Autonomous vehicle technology, a rise in on-demand transportation and a shifting of liability to manufacturers will shrink the auto insurance sector by more than 70 percent or $137 billion by 2050, according to updated research by KPMG.
In a 2015 report, KPMG said the market would shrink by as much as 60 percent by 2040.
KPMG has said it extended its actuarial model by 10 years to 2050 and found that the pace of change has accelerated, pushing projections that illustrate greater declines to the insurance sector than KPMG’s previous 2015 study.
The updated study, The Chaotic Middle: The Autonomous Vehicle and Disruption in Automobile Insurance, also shows an increasing need for new types of insurance products.
KPMG said it now believes that traditional auto insurance carriers are facing the threat of obsolescence with auto manufacturers becoming the alternative to covering driving risk.
Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice, said that building the latest observations into the actuarial model affirms the “projected long-term decline in the number of auto accidents overall, and the share of accident claims funded by personal auto policies will also contract.”
KPMG sees a 90 percent reduction on loss frequency by 2050. That along with severity declines and the effects of mobility on-demand transportation will mean a 71 percent drop in total losses, or $137 billion. The biggest effect will be felt by personal lines auto insurers— by 2050 only 22 percent of auto loss will be in personal auto.
Partially offsetting this, average repair costs will continue to increase at a higher rate than overall inflation as new technologies in future cars become more expensive to repair, Nyce said.
According to the consulting firm, three major forces are disrupting the current, $247 billion premium, auto insurance marketplace:
- Autonomous technology is making cars increasingly safer, leading to a potential 90 percent reduction in accident frequency by 2050.
- Auto manufacturers (OEMs) will assume more of the driving risk and associated liability, and have new opportunities to provide insurance to car buyers, taking market share away from traditional insurers. KPMG estimates that by 2050 there will be a significant increase in products liability insurance to 57 percent of total auto losses in order to cover the autonomous technology in vehicles, and a considerable decrease in personal auto insurance to 22 percent of total auto losses.
- The rapid adoption of mobility-on-demand is quickly translating into the need for less personal auto coverage, with the use of fleets requiring commercial auto insurance.
Between now and 2019, consumers will begin experiencing the safety advantages of new technologies and attitudes will shift towards acceptance of autonomous driving, according to KPMG. Also the first autonomous cars will be on the roads. On-demand transport and car-sharing will continue to expand. By 2024, the majority of travel within cities and surrounding suburbs will be on-demand rather than with a personal vehicle, and by 2035 on-demand will be the norm in transportation, according to KMG’s projections. As a result, products liability coverage and other new types of insurance are expected to pay a greater share of claims resulting from roadway accidents.
KPMG said cyber risk is an example of a new type of risk associated with the era of driverless cars, and there will be a need for new products to cover the potential hacking of autonomous vehicles.
The trends seen by KPMG are in keeping with a report by Allianz Global Corporate & Specialty (AGCS) on the effect of technology on insurance. The report that found autonomous cars will reduce accident rates, shift liability from drivers to manufacturers and lead to a drop in car ownership in favor of motor fleets, car-sharing and driverless taxis.
All of this means that auto insurance carriers have their work cut out for them to survive, according to the advisory firm. The time for insurers to act is now, KPMG said.
“Insurance companies will have to make important strategic and tactical changes sooner than anticipated to navigate through this turbulent transformation of the industry,” said Jerry Albright, principal in KPMG’s Actuarial and Insurance Risk practice.
In the meantime, these new business models will “bring about a decade or so of a ‘chaotic middle’ as insurers adjust their strategies and operations as autonomous vehicle technologies significantly deplete the need for personal auto insurance.”
Insurance companies vary in their level of preparedness for this disruption but many have taken only limited action to face this challenge, according to Joe Schneider, managing director at KPMG Corporate Finance. “As a result, auto insurers may choose to branch out into home-related products, or other commercial coverage, to benefit from diversification,” he advised.
The auto insurance industry is further disrupted by the surge of “smart money” generated by a variety of sources including venture capital firms. “The infusion of capital is boosting the development of autonomous capabilities and related business models, thereby accelerating the pace at which highly automated vehicles will hit the market,” added Schneider.
KPMG sees wide acceptance of autonomous driving, despite recent reports that humans may be reluctant to turn over control to robots. An American Automobile Association survey found that more than three-quarters of Americans are afraid to ride in a self-driving car. A J.D. Power study showed almost every generation is fearful.
Also ride-sharing giant Uber had hoped to disrupt the trucking industry with self-driving trucks and smartphone-based logistics services but progress has been slow.
While KPMG tale a long-term view, another report found that in the short term between now and 2025, insurance coverage for autonomous vehicles will bring $81 billion in new premiums to the U.S. auto insurance industry over the next eight years, driven by risks related to cybersecurity, software and hardware and by the need for additional public infrastructure coverage. That’s according to a report from Accenture and Stevens Institute of Technology.
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