Driverless cars are poised to shake up insurance

Driverless Cars to Shake up the Auto Insurance Industry May 2014 BLOG POST

Impact of driverless cars on the insurance industry is closer to reality than we think Automotive industry has seen various evolutionary phases in the past with introduction of safety airbags, anti-lock braking system, etc. These devices have improved driving experience in terms of safety. Going few notches up, driverless cars are the latest and the most revolutionary landmark awaiting the motor industry, and experts believe that it is going to shake up the auto insurance market.

Personal and commercial auto insurance sector makes up more than 40% (~USD200 Bn) of the total premiums for the US P&C industry. Driverless cars can reduce the sale of coverage for personal and commercial vehicles, putting a dent into the insurance industry’s revenues.

Coverage will change drastically but insurers have to wait and watch for future pricing developments One needs to understand the typical auto insurance coverage in detail to identify repercussions of driverless cars on the motor insurance market. Driverless cars remove the driver from the equation, so cars or manufacturers, and not humans, will be responsible for any collision or road accident that would happen during the time the car is on the move. This would shift focus from personal lines customers to commercial lines (auto makers), and insurers have to re-strategize their product offerings to these consumers.

Secondly, not all types of insurance coverage would get eliminated as one would still require protection from fire, theft or any other natural calamity. With introduction of driverless cars, new laws are definitely going to be introduced and one can expect the auto insurance products to be sold through personal insurance in case of human fatalities and injuries.

There has been a lot of argument regarding pricing of auto insurance products with introduction of driverless vehicles. One argument is in favor of rates coming down because of less human involvement leading to fewer accidents. But there is more to this point than meets the eye as new technology would increase the auto prices. The more expensive the vehicle, the more costly would be the comprehensive insurance coverage. So going ahead, decrease in accident coverage price would be offset by increase in comprehensive insurance coverage price.

Motor industry is also curious to see the impact of driverless cars on the already-evolving Usage-Based Insurance (UBI) and Telematics systems. Going ahead, it is believed that automakers can leverage this technology if the UBI market transitions away from more customers’ (vehicle owners) tool to manufacturers’ (car makers) tool.

Various auto manufacturers like Honda, Volvo, Nissan and others are on the verge of launching driverless cars. Many are also working on a technology that will let these vehicles talk to and avoid each other.

Driverless cars to shake up the auto insurance industry

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Some auto insurers are also evaluating this technology, and instead of adopting the wait and watch approach they have tied up with auto makers to identify opportunities arising from this technology. One such example is the US-based, State Farm Mutual Automobile Insurance Company, which is working in collaboration with Ford Motors to identify and doing R&D for the adaption strategy to these changes and how they can continue to deliver value to their customers.

Driverless car in reality has still a long way to go as far as the commercial market and all legal frameworks are concerned. It may take a decade to hands-free driving to be a reality but insurers cannot avoid the revolution of driverless cars and have to identify new methods to create value to their customers.

Google has already introduced a driverless demo car and with its strong cash reserves it can certainly create competition for auto insurers. If insurers do not react and behave just like spectators, it would give an opportunity to non-insurance players to innovate and introduce insurance products for the emerging driverless insurance cars market.

Driverless cars to shake up the auto insurance industry

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