While many insurance experts believe that autonomous vehicle technology could drastically shrink the auto insurance sector, new KPMG research assigns a precise estimate to the drop. The number is even more drastic than the consulting firm’s previous calculation.
The U.S. auto insurance sector could contract by 71 percent, or $137 billion by 2050, KPMG said in new research, a number that covers personal and commercial auto insurance, and product liability. In 2015, the firm estimated a 60 percent contraction by 2040, assuming auto and safety trends continue.
KPMG explained that it extended its actuarial model by 10 years, to 2050, which determined the wider auto insurance sector contraction. At the same time, KPMG said, the revised model affirmed some other data points covering the long-term drop in overall auto accidents and how much personal auto policies will have to cover in terms of accident claims.
Because of these numbers, insurers will have to make major strategic and tactical changes sooner than anticipated in order to move successfully through the autonomous vehicle transformation, said Jerry Albright, principal in KPMG’s Actuarial and Insurance Risk practice.
“New business models 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,” Albright said in prepared remarks.
Not everyone sees a straight decline. Accenture/Stevens Institute of Technology said recently that U.S. property/casualty insurance carriers could see significant short-term financial gains from insuring autonomous vehicles, but personal auto premium would decline long-term once the technology becomes more commonplace. Expectations are that coverage for autonomous vehicles would bring $81 billion in new premiums to the U.S. auto insurance industry over the next 8 years, their report said.
Three Forces Converging to Implode the Auto Insurance Sector
What will cause the auto insurance industry to implode in size as autonomous vehicles gain in popularity? KPMG blames three major forces:
- A potential 90 percent reduction in accident frequency by 2050 due to autonomous technology that makes cars much more safe. KPMG said that the drop in claims and overall losses coming from fewer accidents would amount to 71 percent per vehicle, and a 63 percent decrease in total losses. This comes down to $71 billion in total losses, about $122 billion less than is typical today.
- A shift of driving risk and associated liability to auto manufacturers, along with new opportunities to provide insurance to car buyers. Products liability insurance will jump to 57 percent by 2050 in order to cover autonomous vehicle technology, according to KPMG estimates. Alongside this, personal auto insurance could drop to just 22 percent of total auto losses.
- Mobility on demand (rideshare services, etc.) is also leading to the need for less personal auto coverage. These cars or fleets of cars will end up needing commercial auto insurance instead.
To adapt to these changes, KPMG said that auto insurers will need to both make the best out of the market sector drop, but also adapt by diversifying into new products and services.
Here are some of KPMG’s recommendations for auto insurers seeking to adapt:
- Be proactive as far as predicting disruptions, developing a clear perspective on how much change is needed and stay informed.
- Figure out how to best manage expenses in a shrinking market, and determine new pricing and product strategies.
- Make sure the company tests what services and products will be provided and to which customer segments in the autonomous vehicle era.
- Figure out where your company has the competitive advantage and figure out how to sustain that as the market dynamics change.
- Consider how other insurers will respond and adjust their strategies and then respond in kind.
- Diversify, both in terms of products and services and in market positioning.
- Consider acquisitions or alliance partners in order to fill gaps in product offerings.
The full report is called: “The Chaotic Middle: The Autonomous Vehicle and Disruption in Automobile Insurance.” You can read it in detail at this link.