The technology in and surrounding vehicles is changing the face of motor insurance – the most stable line of business for insurers. AIR finds out how the industry plans to adapt to these changes.
As the technology and electronics used in cars gets increasingly sophisticated and complicated, the cost of premiums are rising in the UK, Australia and several other parts of the world. According to the Association of British Insurers, car insurance premiums have hit a record high in the last quarter of 2016, with an annual comprehensive policy cost of GBP462 (US$580). This is due to a rise in the cost of car repairs, and shipping in spare parts.
With a rising trend in vehicle rentals, younger car buyers and greater adoption of telematics, as well as increasing popularity of international ride-hailing services such as Uber and Grab, risk exposure for road users is getting higher and affecting how insurers underwrite risk.
In an interview with Singapore’s Business Times last year, Mr Manik Bucha, AIG Singapore’s Head of Auto Insurance, said: “Not only are drivers who use rental cars for commercial enterprise more likely to clock higher mileage and spend more time behind the wheel, but many are young drivers, who are almost twice as likely as the average driver to have an accident.”
AIG’s reports had indicated that younger drivers have increased third-party property damage claims by 33% in 2016, with them being involved in more ‘at-fault’ accidents. While the number of accidents are expected to rise in the short-term – and with repairs having risen by 32% over the last three years – telematics and constant monitoring of driving habits is expected to lead to an improvement in driver behaviour in the long-term.
However, Mr Bucha also predicts that the use of telematics and its adoption by both insurers and drivers will lead to a reduction in insurance premiums by at least 10% within the next two years – just in time for driverless technology to hit the roads.
Autonomous vehicles will lead to big shake-up
Self-driving vehicles are set to change the landscape of highways in a big way, and is predicted to lead to a decline in traffic accidents, which will further lead to a decline in insurance premiums. An Aon Benfield report in September of 2016 titled “Riding the Innovation Wave” said that “if autonomous vehicle technology is adopted at even a moderate pace, US motor pure premiums could decrease by 20% by the year 2035 compared to their 2015 levels – and potentially by more than 40% by the time that autonomous vehicles reach full adoption in 2050.”
With the first commercially available self-driving car to hit the roads in 2018, the report forecast an 81% reduction in claims frequency. At the same time, claims severity is likely to increase, due to sensor costs and an increased cost of handling product liability claims.
Mr Vinay Surana, Head of Individual Personal Insurance at AIG, said: “The insurance industry has already begun to feel the effects of autonomous vehicle technology even at its early stages. In Singapore, Advanced Driver Assistance Systems such as automatic emergency braking, lane departure warning systems and collision avoidance systems are now available in many auto models on showroom floors, and AIG has found that these capabilities are already resulting in significant reductions in auto accidents globally.”
Personal motor currently accounts for 47% of the global insurance premium – without this ballast and implicit capital subsidy, Aon Benfield estimates that US property-casualty insurance volatility could increase by 40%.
Mr Paul Mang, CEO of Aon Analytics, said in a press release: “Adoption of autonomous vehicles will of course be affected by many variables such as regulatory challenges, cost to the consumer, safety, vehicle ownership preferences, and the technology itself. However, we as an industry, need to act quickly to ensure that we have the products available to align to the new paradigm; if we fail to do so, we only invite disruption.”
Navigating the innovation
Mr Pan Jin Long, Head of General Insurance at Aviva Singapore, states that innovations insurers must take need to ensure relevancy and profitability, which will depend on the extent at which driverless technology evolves, and how it is applied to driving.
“For example, in the case of full automation with no intervention from the driver under any circumstances, consumers will no longer be required to purchase a motor insurance plan. Instead, it will be replaced by product liability insurance, packaged together with the car at the time of sale, with a coverage period that’s aligned with the duration of vehicle usage,” he said.
Yet the more likely scenario for autonomous vehicles would be for drivers to be able to intervene at any time, in which case “motor insurance plans will be enhanced to include a product liability feature, and the decision to purchase a motor insurance plan still lies with the driver.”
Mr Pan believes that predicting the future of motor insurance premiums will be difficult, considering all of the variables in play. He stressed the importance of regulators in this matter: “It is therefore imperative that the relevant authorities take a cautious and step-by-step approach in planning the roll-out of such vehicles, and ensure that the implementation is timed to reflect the maturity of the technology.”
Autonomous vehicles will be a massive step forward in road safety, but accidents are still bound to happen. At that point, the question of liability becomes murky – is the driver or the car to be held liable?
Mr Leo Costes, Managing Director of General Insurance at AXA, said: “The implications are becoming clear to us – new risks will have to be insured as a greater portion of the liability will potentially shift from the driver to car manufacturers and software/telco providers.”
Given how driverless technologies affect more than just mobility, solutions can be developed to insure infrastructure providers and the entire value chain that surrounds the manufacturing of autonomous vehicles. Insurers will also have to start taking an active role in helping develop sound risk management practices for autonomous vehicles, making use of data to better understand risk modelling so that they can underwrite insurance policies for cars with higher levels of automation more effectively.
Some insurers have already taken the leap – Tokio Marine & Nichido Fire Insurance will add a special rider, free of charge, to cover accidents involving self-driving cars to its automobile insurance policies in Japan, starting in April. “Sorting out all the legal issues related to autonomous driving will require considerable time,” said Mr Tsuyoshi Nagano, President and CEO of Tokio Marine Holdings to the Nikkei Asian Review. “In the meantime, we will need a system to provide relief to victims swiftly.”
Fewer car owners in the future
Mr Costes also expects the future model of road mobility to move towards a car-as-a-service, “Uber with no drivers”. This paradigm will necessitate coverage for the needs of car manufacturers, fleet managers, clients and pedestrians.
“As the motor insurance industry move towards a usage-based future, partnerships with vehicle manufacturers will start to take centre stage. This partnership will see insurers and vehicle manufacturers work closely to share data and safety innovations, giving the insurance industry a good opportunity to adapt progressively to new car technologies as they emerge and to develop in-depth knowledge on each of them.”
His opinion is shared by the automobile manufacturing industry as well. KPMG’s recent Global Automotive Executive Survey found that 74% of UK automotive executives believe that by 2025, over half of car owners today will no longer want to own a vehicle. About 20% of executives, among them many from India, China and Southeast Asia, felt the industry would focus more on selling vehicles directly to tech firms. Google’s Self-Driving Car Project has seen its fleet of self-driven cars log more than 1.5 million miles on the roads of the United States.
Mr John Leech, UK Head of Automotive at KPMG said in a press release: “Carmakers plan to sell a myriad of new digital services to vehicle users. Today, carmakers already make substantial profits from the sale of consumer finance and annual vehicle insurance but this will grow in the future as innovative services such as remote vehicle monitoring and the integration of the car as a focal point in people’s ever more connected lifestyles are demanded by consumers.”
“For the automobile industry, this implies that pure product profitability is outdated. Carmakers’ success will not be evaluated solely on the quantity of vehicles sold, but on the customer value over the whole lifecycle – especially when the digital ecosystem will be ready for the market.”
Cars in a connected world
The use of telematics has become a necessity for motor insurers. Across the globe, over 12 million telematics-based insurance policies have been issued. The UK and US are currently the biggest markets, but such policies are gaining quick traction in India and China and the emerging markets in Southeast Asia.
The developments that are taking place in the motor industry mirror what is happening to the insurance landscape as a whole. Disruption is prevalent, driven by technological advancements and evolving consumer behaviour.
In order to stay relevant, insurers need to continuously innovate. Innovative disruptors and start-ups can be roped in through collaborations with insurers, allowing the industry to reap the benefits of complementary synergies.
“As an industry, we need to come together to discuss how we should work with regulators and policy makers to make this technological development an enabler that can improve our customers’ lives,” said Mr Costes.
Insurers’ innovation labs
In the past year, insurers have set up innovation labs and are exploring new pilots and initiatives in areas such as telematics, usage-based insurance, and gamification that seek to better meet modern insurance needs. Aviva, for example, launched a Digital Garage in end 2015 as a dedicated space for the best minds across Aviva and beyond the insurance industry to explore, collaborate and build new insurance ideas.
Similarly, AXA has invested significant resources into this area. It has implemented a network of Data Innovation Labs (DIL) across various geographies that serve as business-focused centres of expertise on data analytics. These DILs apply cutting edge data analytics to telematics to help spot trends and foster R&D efforts for new innovations that can be incorporated into their usage-based motor insurance solutions.
Singapore’s NTUC Income have also been collaborating with start-ups in search for the next disruptive technology. A spokesperson told Asia Insurance Review: “It is important that we match industry and domain knowledge to start-ups’ creativity and entrepreneurship to co-develop practical and marketable solutions for real business and consumer needs.”
Outside of just impacting how the motor insurance sector functions, that is, how claims are handled; revision of regulations to ensure clear guidance on liability placement; streamlining of accident reporting processes; driverless technology also raises discussion over the many possible scenarios that might emerge.
For example, having increased safety features would logically lead to fewer accidents and lower premiums, yet a small malfunction in the vehicle’s computer systems could lead to major accidents and higher losses, on average.
Repair costs would also continue to climb, and possibly factor in the costs required for repair technicians to learn how to maintain the new computer systems.
The reliance on computer processing in autonomous vehicles presents an additional problem for regulators, manufacturers and insurers to ponder, as these cars become increasingly vulnerable to cyber-attacks.
Fiat Chrysler was forced to update their security systems to stop hackers from being able to override braking subsystems, kill the engine and take control of the steering wheel. Meanwhile, researchers have discovered that the alarm on the Mitsubishi Outlander hybrid can be turned off via security bugs in its on-board Wi-Fi, allowing thieves to break into and steal the vehicle.
Further considerations include the degree of driver engagement while using a driverless vehicle. The idea behind this technology is for driver to dis-engage from the task of driving, giving them time to use the journey to read a book, watch a film or freely use their phones. This increased productivity of journey time makes up the main economic case for autonomous vehicles.
However, if the degree of dis-engagement is too low, it may be insufficient to attract users. Providing the capacity to remain mentally engaged whilst not physically engaged is highly challenging. At the same time, studies have shown that it takes 35 to 40 seconds for drivers to take full control of the vehicle when switching from autonomous mode.
Research on the relationship between time lag in taking control of the vehicle and driver engagement is currently underway. Results of that research will determine what activities drivers should be permitted to undertake whilst the vehicle is in autonomous mode.