Leseprobe
TABLE OF CONTENTS
Introduction
Self-driving vehicle Innovation/Technology
Traditional Car Insurability Criteria
Other affected sectors and their coping strategies with self-driving cars
Impact of Self-driving cars on Insurance Industry
(i) Alteration of the insurance Value Chain
(ii) Reduced Demand for Insurance - Lower Premiums and Potential Revenues
(iii) Pricing and Underwriting
(iv) Impact on claims
Response Strategies by the Insurance Industry
The future of insurance industry with Autonomous Vehicles
Conclusion
References
Introduction
The future may be uncertain and hard to predict, but it should not be hard to prepare for. Internet and other digital platforms have transformed the way people interact and how they do business in almost all sectors of the economy. This has led to far-reaching challenges and innovations that could have an impact on both current and future of numerous economic sectors. In insurance, for instance, a sector which has remained largely the same for more than three decades, it has a great influence on its value chain right from production, sales and distribution to claims and payments.
This report examines self-driving cars, a digital innovation involving vehicles with the capacity to sense their environment and navigate through the pathways without human driver inputs (NHTSA, 2013). Their ability to analyze sensory data that in return enables them distinguish between different cars in the road increases driving efficacy and as a result likely to alter current state of both automobile and life insurance industry substantially because of the likelihood that their adoption will significantly reduce the number of traffic accidents as majority of road accidents traditionally are perceived to be caused by driver error/negligence consequently shrinking insurance bills and claims for customers (PWC, 2013).
This study further examines how this innovation (autonomous cars) would influence insurance markets/business while exploring the various responses which the insurance industry has/will put in place to help cope with these changes in the future to enable them to remain sustainably relevant in the market.
Self-driving vehicle Innovation/Technology
Abbildung in dieser Leseprobe nicht enthalten
Source: Jamieson, (2015).
Self-driving cars are vehicles which are capable of driving themselves from one point to another with no manual input from the driver. In order to do this, these vehicles are able to perceive their environment, make decisions about where is safe and desirable to move to (Lloyds, 2016). The idea was first conceived by General Motors (GM) in 1939 world’s view and evolved through decades up to early 2000 when it gained momentum. Meanwhile, as of June 2016, Google’s driverless vehicles accomplished more than 1.7 million miles[1] of crash-free driving on autonomous mode while Tesla and other automakers are also conducting substantial test drives.
Unlike traditional vehicles, automated cars have been fitted with sensors that enable them to detect the surrounding for any objects/pedestrians, distinguish between different cars on the road and identify the appropriate navigation paths to destinations without any physical human intervention (Zhu, et.al. 2014). Each vehicle is fitted with crash avoidance technology and less prone to accidents thus making them safer than the current human driven ones. The Reduction of road accident cases is likely to cause third-party damage insurance to decrease drastically hence reducing the premiums payments on car insurance by 75% or more (Mui, 2013).
Traditional Car Insurability Criteria
Traditional car insurance groups their policies into two major categories; third-party, fire and theft and comprehensive Insurance. Third-party policy cover car owners against injuring someone else or destroying someone’s property whereas ‘theft and fire’ give owners the protection in the case their vehicles are burnt or stolen. However, this policy does protect damage to the vehicles that are involved in accidents or vandalised. Comprehensive insurance, on the other hand, covers damages to the vehicles from a wide array of causes including accidents, fire, theft as well as vandalism, medical expenses and personal accident protection (BIBA, 2016).
Currently, car insurance premiums are fixed based on age, occupation, drivers’ previous accident history, vehicle model and terrain in which the vehicle will navigate through amongst other factors. With self-driving cars, this is likely to change greatly since there is no human driver/user involved and therefore there ought to be different metrics of fixing premiums. Furthermore, liability is likely to shift from owner/driver to automaker or software developer thus making it inevitable for them to change strategy. The insurance industry should, therefore, be cognizant of the risks and implications the technology will bring forth and try to position themselves against impending uncertainties. This idea is emphasised by (Stanford and Smith, 2015) that for the management of risks deriving from self-driving cars to be effective, new business models are needed by Insurance companies.
Other affected sectors and their coping strategies with self-driving cars
This innovation does not only affect insurance industry but other sectors of the economy as well. For instance, the primary and most affected sector (automotive industry) has already felt the impact and is in a state of panic because they are well aware that ‘it’s either they shape in or ship out’. This has led them to make numerous changes to their business models for fully accommodate self-driving cars while others are giving clear time frames for its adoption. This is evident in the statement of Hars (2016) where he alludes that in early 2016, General Motors invested $500 million in Lyft,[2] purchased self-driving technology startup Cruise Automation and subsequently build its first self-driving car in July 2016 with BMW and Ford announcing that they would have their self-driving cars on the market within the next five years. Other sectors like energy and petroleum will also experience depressed demand since the infrastructure of autonomous cars would require networks for electric charging stations, a system which has been widely adopted already. The insurance industry also needs to quickly learn a lesson from these industries by making prompt adjustments.
Impact of Self-driving cars on Insurance Industry
In this section, the study examines some of the aspects of insurance that will be affected as the Automotive industry seeks to fully embrace the self-driving cars innovation.
(i) Alteration of the insurance Value Chain
As vehicles become increasingly automated, the issue of liability comes into play. For instance, if an accident occurs, the legal dispute will be whether it is the owner’s or the manufacturer’s fault (Bertolini et al., 2016). According to Kermorgant and Siary, (2015) depending on future legislations, the responsibility for avoiding an accident shift entirely to the vehicle and the components of its accident avoidance systems thereby shifting liability from the vehicle owner to the manufacturer. This would completely change the entire value chain from product definition to pricing of the products, marketing, distribution, underwriting, to claims as a result of shifting the buyer from the end user to the manufacturer.
The change in the value chain and the shift of risk from owner to the manufacturer will provide openings/opportunities that allow insurers to gain market share by arranging deals with motor vehicle manufacturers, but this also poses another threat to those insurance companies who might fail to capitalise on these opportunities. With massive changes in technology, only those insurers who are able to repackage their auto insurance policies to come up with new and creative ways while targeting urban and self-driving vehicles will survive.
(ii) Reduced Demand for Insurance - Lower Premiums and Potential Revenues
According to Actuarial-Post (2016) there were over 1,730 fatalities and 186,202 other injuries resulting from motor accidents in the year 2015 and an estimated 88% of these arise from reckless behaviour and negligence. Although autonomous cars have not yet been officially introduced to the market, its official introduction in the roads could have the potential to eliminate the human error component of risk consequently translating to a significant reduction of motor accidents as well as the consumer demand for insurance services by motor owners.
While supporting this idea, Diana (2014) asserts that insurance premiums are a direct function of the frequency and severity of accidents. The introduction of driverless car/vehicle innovations could curtail future road accidents thus translating to lower claim volumes. This is an indication that most insurers will be in serious profitability problems. Needless to say, this could upend the way auto insurance market works (LLC, 2014). However, this will not have any visible impact in the short-run because fewer accidents could mean fewer claims, and therefore greater profits for insurance companies. On the same note, health insurers would also lose more revenues as car related accidents fatalities/injuries have been reduced.
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[1] Actual distance is 1,725,911 miles (2,777, 585 km)
[2] Lyft- American transportation network company based in San Francisco