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06

Driverless cars could shrink motor insurance industry by 60%

Open-access content Friday 19th June 2015 — updated 5.13pm, Wednesday 29th April 2020

The personal car insurance sector could shrink to less than 40% of its current size in 25 years as a result of driverless cars, according to a KPMG report.

2

KPMG said this was because accident frequency would decline as a result of driverless cars, which would lead to a drop in costs and subsequently premiums. 

The firm warned this could lead to financial stress for traditional insurers, resulting in consolidation among traditional writers.

"The potential reduction in car ownership and decreased demand for personal auto insurance could lead to financial stress for less-diversified carriers, triggering consolidation in the insurance industry," said Joe Schneider, a director at KPMG Corporate Finance. 

The report, based on a survey of senior US insurance executives whose companies account for almost $85bn in car insurance premiums, found 42% said driverless vehicles would result in niche writers and 39% said new providers would emerge in the motor insurance industry in the next 10 years. 

Such providers include car manufacturers (58%); start-up companies (45%); established technology firms (39%) and investment firms (32%).

Schneider said: "Assuming consumers demand lower premiums to reflect fewer accidents, there is the possibility of frenzied competition as firms attempt to maintain premium volume to cover operational expenses and market share.  This irrational pricing behavior could result in a dangerous downward underwriting spiral for the broader industry."

But KPMG said seven out of 10 insurers were unprepared for driverless cars and had not adjusted their business models to prepare for potential disruptions.

Most executives (84%) do not expect the technology will have significant impact on their business until 2025, while 42% think autonomous vehicles will significantly impact their business in six to 10 years. Nearly three-quarters (74%) feel they are unprepared for driverless cars.

In addition, KPMG said more than half (55%) believed regulators would delay the adoption of driverless cars, "which may help to explain why they anticipate a more distant effect on their business".

In terms of preparation, 65% of respondents said their firms were in "the discussion phase", while 32% have done nothing and only 22% of firms have developed a formal plan or a task force to deal with impact. 

Jerry Albright, principal in KPMG's actuarial and insurance risk practice, said insurers "must evaluate their exposure" and make necessary adjustments to their business models. 

"The disruption of autonomous vehicles to the entire automotive ecosystem will be profound, and the change will happen faster than most in the insurance industry think," he said.

In terms of business operations, 61% said the area most significantly impacted would be underwriting, while 52% cited product management and another 52% said it would be claims. 

This article appeared in our June 2015 issue of The Actuary.
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