Will Self-Driving Cars Lower Insurance Costs?

Autonomous vehicle technology could shrink the auto insurance sector by 71 percent or $137 billion by 2050, according to new research by KPMG, titled The Chaotic Middle: The Autonomous Vehicle and Disruption in Automobile Insurance. KPMG has extended its actuarial model by 10 years to 2050, finding that the pace of change has accelerated, pushing projections that illustrate greater declines to the insurance sector than KPMG’s previous 2015 study. It also shows an increasing need for new types of insurance products.

“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. “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.”

Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice, added, “Building the latest observations into our 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. 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.”

The Triad of Disruption in the Auto Insurance Industry
Three major forces are disrupting the current, $247 billion premium, auto insurance marketplace:

1. Autonomous technology is making cars increasingly safer, leading to a potential 90 percent reduction in accident frequency by 2050.
2. 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% of total auto losses in order to cover the autonomous technology in vehicles, and a considerable decrease in personal auto insurance to 22% of total auto losses.
3. 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.

“Insurance companies are varied in their level of preparedness for this disruption and many have taken limited action to face this challenge,” said Joe Schneider, managing director at KPMG Corporate Finance LLC. “As a result, auto insurers may choose to branch out into home-related products, or other commercial coverage, to benefit from diversification.”

A New Mix of Auto Insurance Coverage
By 2024, the majority of travel within cities and surrounding suburbs is expected to be on-demand rather than with a personal vehicle, and by 2035 it is expected to be the new normal in transportation. 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. Cyber risk is a good example of a new type of risk associated with the era of driverless cars, and market participants are building new products to cover the potential hacking of autonomous vehicles.

Autonomous Capabilities on a Fast Track
The auto insurance industry is further disrupted by the surge of “smart money” generated by a variety of sources including venture capital (VC) 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.