Autonomous Vehicles Impact: Insurance Industry
Continuing implementation of automation and technologies are having an impact on improving safety on the roads and the falling number of fatalities. However, even though increasing safety is a positive sign for society, this trend also negatively affects the performance of insurance companies, due to contracting motor premiums. What is more, the emergence of self-driving cars is expected to pose an even greater threat to the insurers, which are projected to witness changes in their major clients’ structure and will be forced to offer new products in order to support premium growth.
Autonomous vehicles to further erode insurance gross margins
According to the National Highway Traffic Safety Administration, the number of vehicle miles travelled and the number of fatal crashes in the US have been moving in different directions. While vehicle miles travelled grew by a CAGR of 1% during 2000-2014, the cases of fatal crashes fell by a 2% CAGR over the same period.
Chart 1. Fatal Crashes Growth Index vs Vehicle Miles Travelled Growth Index 2000-2014
Source: Euromonitor International from National Highway Traffic Safety Administration
Growing adoption of safety systems and a gradual shift towards self-driving cars are projected to even further decrease the number of accidents on the road, at the same time resulting in slowing growth of motor premiums. According to the OECD, gross premiums of motor vehicle insurance have been growing at a slower rate than total non-life insurance premiums. For example, US and the UK motor insurance gross premiums grew by CAGRs of 4% and 2%, respectively, in 2010-2014, while non-life insurance premiums went up by CAGRs of 6% and 3%, respectively.
Therefore, in order to stimulate premium growth, insurers will be forced to be more innovative, as they cannot afford to lose the lucrative motor insurance category.
New products necessary to secure revenue from motor insurance
On average, the non-life insurance category accounted for 55% of total industry revenue in 2015, and motor insurance was the largest business line in the majority of countries. Therefore, securing revenue stream from non-life insurance is among the key priorities for the insurers.
Chart 2. Life and Non-life Insurance Categories’ Shares of Insurance Revenue in Selected Economies, % in 2015
Source: Euromonitor International from trade sources/National Statistics
With the expected arrival of the first fully autonomous cars in 2025-2030, the insurers still have time to adapt to changed conditions. A gradual shift towards autonomous cars is expected to create lots of new data and encourage car-sharing services. Therefore, car-sharing insurance and cyber insurance are projected to see strong growth over the coming years. In the face of such a trend, insurers have already been gradually changing their business strategies in order to secure their profits in the future.
For example, GEICO, one of the largest auto insurers in the US, introduced a new product in 2015 – GEICO Rideshare Insurance, which provides coverage for car-sharing. Some other US insurers, such as Erie Insurance, Framers Insurance or Mercury, have also offered ride-sharing insurance in different states. In addition, in the US alone the number of companies offering cyber insurance grew from 10 to over 50 in just a couple of years, indicating the increasing popularity of this product.
With household spending set to decline, insurance industry to target automotive companies
The insurance industry has been highly dependent on household spending. On average, more than half of total insurance demand was generated by private clients in 2015. However, the shift towardsautonomous motor vehicles is projected to lower such dependence among non-life insurers.
Chart 3. Dependence on Household Purchases in Selected Economies, % Share of Total Market Value 2015
Source: Euromonitor International from Trade Sources/National Statistics
Adoption of fully autonomous cars will lead to the elimination of the human factor. As a result, responsibility for the damage caused by a self-driving car is set to be taken by the car manufacturers rather than the drivers. In 2015, Volvo already officially announced that it would take full responsibility for the crashes caused by its self-driving cars. Due to strong competition in the industry, such a move is projected to push other car manufacturers to also accept full liability for such accidents. Consequently, over the coming years, motor insurers are expected to focus more on this fast-growing buyer group.
What is more, vehicle parts will become more complex due to the growing automation of the vehicles, which will result in higher costs for replacing such components. Therefore, even though the number of accidents is set to decline over the coming years, the total cost of an accident might show the opposite trend. As a result, this factor is also set to support the motor insurance business in the future.