was taken by Tesla mainly because they have clearly identified a malfunction in the current auto insurance premiums that does not match the low risk profile of their models especially those that include the auto pilot feature. In addition, according to the Insurance Institute for Highway Safety Tesla Model S came first in the list of the most expensive insurance premiums with an annual average insurance premium of $1,789 in the US which further encouraged Tesla to offer their in house insurance policy (USA today). The offering also demonstrates a very high level of confidence by Tesla in their own technology of autonomous driving and accident prevention systems. Furthermore, it gave Tesla additional bargaining power and competitive advantage when selling their vehicles by proving that their cars are safer than traditional vehicles which is clearly shown in the lower insurance premium.
At the date of this report there were no published reports on the percentage in the difference in premiums between Tesla’s in house insurance policy and the traditional policy and neither was there reports on the number of policies sold. However, the new insurance offering of Tesla acts as a real case that represents the beginning of the impact of autonomous vehicles on the auto insurance sector and gives us insight on how the insurance industry is going to change as well as the risks and issues that it will be facing.
Challenges Insurance Companies will be Facing
The following are a list of challenges that are most likely to face the insurance industry with the introduction of autonomous vehicles. The Tesla Case is going to be used as a guiding reference to validate and help in providing a better understanding of the below listed potential challenges.
Lower Insurance Premiums:
Insurance premiums is one of the main sources of revenues for insurance companies and lower premiums heavily affect the company’s performance. As mentioned previously autonomous vehicles are 90% safer than traditional car and this was proven by nearly every metric and report that studied AVs’ safety. At first, there will be fully autonomous vehicles, mid-level autonomous vehicles (Level 2 till Level 4), and traditional vehicles roaming the streets and thus the risk of accident will have to gradually decrease with the increase in adoption of AVs and decrease in the number of traditional vehicles. However, from now on traffic collision is set to be on a constant downward trend which is correlated with the auto insurance premiums and cause them to drop as well.
Some insurers already started offering discounts on insurance policies in case a car is equipped with advanced safety features. For instance, Geico in the US offers discounts on cars equipped with day time running lights, passive restraints, etc..( Geico) (See Appendix D).Moreover, in the Tesla Case, one of Tesla’s strongest proposition for their in house insurance policy is that its priced lower than traditional policies since it truly matches the lower risk profile of the car with the premium. Accenture predicts that most AVs by 2050 will be owned by automakers and ride-sharing companies, thus not only will the industry witness a decrease in premiums but also a decrease in the number of policies. Furthermore, the Accenture report continues to show that auto insurance premiums could decline by more than $ 25 Billion Dollars in the US by 2035.
On the other hand, taking into consideration the safer nature of AVs, the cost side to the insurance companies is mainly related to claims payout which will also significantly drop. However, there is a gap in knowledge in the existing research which did not address whether the drop in claims could compensate insurance firms for lower premiums and is hard to predict since it depends on many variable factors.
Shifting Liability:
Currently auto insurance policies for traditional vehicles hold the driver of the car liable for accidents while driving the vehicle. However, as discussed earlier level 5 autonomous vehicle would not require any human intervention to drive the vehicle. This means that in case of an accident the driver or the owner of the vehicle is not responsible. The liability risk will shift from the driver to the vehicle and car components manufacturers as well as the software systems supplier since in essence it is the computer of the vehicle that is driving the car (Marsh).
It will be a very long time before having only fully autonomous vehicles roaming the street, thus a considerable percentage of vehicles will still rely on the driver’s input. In this case, insurance companies should underwrite hybrid policies which cover both the driver in case he is driving and the manufacturer in case the car was in autopilot mode. This also will raise concerns on how to measure the risk and price policies. In order to achieve a better estimation of the risk there should be advanced sensors in cars to know whether a given accident was the fault of the system or a human driver. Going back to the Tesla case, it is clear that by offering cheaper in house policies Tesla assumes liability on its vehicles’ systems and software and is a kind of assurance on the safety of its vehicles. It also indicates the start of the shift in liability from the driver to the car manufacturer.
Lower Demand for Auto Insurance Policies:
With increase in safety and autonomous perfection of vehicles and in turn also the decrease in traffic collisions auto insurance policies as it is today will be less attractive to individuals. Venturebeat, assumes that by 2040