By Jonathan Agnew – Head of Insurance, recoveriescorp What would you say if I told you that in 20 years’ time 90% of motor repairers and service providers to the motor insurance industry will be out of business and personal insurance motor businesses will be 60% smaller than they are today?
By Jonathan Agnew – Head of Insurance, recoveriescorp
What would you say if I told you that in 20 years’ time 90% of motor repairers and service providers to the motor insurance industry will be out of business and personal insurance motor businesses will be 60% smaller than they are today?
In this article we are going to raise some issues for discussion around self-driving vehicle technology and then go into more detail in the follow-up articles to discuss the impact that driverless vehicles are likely to have on the wider community as well as the motor insurance and related industries. We will review the;
1. Potential disruption to the motor insurance and related industries
2. Existing and emerging driverless vehicle technologies
3. Underwriting, legal liability and ethical dilemmas
4. Cyber risk and privacy
5. Community benefits, costs, and attitudes
Potential disruption to the motor insurance and related industries
In a classic case of ‘digital disruption’, for those involved in the motor insurance and related industries, the ‘autonomous or driverless vehicle’ discussion has become an increasingly important consideration in strategic and business planning due to their potential to profoundly change the motor insurance industry in the medium to long term. A 2015 KPMG report suggests that driverless vehicle technology could see the personal motor insurance industry shrink to 40% of its current size in the next 25 years, so if you are the CEO of a motor insurer will your motor book ever be worth more than it is today? Is it time to sell and reinvest the capital in the aged care sector?
Professor Vardi, Computer Science Professor at Rice University in Texas predicts that “automated driving would cut accidents by 90 percent or more, compared with vehicles driven by error-prone people”. (Cookson, 2016).
If, as Vardi suggests, automated driving is going to reduce accidents by 90% it is not unreasonable to conclude that up to 90% of the motor repair and aftermarket Autobarn type enterprises will go out of business when driverless cars become mainstream on our roads. Fewer accidents means fewer claims, fewer claims means fewer repairs, etc. In addition, services such as motor claim recoveries provided by recoveriescorp, the parking industry and the aftermarket auto sales industry will also go the way of the dinosaur, or at best have their business models shredded. Cyber insurance anyone?
Given the increasing investment in research and development to bring autonomous vehicles to the masses, the discussion is warranted. Industry experts are predicting the introduction of autonomous vehicles onto Australia’s roads within 3 to 5 years1. With manufacturer Volvo aiming to have driverless vehicles ready for the Australian public by 2020, and State Governments like South Australia leading the way by introducing new driverless vehicle legislation, there is no disputing the progress that’s been made. Driverless vehicles are already a reality. Although not yet on our roads in any significant numbers, driverless vehicles are on the agendas of western governments, universities, and businesses alike, all of which will play a significant role in bringing driverless vehicles to the mass market.
Does the Australian insurance industry see this as a non-event, a threat or an opportunity?
Depending on who you talk to, the arrival of autonomous vehicles is seen as one or a combination of;
a) A non-event
b) A looming threat for the industry or
c) A major opportunity
The ‘non-event’ camp (probably those planning to exit the industry or retire in the next decade) are ambivalent because they can’t see any major impact from autonomous vehicles within the next 10 years due to the age of the fleet currently on our roads and the time and cost to turn that fleet over to autonomous vehicles. The non-event camp can take heart in the fact that most of the experts agree with them and think that the driverless car transition will happen in a meaningful way from around 2023 onwards. To those in the non-event camp; “Tesla founder Elon Musk predicts that his electric cars will be entirely self-driving (even docking themselves at robotic charging stations) within three years.” (Time Magazine, 2016), so the clock is ticking.
The ‘looming threat’ camp understand that motor insurance is the industry’s largest single source of income2. Accounting for 36% of industry premiums and 34% of insurance profits. The significant decrease in accidents expected to occur as we transition to an autonomous vehicle society, leads experts to forecast lower demand, lower premiums and lower earnings. A 2014 report by Merrill Lynch suggests that with the introduction of autonomous vehicles, two of Australia’s most dominant insurance brands have a potential risk of 37% and 29% of group earnings3. This is highlighted in the report as a worst-case scenario, but certainly focuses insurance executive’s minds on the potential financial impacts posed by mass scale autonomous vehicles.
The ‘major opportunity’ camp recognise the force of change on the horizon and are working to identify potential opportunities that will arise in this new era. Technological advancements will significantly reduce the risk of human error but are sure to create new risks requiring innovative insurance solutions and new products. Consumers may no longer require a liability policy, but may need a cyber policy to indemnify them against hackers crashing their car that only becomes obvious in the driverless vehicle era4.
Why driverless vehicles will lead to industry transformation
There are more than 1,000 fatalities and nearly 30,000 serious injuries resulting from motor accidents in Australia every year and approximately 95% are a result of human error5. In America there are 33,000 fatalities every year plus an additional 2 million injured (Time Magazine, 2016). Driverless vehicles remove the potential for human error, and are expected to significantly reduce accident frequency.
In the simplest possible terms, computers will make better drivers than humans. The potential to reduce the road toll by 90% is enough to make driverless cars a reality by itself. Computers don’t text or snapchat, computers don’t get tired or experience road rage, computers don’t drink and drive or decide to take drugs and get behind the wheel, so it’s a no brainer.
Google, Volvo, Tesla and Mercedes Benz have already invested hundreds of millions of dollars in driverless vehicle technology and in March 2016 General Motors announced that it will buy self-driving car start-up Cruise Automation for a figure reported to be $US1B, so there is no lack of investment in the future of driverless technology and driverless technology means the industry will have to transform to remain viable.
If you don’t believe smart computers will be able to safely drive a car on our roads without human intervention in the very near future Google ‘IBM Watson’ and have a read about how IBM developed a technology platform that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data.
The potential socio economic benefits of automated vehicles, such as maximised road efficiency and resultant productivity improvements, improved road safety and reduced health costs from death and injury are overwhelmingly positive. Eventually, every western government will realise that investment in a future of driverless technology will pay significant dividends. It’s too early to determine exactly how the motor insurance industry will need to transform itself to remain sustainable. However, it is unlikely that the transformation required by the mass arrival of driverless vehicles will be anything but significant.
Increased security vulnerabilities with cyber threats and privacy issues
Software and internet security is probably the most substantial piece in bringing about driverless vehicle technology. Unfortunately, software and the internet make these vehicles vulnerable to hacking, viruses and even terrorism8. In addition, privacy issues will now have to be extended to the driverless vehicle technology.
Despite the eagerness to deliver vehicles with advanced driverless technology to the masses, there are still many unresolved issues that could slow its progression. Technological issues, legislative, legal and regulatory barriers, and ethical dilemmas will all need to be addressed to achieve the confidence necessary for wide spread adoption.
As we continue to progress towards a fully driverless vehicle society, we will find that there remain more questions than answers. However, the driverless vehicle momentum is unstoppable, and with the benefits reaching every level of society, the transition has become inevitable.
In our next article we will look in more detail at existing and emerging driverless vehicle technology.