Pressure mounts on motor insurers to reinvent themselves

Driver assistance technologies and connected services are going to transform the motor insurance industry. Insurtech companies are eager to take advantage of the new opportunities and grab business from the incumbents, but traditional insurers don’t plan to give in.

There is a lot at stake. Motor insurance is the most important line of business globally representing 42 percent of all non-life gross premium of total property/casualty insurance market, according to a recent report by Swiss Re and HERE titled “The future of motor insurance.”

And the business is threatened from many sides. Several fast-moving trends are set to reshape the industry. Car ownership is on the decline, particularly among urban millennials and other city dwellers, as people factor in the perceived high cost of car ownership as well as alternatives such as ride hailing like Uber and car sharing such as Zipcars.

In addition, car technology is quickly developing towards autonomous vehicles. On the road, today there are already cars with advanced driver assistance systems (ADAS) such as lane-keeping assist or emergency braking.

“It’s absolutely challenging times,” says Jonathan Dye, head of motor insurance at Allianz, during a June round-table organised by Intelligent Insurer. The sector faces unprecedented change driven by technology, Internet of Things, telematics and autonomous vehicles, he explains.

There is good news. Through technological advancements, accident numbers and therefore claims volumes are expected to fall. According to the UK Department for Transport the driver’s failure to look properly or to judge another person’s path/speed are the most common cause of accidents on both urban roads and motorways.

Basic driving assisting technology such as forward collision warning, blind-spot detection and lane-departure warning may reduce accidents on motorways by 16.3 percent and by 11.6 percent on other roads, according to estimates.

More sophisticated driving assisting technology such as lane keeping assistant, emergency braking assistant, night vision, would reduce accidents on motorways by 25.7 percent and on other roads by 27.5 percent.

Advanced technology such as highway pilot, would reduce accidents on motorways by 45.4 percent and on other roads by 27.5 percent, according to the estimates.

Taking into account technological development, in 2020 the motor insurance market would be worth an estimated $594 billion. This suggests that within a six-year period just over $20 billion would be trimmed from annual premiums as a result of increased road safety enabled by automated car technology. This reduction would be greater were it not for global car sales growth, mainly fuelled by growth in emerging Asia, in China and India in particular, which will become the largest markets for motor insurance by 2025 in terms of volume.

“As with any change, there’s opportunity though,” Dye notes. “I think there’s opportunity from insurers and brokers and reinsurances to take the initiative and create what we believe our customers want in the future.”

Take telematics for example. So far, the technology has been popular with young drivers to lower their insurance costs as they prove to drive safely. But Unipol Re, a subsidiary of Italy’s UnipolSai Assicurazioni, wants to make it attractive for other driver segments by expanding services derived from the technology.

“We did turn young drivers into profitable clients, but what we would like to do is to turn telematics into a mass market product,” UnipolRe CEO Marc Sordoni, says during the round-table.

Through geo-localised vehicles, an insurer can demonstrate who caused the accident if there are no witnesses, saving the innocent driver from a rate increase in case of a dispute, Sordoni explains the benefits for drivers.

Another aspect is security. In case of an accident where the driver is in a coma, a black box can save their life by triggering a call from the insurer which when not answered automatically sends an ambulance to the accident site.

A service which proved to be very popular but Sordoni admits is more of a gimmick is a feature that allows the client to access performance data on their journey or to find out where the nearest parking area is.

New players attacking the value chain

But some insurtech companies such as Cuvva are preparing for a society where cars are no longer a status symbol but a basic commodity that will be shared.

“The decentralisation of ownership will not benefit the zipcars in this world, the massive fleets, it’s going to be very small communities who all have access to the same vehicle and we’re just trying to solve the insurance problem for it,” says Freddy Macnamara, the founder of Cuvva, a new pay-as-you-go insurer.

Macnamara believes that in the future friends will increasingly form groups to share a car, and Cuvva wants to offer the insurance solution which covers the car and all the drivers.

“We are building the tools to help people do that,” he says.

Such insurance models may work through a smart phone or through a system integrated in the car, which can be turned on and off as required.

Swiss Re expects that by 2020, more than two-thirds of cars sold worldwide will have some form of connectivity.

The adoption of hybrid telematics solutions (which feature both embedded and consumer electronics device tethered connectivity) will grow the fastest, with a compound annual growth rate (CAGR) of about 88 percent.

By 2020, approximately 260 million connected cars will be on the roads worldwide. Since modern upscale cars are equipped with dozens of sophisticated sensors, there are vast streams of driver data that could be aggregated, processed, analysed and harnessed for
different purposes, the report notes.

For traditional motor insurers, this can mean losing market share and lower profitability.

Insurers must take strategic decisions now about how to thrive in an era of data-driven insurance, the Swiss Re report warns. Delays in adapting business models may leave insurers vulnerable to competition from new entrants from adjacent industries and especially software-centric companies which have been honing their capabilities in big data processing and analytics.

And, established players in the market may have to move fast as disruptive innovations that may have once taken many years to transform an industry, have now compressed the adjustment time considerably through digital capabilities.

The list of potential competitors is long, ranging from established and emerging software and IT companies to traditional auto (parts) manufacturers. Automakers may choose not to share the data they collect but rather use it to issue their own policies. KPMG’s recent survey suggested that 58 percent of insurers believe that original equipment manufacturers (OEMs) will become a major distributor of vehicle insurance in the future, while close to 40 percent believe that established technology companies will also become direct sellers
of insurance.

But many questions may yet to be clarified.

“An interesting question is who owns the data,” says Mohammad Khan, UK Insurance Leader at PwC. In case of Tesla, an innovative electric car manufacturer which includes autopilots in its vehicles, it is clear that when they do have accidents, it’s not the customer who controls the data but the car manufacturer, Khan notes.

Plenty of opportunities for insurers

For insurers it will be crucial to retain access to the drivers’ and the cars’ data.

By exploiting in-car telematics, insurers can learn more about their customers to identify potential opportunities to cross- and up-sell supplementary products and policy features. Car manufacturers are becoming more interested in entering the insurance value chain and distributing insurance. They understand that being the hub that collects driver and vehicle data from embedded telematics devices in vehicles gives them an excellent position to distribute insurance or sell data to insurers. Some manufacturers are already equipping vehicles with telematics devices and partnering with insurers.

The biggest opportunity for insurers related to car connectivity is usage-based insurance (UBI), according to the Swiss Re report. Products based on how often, where and how people drive enable insurers to price the risks more accurately, which can result in lower premiums for the insured taking less risk. The demand for insurance policies based on vehicle-based telematics has been growing and we expect the variety of policies available to increase.

The opportunity for insurers also extends beyond the vehicle. By combining vehicle data with information from other sources, such as smartphones or public transit systems, an insurer could build a more complete picture of a driver’s usage of mobility services irrespective of the type of transportation they use. This paves the way for insurers to develop new types of policies that insure a user for their broader mobility and not just driving.

Connected cars may enable insurers to boost profitability. The vehicles generate vast quantities of data which can enable insurers to select and price risks more accurately. And, car connectivity simplifies the servicing of insurance policies, potentially reducing costs.

And there are other opportunities which may enable insurers to grow revenues. By exploiting in-car telematics, insurers can offer additional services such as vehicle theft tracking, automated emergency calls, vehicle diagnostics, breakdown notification, fuel efficiency and safe driving tips. Such product features may help an insurer to differentiate itself from other auto insurance providers and encourage customer loyalty in an increasingly commoditized market place. Taken together with the cost savings that new technology might bring, such as the reduced potential for fraud and more efficient claims handling, this can help support underwriting profitability even in the face of enhanced competition.

Car connectivity and the introduction of increasingly sophisticated driver-assist technologies and autonomous driving will lead to significantly improved road safety.

Vehicle-to-vehicle and vehicle-to-infrastructure data transmission will inform drivers of hazards and dangerous situations they would not normally notice, prompting them to take evasive action. According to a US Department of Transportation report, a combination of the two systems could potentially address about 81 percent of all-vehicle target crashes; 83 percent of all light-vehicle target crashes; and 72 percent of all heavy-truck target crashes annually.

As car connectivity and automated driving in principle lead to a reduction in expected losses for insurers, overall insurance premiums for drivers should decrease.

In a recent survey, 45 percent of insurance executives indicated that as driverless vehicles enter the marketplace they expect to reduce premiums on personal auto insurance. However, in judging the impact of the transition towards highly automated vehicles insurers need to be alert to the potential for large unexpected losses that cannot be addressed simply by pooling risks over a large number of policyholders (and investing the associated premiums in available financial assets), according to the Swiss Re report.

As the motor fleet moves towards autonomous driving, legislation will be needed to clarify how claims will be distributed between automakers and insurers, as an accident may in the future increasingly be caused by faulty drive assist technology.

It is important to have an efficient subrogation process in place, Dye says. If in an accident, the car was in autonomous mode, it’s the fault of the manufacturer, whether its programmed to do that or whether it’s a fault, he explains. The likely procedure will be that the motor insurer, the customer and the injured third party or whoever is involved get compensated by the motor insurer, who then claims it back from the manufacturer.

And, the challenge will be to find out who is liable when traffic consists of a mixture of semi-autonomous, autonomous and totally manually vehicles.

Macnamara believes that in 20 years there will be mostly autonomous driving vehicles transporting people and the risks will be captured by reinsurers and car manufacturers.

But the increased connectivity of vehicles may also create new risks from cyber-attacks, adding a new demand for cover to the insurance industry and potentially further changing today’s understanding of motor insurance.

Potentially, third-party motor liability may become strictly a product liability insurance, general liability or a liability with a cyber-attack or anything like that, Sordoni says.