As technology reduces risks—and eventually the number of drivers on the road—auto insurers explore new business models as they brace for an era of tighter premiums.
- Mary Diduch
- October 2018
- Changing Lanes: With the rise of tech-driven vehicles, insurers that depend heavily on auto insurance have had to start asking themselves questions about how to prepare.
- Focus on Auto: About 200 companies have at least 50% of their overall direct premiums coming from their auto insurance business, according to A.M. Best data.
- Making Moves: Some insurers are examining their product lines, rethinking lines of business and where to focus their efforts. Other insurers are considering diversifying into other products or geographical regions.
With the rise of tech-driven vehicles that remove human drivers from the risk equation, auto insurers face hard questions about their business models.
Many in the industry expect auto insurance to gradually shift to a product liability business as auto manufacturers and software companies become a potential target for lawsuits should an autonomous car malfunction and cause an accident.
Premiums from the auto insurance lines, meanwhile, won't completely disappear, but are likely to decline.
That raises questions about the future for insurers that depend heavily on auto insurance premiums.
More than 90 insurers in the U.S. have 100% of their business coming from auto lines, according to data from BestLink compiled by Best's Review. Many of these are risk retention groups, captives and insurers dedicated only to auto insurance.
Another 27 insurers have more than 90% of their business in auto lines. In total, about 200 companies have at least 50% of their direct premiums coming from their auto insurance business.
“Over time, autonomous vehicles and vehicle safety systems will reduce the number of crashes and at that point in time also reduce the value of and the amount of people who pay for insurance as we know it today,” said Teresa Scharn, associate vice president of product development for Nationwide's personal lines. About 47% of Nationwide's overall direct premiums are from its auto insurance business, according to A.M. Best data.
Speaking earlier this year at Philly I-Day, Mike Stankard, automotive practice leader for Aon, discussed the coming changes to automobiles and the impact on insurance.
“Consumers in the future are going to be in vehicles, highly technologically driven, electrically powered, and they probably won't own the vehicles. They're going to be provided by commercial companies that are going to be selling transportation by the mile,” he said.
The impact on insurance will be significant.
“As far as the insurance industry overall, 46% of all premiums in the entire industry, including life insurance, derive back to auto and motor insurance,” Stankard said.
“If you believe that this technology is really going to effectively de-risk the industry, we're going to have 94% of accidents conceptually be eliminated, which will draw up to 40% of the total industry's premiums away. Pretty dramatic change,” Stankard said.
“I think the industry, the personal lines industry, right now is concerned about that trend. They're looking at where they're going to replace that premium, and what needs the consumers are going to have relative to transportation going forward.”
This doesn't mean, however, that the need for auto insurance will disappear, said Greg Williams, senior director at A.M. Best. Theft, animal hits, hail—these are examples of why comprehensive coverage packages will still be needed. “How severe that contraction will be and how soon—that's still very much up in the air,” Williams said.
Indeed, how soon fully autonomous vehicles will have meaningful penetration in the marketplace is still unclear.
“Today that's not settled in any way,” said Tim Hyman, product development and strategy associate vice president in personal lines at American Family Insurance Group, which has about 53% of its overall direct premiums from its auto insurance business.
Teresa Scharn, Nationwide
As one part of insurance may be shrinking or declining over time, there are other parts that are going to expand.
Getting in Gear
While there is still much uncertainty about the shape of the future, industry executives and analysts say carriers should be taking steps now, if they aren't already, to hedge any potential loss of premium and adapt to ever-evolving demands.
“Complacency just can't be the answer,” said Jim Bramblet, property/casualty and digital insurance consulting business lead in North America at Accenture, a management consultancy firm.
Many carrier executives are still in a wait-and-see mode when it comes to autonomous vehicles, but that has been shifting. “Leadership at insurers is much more informed than they were several years ago,” said Joe Schneider, a managing director with KPMG Corporate Finance LLC.
Some carriers are already making moves and they are starting with research and planning.
“Across the industry, everyone is looking at this issue closely,” said Jim Whittle, assistant general counsel and chief claims counsel at the American Insurance Association, an industry advocacy organization.
Some insurers are examining their product lines, rethinking lines of business and where to focus their efforts. For some, that might mean expanding into product liability coverage. Others are exploring so-called lifestyle coverages. Cybersecurity protection is another area that could become a significant opportunity in the future.
Other insurers are considering diversifying, with some carriers exploring mergers and acquisitions to diversify product lines, rather than double down on a single line of product in one geographic region. Others still may decide their mission is to provide auto insurance and remain focused on that, even if that means a decline in premium at some point in the future.
Key to this evolving education is carriers remaining nimble in their business plans, in order to be able to shift once autonomous vehicles become the norm. “Being agile in that way is going to be critical,” said Pete Drogan, senior vice president and chief actuary at Amica Mutual Insurance Company. About 57% of Amica's overall direct premiums come from auto.
There are three ways in which business plans need to adapt. First, carriers need to anticipate changes in underlying costs and risks over time, Drogan said. “Claim frequency will gradually decline but claim severity will increase due to the costs of embedded technology,” he said.
Second, carriers need to prepare for the shift from driver to vehicle, which will trigger changes in coverage as traditional automobile liability protection transitions to a shared responsibility with manufacturers and technology companies. Finally, insurers will need to continually add new data sources, which will enrich risk assessment, pricing, claim evaluation and settlement processes, and the entire customer experience, he said.
Greg Williams, A.M. Best
There are a lot of developments going on right now in the personal auto space that have caused companies to assess their long-term strategies, with autonomous vehicles being one of them.
This agility could be key once the technology hits the roads on a mass scale, as many experts think that auto insurance will shift to product liability coverage.
“Over time I think it's going to be more and more of a product liability coverage, because ultimately you're insuring the autonomous vehicle technology … that's having a much broader role in the operation of the vehicle,” said KPMG's Schneider.
Accenture estimates that the rise of autonomous cars could create a growth in manufacturer-type of liability, creating upside of $81 billion in new premiums for the auto insurance industry over the next five years for commercial lines, Bramblet said.
“If you envision a world where all we have are autonomous vehicles, yes, we believe that the risk of accidents will move to the vehicle manufacturer because they handle the algorithms, the programs that [operate] the vehicle,” Bramblet said.
The shift to product-liability coverage is a shift that Nationwide expects to occur as well. “We absolutely believe that as the driver begins to take more of an occupier or passenger role … the risks will switch from the driver to some sort of product liability,” said Scharn. “Then the question is, whose liability is that?”
The expected shift away from auto insurance to product liability coverage, however, may pose a significant challenge for auto insurers.
That's because product liability coverage has typically been the domain of large commercial insurers, as opposed to auto insurers, or it has been self-insured by the company at risk. For insurers that have focused mainly on auto coverage, a move into product liability may not be realistic.
Insurers are watching these evolving technology and market developments. “We obviously have interest as an insurance carrier to be providing product liability coverage. … I’m not going to necessarily say is it the vehicle manufacturer’s need or is it the car sensors’ creators need. All of that will remain to be seen,” Scharn said.
Some carriers, particularly those who face pressure from Wall Street, are taking more concrete steps, starting with building task forces and making sure executives are informed and aware of the market trends, KPMG’s Schneider said.
This can help companies to think more broadly about what a company is good at and where it needs to improve. “It revolves first around people internally who have to realize this is for real,” Schneider said.
Nationwide has had its Emerging Vehicle Task Force since 2016, Scharn said. The cross-sectional group studies the emergence of these vehicles and the carrier’s strategies to adapt. Nationwide also has groups focused on telematics usage in both personal and commercial coverage.
Should fully automated vehicles become mainstream, Nationwide foresees another insurance need that could arise: cybersecurity protection.
“The risks are very different in the future than they are today,” Scharn said. “That’s one of the risks that we think emerges and it’s certainly going to be a very large opportunity, I think, from an insurance perspective and—even more importantly—the purpose of it is that need from a customer’s perspective.”
“As one part of insurance may be shrinking or declining over time, there are other parts that are going to expand,” Scharn added.
Accenture’s Bramblet said a new concept starting to be tested in the market is a move toward creating more lifestyle coverage, though he has not seen carriers start this just yet. “We are seeing a lot more carriers trying to understand more about being relevant to consumers,” Bramblet said.
Some carriers also may look into M&A options to diversify their product lines, and expand beyond a single line of product in one geographic region.
There may be more carriers seeking affiliations for geographic and product line diversification purposes. Results deteriorated in the personal auto line for 2015-2017, and the rise of autonomous vehicles could further serve to be a wake-up call, A.M. Best’s Williams said.
“There are a lot of developments going on right now in the personal auto space that have caused companies to assess their long-term strategies, with autonomous vehicles being one of them,” he said.
Carriers also are working to harness data produced by technology implemented into vehicles to make driving safer—like rearview cameras. These features are paving the way for more complex technologies to be adopted, and for insurers to better understand the risks they pose.
There could be different ratings algorithms—one for the human component and the other for the tech side. “Companies need to harness and leverage all the data that they can through telematic devices and/or apps,” Williams said.
Atlas Financial Holdings, a commercial auto insurer, has been working with equipment, for example, that uses AI and facial cameras to identify distracted drivers and notify insurers. “We have been able to observe a lot of real-time distraction events before there’s an accident,” said CEO Scott Wollney. About 98% of Atlas’ overall direct premiums come from its auto insurance business, according to A.M. Best data.
The carrier also has been using machine learning and predictive analytics to quickly capture the impact of emerging technology, Wollney said. This helps them to more quickly see patterns in the data, and to provide more sophisticated products to consumers. “To be competitive and to really be innovative, you need to be prepared to move much more quickly,” Wollney said.
American Family also is making adjustments for new safety features, looking how to best pass down those discounts to consumers, Hyman said.
For example, the carrier is working with a number of partners to better understand how this technology will unfold. It has supported research from the University of Wisconsin-Madison to test autonomous vehicles, Hyman said. The carrier also is investing in telematic platforms to understand driving behavior with respect to auto risks.
“We look forward to the evolving technology and we’ll partner with many in the industry to bring this to consumers because we believe that many consumers will be liberated with the ability to have additional mobility,” Hyman said.
Bumps in the Road
While new technology can help to reduce losses by improving safety, other costs may move higher.
For example, fixing a bumper with new rearview camera features would be far more expensive than repairing traditional bumpers.
“When there is a collision with a vehicle that has many of these safety features, the severity is quite high and the reason being the technology is very expensive at this point,” Hyman said.
The expected shift to product liability coverage, however, could pose unexpected problems, the AIA’s Whittle said. Product liability litigation has the potential to shut down every vehicle of that kind that a company might own or produce, Whittle said. “That doesn’t mean that Jim can get his bumper scratch fixed really quickly,” Whittle said.
Regardless of the uncertainties surrounding the future of autonomous vehicles, their rate of adoption and their potential impact on the auto insurance sector, many in the industry agree that this is a trend that won’t go away, even if the technology isn’t on the roads today. “I think the market is going to go through some change,” said Amica’s Drogan. “There’s no doubt about it.”
Nationwide (A.M. Best # 005987)
Amica Mutual Group (A.M. Best # 018522)
American Family Insurance Group (A.M. Best # 000124)
Atlas Financial (A.M. Best # 018884)
For ratings and other financial strength information visit www.ambest.com
Mary Diduch is a writer for Best’s Review. She can be reached at firstname.lastname@example.org.