Despite the relentless advance of self-driving vehicles, most insurance companies have done nothing to prepare for disruptive change
by Blake Desaulniers
At the turn of the 20th Century the vast arc of Manhattan’s future rose before the new centre of the world. It had seen its population double in 100 years, and per capita income quadruple. In all the city’s bustle and charm, the horse still ruled the roadways.
The equine population had burgeoned to 175,000 in number. Each one consumed 1.4 tons of oats and 2.4 tons of hay every year, and produced 15 to 30 pounds of manure daily. Some worried that by 1930 horse droppings would pile up to the height of third story windows.
When first introduced, in the fresh new century, the automobile was met with excitement and amazement. People stopped and gawked at the incredible, self-propelled vehicles.
But that admiration soon turned to open hostility. Cars frightened the horses, and people took to shooting at those damned cars.
Like most innovations, the horseless carriage did run into resistance and hostility. Yet within only 20 years, vehicle ownership had leapt from 8,000 to 8 million cars. Still in the incubation stage in 1902, the automobile succeeded in making the jump from niche ownership to broad market adoption in a mere two decades.
Today, more than 100 years later, according to a series of reports from KPMG, the most recent dated October 2015, the transportation market is about to go through another massively disruptive phase, perhaps even more quickly than it did in the first twenty years of automotive adoption, early in the 20th Century. Self driving vehicles are about to hit the road.
While earlier reports from KPMG outlined the nature of buyer demand, the ramifications of autonomous vehicles on car ownership, the emergence of mobility services and the end of the two car family, KPMG’s most recent study, released late last year, points to the impact of new mobility models on the insurance industry. The outlook for some is not pretty.
In a word, KPMG’s insurance and automotive groups call the emergence of self-driving vehicles the biggest change since the introduction of automotive transport. And they sound a warning. The industry is broadly unprepared for the disruption about to rattle automotive insurance.
The pace of change is quick, and it’s accelerating. Barely a week passes without ubiquitous headline stories about self-driving cars. Whether it’s a leap in technology, regulatory moves, or announcements from auto makers, the buzz around autonomous vehicles is everywhere.
Just how fast are things changing? According to numerous sources the collision avoidance systems of today are widely expected to evolve into more sophisticated iterations, capable of taking over all driving functions. Major manufacturers have publicly announced self-driving capable cars will be on the road in five years.
Just ahead we’re seeing auto-braking system becoming standard equipment in all new vehicles. In March, 2016 the U.S. National Highway Traffic Safety Administration and Insurance Institute for Highway Safety announced an agreement with automakers to install automatic emergency braking (AEB) systems in nearly all U.S. vehicles by September 2022.
The deal includes such companies as Audi, BMW, FCA US LLC, Ford Motor Co., General Motors Co., Honda, Hyundai, Jaguar Land Rover, Kia, Maserati, Mazda, Mercedes-Benz, Mitsubishi Motors, Nissan, Porsche, Subaru, Tesla Motors Inc., Toyota Motor Co., Volkswagen AG and Volvo Car USA.
AEB systems can reduce auto insurance injury claims by as much as 35 percent, according IIHS research.
If all vehicles had been equipped with autobraking that worked as well as systems recently studied, there would have been at least 700,000 fewer police-reported rear-end crashes in 2013 in the US. That number represents 13 percent of police-reported crashes overall.
“The success of front crash prevention represents a big step toward safer roads,” says David Zuby, IIHS chief research officer. “As this technology becomes more widespread, we can expect to see noticeably fewer rear-end crashes. The same goes for the whiplash injuries that often result from these crashes and can cause a lot of pain and lost productivity.”
While far from perfect, especially on Canadian roads in the winter, auto-braking systems will certainly slow all equipped vehicles before fontal crashes. While this reduces the severity of accidents, and the cost associated with repairs at the low end, it also results in cars that may have been written off in past coming into the shop for repair instead.
In fact, Canadian driving conditions present certain challenges to today’s collision avoidance systems. Systems that rely on cameras can fail in snowy or icy conditions, or when driving along dusty roads. Cameras covered in ice, slush and mud just don’t see too well. Lane departure systems that use cameras to see the lines and signs on the road don’t work when everything is covered in snow.
More over, the interaction between increasingly complex collision avoidance systems and human operators can be problematic. In a world where some cars have adaptive cruise control and some only have forward-collision alerts, for example, motorists will need to be cognizant of both the abilities and limitations of these systems on every car they drive. Not all drivers will be.
Last summer a Volvo salesperson attempted to demonstrate the XC60 City Safety system to a group of prospective car buyers. What the dealer didn’t understand was the safety system, which helps avoid or mitigate collisions, doesn’t detect pedestrians.
A pedestrian-detection system costs an additional $3,000, and this car wasn’t equipped with one. Nobody realized that until the driver of the XC60 plowed into two onlookers.
Current systems use one or more of a number of technologies including radar, lidar, and camera systems—each with different applications and varying results, and each with its own repair implications that can affect the cost of repairs.
Collision claim severity is much higher for vehicles with radar-based systems. The average cost per claim is $522 higher for equipped vehicles. That likely reflects the cost of repairing the radar system after crashes that weren’t avoided. The radar units are located in the front grille and are therefore much more vulnerable to damage than cameras located inside the occupant compartment.
When some collision mitigation system components require replacement, the costs can be astronomical. Radar sensors start at around $1,000 each and cameras are often serviced only with the exterior body part they are attached to (upper rear brake lamp or tailgate handle) and can cost hundreds to replace. It’s difficult to recommend any service or maintenance tips to extend the life of these units. The costs to simply inspect them on a regular basis can be unpalatable due to component location.
On trend, this year more automakers will introduce more sophisticated systems aimed a higher levels of crash avoidance and more effective at higher speeds.
Subaru leads a pack of top rated systems along with a pack of other top-ranked car makers including Volvo, Cadillac, and Mercedes-Benz.
The longer term impacts of this technology are incredibly disruptive. Even more important, the evolution of the technology systems and the legal framework to facilitate more and more driverless miles is coming at a much faster pace than most people expect.
Volvo has upgraded its City Safe for this year, raising upward the limit of claimed protection from its former 22 mph. Even in its last iteration, with its lower speed limitation, City Safety had the biggest effect on roads with speed limits of 40-45 mph. The equipped Volvos rear-ended other vehicles 54 percent less frequently than comparable vehicles on those roads. The reduction was 39 percent on roads with speed limits of 35 mph or less and 25 percent on roads with speed limits of 50 mph or higher.
Toyota has committed $US1billion to the newly formed Toyota Research Institute to take on the challenges ahead of creating a truly safe, completely autonomous vehicle. The institute will work in association with M.I.T. and Stanford universities.
The Consumer Technology Association has predicted one million fully autonomous vehicles to be in production by 2030. At the CES conference in January, Kia vice-president Seung Ho Hwang pledged $US2 billion “to bring the fully autonomous driving technology to the market,” by 2030.
Volvo plans to test the Concept 26 in 2017 and announced at CES that it is working with Ericsson to develop HD streaming for self-driven vehicles. GM has invested $500-million in Lyft with the notion of building driverless cars, including the hybrid Volt. Nissan CEO Carlos Ghosn has said the company will have 10 models on the road by 2020 with autonomous capabilities.
The shape of crash avoidance systems is morphing into full-on autonomous vehicles at high speed.
On Feb. 16, Audi brought actor Daniel Brühl to the red carpet at the Berlin Film Festival in an A8 L W12 model without a driver. While the star at a red carpet is usually an actor or other industry professional, Audi’s “chauffeurless” vehicle also got its fair share of attention.
An Audi release on the happening explains that the vehicle found its way by registering “prominent architectural features” such as distinct buildings along the driving route, cross-checked that information with its internal mapping capabilities and then synchronized the data with its own calculations of its movements.
Additionally, the ride was reportedly smooth, with modulated rather than sudden breaking and acceleration to closely mimic human actions.
Two major concerns often lobbed at driverless vehicles is that a machine could not successfully replicate human nuances and behavioural patterns, such as gradual braking and acceleration or easing into the intersection to prepare for a turn, or operate on roads filled with human drivers. The successful A8 drive suggests that these problems are already being addressed successfully.
On March 21 2016, Uber announced that it has ordered 100,000 autonomous S-Class cars from Mercedes—an order valued at $US11 billion.
Ford CEO Mark Fields says the 112-year-old company is tripling its investment in new technologies that will ultimately lead to self-driving vehicles. According to Raj Nair, who has global responsibility for Ford’s design, engineering, research and product development, near autonomous driving will be a reality from Ford within four years. “I think it is credible that an autonomous vehicle at SAE Level 4 (one step below full automation) will hit the market by 2020,” Nair says.
Ford has also recently indicated that it is redefining itself as a “mobility services company.” Ford is establishing a new subsidiary to expand efforts to profit from transportation services.
The new unit, Ford Smart Mobility LLC, could invest in transportation services companies, but it is not solely a venture fund, Ford CEO Mark Fields said in an interview with Reuters. “Their remit is to design, build, grow, and in some cases invest in, new mobility services,” he said.
Ford’s move comes amid a flurry of maneuvers by big automakers and automotive suppliers to buy or build the capability to sell transportation services, profit from high-speed digital connections to vehicles and engineer vehicles that drive themselves.
The move illustrates a part of the broad-based change laid out in KPMG’s October report entitled “Marketplace of Change: Automobile insurance in the era of autonomous vehicles.”
One major impact of increasingly automated transportation will ultimately be market consolidation. Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice, says that the personal auto lines sector will likely bear the brunt of the transformation to self-driving, as it will hold a smaller share of a smaller market. “By 2040, we believe this sector will cover less than US$50 billion in loss costs in nominal dollars, compared with the current US$125 billion, with premiums moving nearly proportional,” Nyce said. “The shrinkage in real terms may be even greater.”
The alarming conclusion from the KPMG report is that the industry is broadly unprepared, and in many cases taking no action to prepare for the massive disruption.
In putting the report together, KPMG engaged with companies that represent $85 billion in annual premiums. Of that group, 74 percent feel “unprepared” for an autonomous vehicle future. Tellingly, only three percent have allocated more than one percent of their operations budget for AV preparation, and 68 percent have allocated nothing.
Given the potential reduction of 80 percent in accident frequency by the year 2040, KPMG concludes that the mix of insurance will change as commercial gains a greater share due to vehicle sharing.
Driving the sharing fleet growth, costs of vehicle sharing are expected to drop from a fixed and operating combined $0.82 per mile today down to $0.43 per mile with the adoption of autonomous vehicles.
In a consolidating market, with new competition introduced by the likes of Google and others, all fighting for a slice of a seriously smaller auto insurance pie, competition can be expected to get vicious.
This is particularly bad news given that the last time the industry turned an underwriting profit was in the year 2010. On an aggregate basis carriers are losing money underwriting auto in “normal” market, so what happens when a contracting market puts pressure on pricing and profitability?
For most insurers, adaptation cannot occur overnight. With inflexible underlying cost structures and legacy systems trammelling their ability to meet rapidly emerging challenges, many of these players will simply have no choice but to fold. Subscale P&C carriers with high concentrations of personal auto in their overall book will likely be affected the most.
There will be detrimental profitability consequences for insurers who do not proactively plan and manage expense bases far in advance of the shrinking premium pie, the KPMG report states.
“There will be significant tactical demands—from setting new pricing schedules to updating policy forms and defining legal claim approaches. Computer systems will need to be changed, people will need to be trained, and customers will need to be managed. And perhaps not at first apparent—costs will likely need to be sliced to reflect a much smaller amount of business. Those efforts will take much time and money to address. A shift in business strategy will also take years to realize. Now is the time to act.”
The million dollar question—just what should that action be?
KPMG envisions the emergence of a contracting industry with fewer places at the table, and as a result survival will fall to “scale whales” and “mother mutuals.” who are able to dominate through economies of scale advantages.
In part, they recommend diversification. Companies should move into other products that potentially shield them from challenges across the personal auto line of business.
Innovation will also be key to survival. With new areas of risk, such as data security in an environment where vehicles spin off a vast data flow. Identify these areas and launch new products that meet the needs of an evolving market, KPMG recommends.
Partnerships and new alliances will be critical to survival, particularly as automotive transportation morphs into mobility services. KPMG advises looking at new business models and identifying where insurance could be embedded into the cost of yet to be designed mobility services packages. These new models will often require forming new partnerships and meeting the challenges that go along with stepping onto an unfamiliar field.
The report outlines seven steps that insurance companies can take now to prepare for market changes engendered by autonomous vehicles. Those include evaluating overall strategy, understanding exposure to change, identifying and monitoring leading indicators, aligning with other insurers and forming partnerships, educating and training people, understanding cost structures, and preparing operations.
Reb Wesseling, EVP National P&C Product at The Co-operators, says that Sovereign General is forward looking and planning for the evolution of today’s collision avoidance systems into self-driving cars. It’s an ongoing process. “We’re moving along a continuum,” he says.
According the Wesseling, while The Co-operators is actively addressing the issues of a shrinking market, and the need to develop product and service offerings that take into scope a market comprising software, hardware, infrastructure and data and the liability profile within that market, he is not currently at liberty to provide detail.
Nonetheless, his thinking on the subject could indicate the direction Sovereign General has in mind. “The whole nature of transportation is going to change based on the advances in self-driving capability. There will be a larger portion of the population who want transportation, not cars. Companies that don’t understand what business they’re in can fail,” Wesseling says.
He says there’s a lot that can be done to build the new business model, with insurers taking a lead role planning and facilitating the transformation to mobility services. That presents opportunity. “There’s a lot we can do to add value through the data flow from mobility systems. We can do a lot to help with loss prevention. The predictive value of that data will certainly allow us to better understand, quantify, and manage risk,” he says.
Taking a lead role is, in Wesseling’s mind, critical to survival. “It’s easy to find many disruptions enabled by tech or data that have unseated legacy incumbents. But nobody is better positioned in an industry than the incumbent. We need to disrupt ourselves.”