Driverless cars to shake up insurance industry
Premiums apt to drop 25% within 4 years
Car insurance premiums may drop by 25% in the next four years, drastically reducing their role in the insurance business, as car ownership shifts to corporations and autonomous vehicles make driving safer.
The first fully driverless car will hit the road by 2022. By 2050, every car on the road will be driverless, said Guillaume de Gantes, a partner at McKinsey’s Jakarta office.
Driverless cars will make driving safer, dramatically reducing the 1.2 million car accident fatalities worldwide. They will also change who owns the vehicles and who takes responsibility for them.
As cars become safer, insurance premiums will drop by 25% in the short term, and suffer a “massive impact” by 2030 or 2040, according to McKinsey. In the short term, revenues will be compensated or more than compensated by a drop in accidents, he said.
In the long term, car insurance will represent a much smaller portion of insurers’ business, but some are looking at the possibility of replacing the lost turnover with experience insurance.
“This insurance will cover people for the duration of a car trip and for a number of activities they will do during the trip, just like travel insurance today,” said Mr de Gantes.
Moving forward, experts expect a good chunk of vehicles in the market to be owned by platforms like Uber, Zicar, as well as big tech companies like Google, and automakers. Last year, for example, Uber announced a plan to buy 24,000 autonomous vehicles from Volvo. Lyft, which also partners with Google’s autonomous vehicle arm Waymo, recently struck a deal with Ford that will allow the company to deploy a fleet of vehicles on the platform.
Most car accidents today are produced
by human error, but a majority of car accidents in the future will be produced by design errors, glitches or cybersecurity errors. While accidents will become less
frequent, they will also become more catastrophic. A virus, for, example, can rapidly infect a whole fleet of same model cars, producing a series of interrelated accidents.
Where the responsibility for these accidents will lie, and consequently, who will be responsible for insuring the vehicle is still uncertain.
“Countries have taken different legal routes,” said Mr de Gantes. “In some jurisdictions, autonomous car insurance is becoming an extension of product liability, similar to a situation where you buy a fridge and it blows up. The second framework would be an extension of today’s motor insurance, in which the buyer of the car is responsible for insuring it. A variation is requiring anyone who enters the car to have the equivalent of auto insurance.”
New ownership models open the door for the owners of big fleets, or car manufacturers, to insure themselves, instead of relying on traditional insurers. According to the Wall Street Journal, insurance companies could forfeit more than 80% premiums in the coming decades.
After all, in a driverless world weighted variables such as frequency of past accidents, and the demographics of drivers, on which insurance companies keep robust databases, will no longer be useful to calculate premiums. Rather, an in-depth knowledge of the car’s design and of the data generated by the car as it is operated will be used in calculations, data which belongs to car manufacturers.
“Companies could underwrite a lot of the risk, but they may choose not to. They may not want to put the possibility of catastrophic risk on their balance sheets. Moreover, with cybersecurity risks, accidents within one company will have immense correlations, so they will want to diversify that risk,” he said.
In the future, one could imagine a world where the two primary functions performed by insurance companies today — risk management and customer service — will be divided among three actors: car manufacturers or fleet owners, and traditional insurance companies.
Each actor will insure part of the risk, and insuretech startups such as Trov will emphasise user experience.
Trov, which signed a partnership with Google’s Waymo last year, was founded in 2012 to provide short-term insurance for phones, computers and other costly items. Unlike with traditional insurance policies, users can switch coverage on and off through mobile apps. Trov will redeploy its technology to provide coverage of passengers just for the length of a trip.