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Handing Over The Keys

As the era of ride sharing and fully autonomous cars quickly approaches, insurers are crafting new coverages and endorsements to meet the needs of the "new mobility ecosystem."
  • Lori Chordas
  • October 2016
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The auto insurance industry is in the midst of a watershed moment. The rise of autonomous vehicle use and ride sharing is expected to impact the largest line in the property/casualty sector in a big way, with some experts predicting a precipitous drop in premiums. While auto insurers have time to respond--experts predict autonomous vehicles will widely begin rolling off assembly lines in the next 10 years, with nearly full market penetration two decades later--carriers already are crafting ideas, products or endorsements to meet the needs of what some call the "new ecosystem."

"People often ask me, 'When will we start to see the future of mobility?'" said John Matley, a principal in Deloitte Consulting's insurance and technology practices. "I tell them, 'We're already living in it with the advent of ride sharing, car sharing and new automotive safety features like adaptive cruise control and automatic braking systems.'"

Those developments--along with others yet to hit the market--will signal "some pretty big changes" for auto insurers, Matley said. "For the past 90 years, auto insurance as we know it has largely been unchanged in terms of how it's purchased and what it covers. Now, we're standing on the edge of where we'll see the product itself change because the nature of driving and transportation is shifting.

"We're heading to a world of self-driving cars," he added, "but on the way there we'll have cars equipped with assisted-driving technology that will reduce the number of accidents. That's already happening."

Vehicle collisions aren't the only things set to decline. Auto premiums are expected to dwindle from approximately $200 billion to $40 billion by 2040, "with $100 billion of that shifting to more commercial lines," Matley said.

That's why it's important for carriers to start rethinking their role in the mobility ecosystem, "along with their relationship to drivers, owners and vehicles," Matley added. "Currently, we don't know of any U.S. carrier actively writing autonomous cars coverage yet because the vehicles aren't available in the market. But many large personal writers are exploring how those vehicles will impact their books of business, their distribution relationships and their auto business along with other lines of business, especially if they use auto as a lead line and cross-sell other products. That's where carriers now need to be if they want to excel in the new environment."

Accelerating Change

Carriers are already starting to react.

"Many are focusing more heavily on emerging technologies and their possible insurance implications," said Jeff De Turris, vice president, coverage products and operations at ISO. "To understand those implications, carriers often strategize to understand the technologies, what they mean and the impact they may have on their business so they can then tackle that from an insurance perspective, by serving new markets and create new tools to address these new trends."

That mindset is transitioning into the launch of products such as Nationwide's program that offers unlimited rental car coverage when customers select a repair shop participating in the Nationwide On Your Side Auto Repair network to repair today's vehicle features, said Larry Thursby, vice president, property and standard auto product/pricing for the Columbus, Ohio-based carrier. "It may take longer to repair cars with more advanced safety features, and many consumers purchase rental car coverage so they have a vehicle when their car is being repaired. Today's timeline for the coverage may not always work well, so we have an endorsement to meet those needs."

Carriers are also crafting endorsements to bridge a so-called insurance gap between personal and commercial insurance faced by ride-hailing services such as Uber, Lyft and Sidecar.

Uber--the largest transportation network company with nearly 1 million daily trips and more than 160,000 active drivers--offers its drivers, who unlike traditional livery drivers use their personal vehicles to transport riders, non-primary umbrella coverage with $1 million for driver liability and $1 million to cover uninsured or underinsured drivers, according to reports.

But Uber's policies, much like coverages for other TNCs, are only in force during the time a driver accepts an assignment from the company's smartphone app until the passenger exits the car, otherwise known as "Period 2." What happens in "Period 1" when the app is on, and the driver is available to be matched with a customer?

That question became a huge issue in 2012 after an Uber driver hit and killed a six-year-old in California. The girl's family sued both the driver and Uber, which absolved itself of liabilities because the driver didn't have passengers in the car. The driver, according to reports, had $30,000 in bodily injury liability on his personal policy. Uber and the family eventually reached a confidential settlement.

Varying state laws also add to the mix. Colorado, for instance, was the forerunner to ride-sharing laws that stipulate that TNCs provide up to $1 million in liability insurance from the time a driver accepts a request to the moment the rider leaves the car. California's more stringent law, on the other hand, requires TNCs to provide insurance from the moment a driver turns on the app.

Farmers Insurance was the first mainstream carrier to help bridge the insurance gap. Its ride-share endorsement, currently available in 29 states, extends drivers' auto coverage until they accept a ride, at which point their TNC affiliate's commercial insurance coverage would apply, said Mariel Devesa, head of product innovation for Farmers.

American Family Insurance, Geico, State Farm and others have followed suit with their own endorsements. Earlier this year, Progressive was "the first admitted insurer to provide commercial Transportation Network Company Insurance to a TNC platform" through its pilot with Uber in Texas, said Jeff Sibel, a company spokesman. "During the pilot, we insure Uber as a policyholder and provide coverage to drivers, vehicles and passengers during all three periods of the driver's trip."

Shifting Into Overdrive

When it comes to fully autonomous vehicles, auto manufacturers are scrambling to edge out competitors' timelines for rollouts. American automotive and energy storage company Tesla Motors Inc. said it will release autonomous vehicles to the public in 2018.

In August, U.K.-based auto parts manufacturer Delphia and camera and software developer Mobileye announced a partnership to bring driverless technology to the public in 2019--one year ahead of the anticipated timeline by companies such as Volvo, Toyota and Google. Uber is also gaining ground in the race, launching a pilot program in September using prototype driverless cars to serve ride-hailing customers in Pittsburgh.

"For insurance carriers, it's still early days on the autonomous vehicle front," said Gene Boehm, a director at PwC Advisory. "They have things on the drawing board, such as product ideas and innovation around those vehicles. But it's much too soon to put a marker on anything yet."

However, it's not too early for carriers and risk managers to evaluate concerns like cyberrisk that could arise from disruptive technologies such as autonomous vehicles, said Mike Scrudato, senior vice president and head of the mobility domain at Munich Re, US. "Today, many risk managers consider cyberrisk to be their top concern. However, while cyber and automobile risks are separate buys today, as vehicles become more and more connected and automated, there is the potential for cyber exposure to be linked with the auto exposure."

As carriers inch their way toward autonomy, "the products and policies they'll create will depend on upcoming regulations and ownership of autonomous cars," Boehm said. "Currently, no formal regulations exist from the federal government about the 'rules of the road' for those vehicles. There are also software considerations and liability questions that will need to be answered."

In May, for instance, a 40-year-old Ohio man died after the sensor system of his Tesla Model S, which he put into autopilot mode, failed to distinguish a tractor trailer crossing the highway. Incidents like that leave carriers wondering: Who will shoulder responsibility when something goes awry?

"The biggest challenge now is simply understanding what autonomous means," Nationwide's Thursby said. "If fully autonomous means no steering wheel and no driver controls as Google and Ford have announced, then will those companies assume all liability? If autonomous means cars with auto-pilot features where drivers must remain engaged, then that's a different story. That's where regulatory requirements come into play because those are two very unique approaches by OEMs [original equipment manufacturers]. We'll then have to develop products around those different approaches."

Europe is ahead of the curve on that front. This year, specialty motor insurer Adrian Flux Insurance Services launched the United Kingdom's first personal insurance policy for drivers with driverless or autonomous features in their existing cars. The policy covers customers for loss or damage if there are, for example, satellite failure/outages that affect the navigation system or car hacks or attempted car hacks.

Reaction Time

How will auto carriers fare in the new mobility macrocosm?

"These disruptive changes aren't a death knell for the industry," Deloitte's Matley said. "We're moving to a safer world--not a perfect world. So the need for auto insurance will continue for the times when things go wrong."

However, auto premiums will likely suffer under the new ecosystem, Nationwide's Thursby said. "At Nationwide, we fully expect that auto insurance will make up a smaller portion of our overall business model in a few decades because of autonomous vehicles and car sharing. Premiums will dramatically decrease or at least hold flat while other business lines will increase."

Nationwide is responding to that threat by shifting more heavily in other areas, he said. "It's almost inevitable that auto will not be as important to our company 20 to 30 years from now as it is today. So rather than trying to change the world, we're investing in other lines, such as homeowners and farm/agribusiness, so we, as a company, can remain strong."

"Carriers are gathering information and thinking about what products they can develop, what processes they need to change, how to underwrite for new exposures and decide what rating factors and information they need to do that," added Robert Passmore, assistant vice president, personal lines policy for the Property Casualty Insurers Association of America. "One thing that will be important is that insurers have, on reasonable terms, access to data generated from autonomous cars to develop those products and handle claims."

Focus goals will also be key, Boehm said. "Change is coming, and carriers realize that in order to be ready, they'll have to focus on innovation, their customers and an expense structure that allows them to offer competitive prices."

Curves Ahead

While the new mobility ecosystem is already starting to unfold, many big changes remain around the bend.

"When automobiles first came out, everyone didn't just leave their horses behind the next day. It took decades for everyone to get comfortable and have roads and infrastructure in place to handle it all," said Mike Stankard, industry and materials/automotive industry practice leader at Aon. "That's similar to what's occurring today. The technology is developing at a very rapid pace. What will slow down the process will be years of testing on all foreseeable road, traffic and weather conditions. For example, lane detection systems need to work the same in dry, rain and snow conditions. All that needs to get worked out."

The good news is that "it will get worked out," he said. "And more than 95% of current accidents will one day be eliminated."

That's creating "a pretty seismic transformation" in the market, Matley added. "But it's an evolution, and those who aren't prepared as these new capabilities come online may fall behind. Insurers need to pick how aggressive they are."

That's where winners and losers will begin to emerge, he said.

"We expect to see some consolidation in the market because of upcoming changes and declining premiums. But not every car will be autonomous; someone will still want to drive their vintage Ford Mustang. However, we expect penetration of driverless cars and ride sharing to likely occur in densely populated cities," Matley said. "Rural areas, where cars are more like utility vehicles, will be less apt to move into that world. So carriers will need to focus on different geographic areas and ramp up for autonomous cars."

Those vehicles, along with telematics, crash-avoidance technology, shared mobility platforms and more, are all "coming together to change the way auto insurance might work in the future," Munich Re's Scrudato said. "And it's important for the industry to be proactive in seeking out these new solutions rather than just wait and react to them."

In the end, there's an "economic value proposition to all of this," Matley said. "Otherwise, people wouldn't change what they're doing now."

Today, the cost to drive a personally-owned car averages about $1 a mile, Matley said. "In several decades, that price will come down. Autonomous vehicles will no longer be shiny objects or a cool, new technology; they'll actually be a cheaper way to get from point A to point B. And by 2030, they'll start to become the predominant way in which individuals and goods are transported."

Learn More

Farmers Insurance Group

A.M. Best # 000032

Geico General Insurance Co.

A.M. Best # 001852

Nationwide Mutual Insurance Co.

A.M. Best # 002358

Progressive Group

A.M. Best # 019731

For ratings and other financial strength information visit www.ambest.com

By Lori Chordas, senior associate editor, Best's Review: Lori.Chordas@ambest.com


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