Lessons for Auto/Motor Insurers from Disruption in the Music Industry

They could feel it coming, but they couldn’t exactly see what was going to happen to them. Before they could react, a major part of their business disappeared and another large chunk of it was transferred to a new competitor. This is the experience of the music industry from 2002 to 2012 that was detailed by Thibaud Morin, Senior Vice President Innovation at Vivendi, during the keynote speech of Celent’s conference What’s Next: The Search for Disruptive Innovation http://www.celent.com/node/31640 The final result? In 10 years, the music industry lost $10billion in revenue and $7billion of the remainder was transferred from existing, incumbent companies to new digital providers (most of it to Apple). The parallels with the automobile insurance market are striking. Telematics, collision avoidance, automated traffic law enforcement, and (to a limited degree) driverless cars are all here now and have the potential to radically change the automobile insurance marketplace (see A Scenario: The End of Auto Insurance).  For guidance about dealing with disruption, insurers can look to the music industry and the changes that have occurred there over the last decade. Thibaud, pronounced Tee-bow, was working at Vivendi during this entire period.  Vivendi is a conglomerate with $40billion in annual revenues which includes Universal Music Group, a $6billion business. (Celent clients can view his full presentation at http://www.celent.com/node/31882 )  Here is Thibaud’s sketch of the events of that period: Initially, when mp3 players first appeared, music companies did not see the new technology as a threat — people still bought CDs, piracy was limited and occurring mainly on consumers’ home computers (and thus contained). The industry’s reaction was to invest in lobbying of politicians to strengthen penalties for intellectual property infringement. However, with the exception of some limited progress in France, these efforts were mostly unsuccessful. Lesson #1: Vivendi could not count on regulators to protect them. In 2003, Apple began supporting their .mp3 player, the iPod, with the iTunes platform. A new download music market emerged alongside the traditional one and all the new value that was created went to the new entrant. Now, Apple controls 80% of the global download music market. Lesson #2: Disruption came from a newcomer, not from Vivendi’s traditional competitors. 2013 09 30 - Keynote Celent note TM v5 Finally, Thibaud shared that he saw his organization go through denial and then panic. They were in what he calls a “denial trap” and had a very difficult time responding to the new challenge. Eventually, and rather recently, the company found ways to partner with the new entrant for mutual benefit. Lesson #3: The conclusion for Vivendi was “You have to cannibalize yourself or others will.” Having learned this painful lesson, Vivendi has taken aggressive steps to institutionalize disruptive innovation within their company.  Thibaud outlined several of their interventions, including actions such as selectively acquiring startups, and moving their disruptive efforts out of the core business (in order to protect them from “too much love and too much money”). Now that they are on the other side of the digital music disruption, the main take-away for his company was summed up in Thibaud’s comment “When innovation comes, you have to live with it”.  The insurance industry cannot exactly see the specific disruptions in the automobile line of business, but the signs are clearly visible.  Those insurers which invest in building innovation as a corporate capability will be in the best position to react to disruptive threats.  

Auto Insurance Vanishing? Don’t Hold Your Breadth and Don’t Close Your Eyes

On January 17 I&T posted a story about an exchange that took place at the Property/Casualty Joint Industry Forum between State Farm’s CEO, Edward Rust Jr., and an industry analyst, Brian Sullivan. Mr. Sullivan said, “It’s impossible for anyone to look at the data and say there won’t be fewer accidents than before. The technology is getting better and drivers are getting safer. I think this business is shrinking: Fewer accidents means fewer exposure.” And Mr. Rust responded, “I don’t see the risk being mitigated so much that the premium falls significantly,” Rust added. “The cost to repair a vehicle that has been in an accident is much greater. It’s not your Grandpa’s Olds.” I will judiciously say that both Mr. Sullivan and Mr. Rust are correct—but the real question is the timeframe during which each of them is correct. This year and next year and maybe the year after, there won’t be much technology-driven reduction in auto losses (and associated drops in premium). But inexorably collision avoidance technology is going to get better, and even more importantly, it will become more pervasive among the vehicles on the road. And while insured losses depends on severity (i.e. the cost to repair partial losses or replace total losses), it also depends on frequency. As collision avoidance technology (and automated traffic law enforcement, and yes eventually driverless cars) advances, frequency will drop. And in all likelihood severity will also drop—for example when an automatic braking system reduces the speed at impact from 15 mph to 5 mph. So losses will drop and insurance premiums will follow. The big questions are how much and how soon.

Another view on the future of auto insurance

PwC has just published an interesting and thoughtful paper on, “The Reshaping of Auto Insurance.” The paper describes the possible impact of various on- board technologies (automatic braking, telematics, etc.) on auto losses and the longer term potential for changes in auto insurance business models. Here are a few Celent comments: It is true that changes in frequency, and especially severity, of motor vehicle accidents will not drop overnight. But the PwC paper looks only at “on-board” technologies. By doing so, it ignores the potential impact of automated traffic law enforcement (e.g. speeding and red light cameras). Depending on the political will (and desire for revenue) of state and local governments, these technologies may have a quicker and more dramatic impact than onboard technologies. There is also a potential incentive for governments to mandate Vehicle to Vehicle (V2V) communications as a way of increasing the carry capacity of roadways, and avoiding costly construction–plus, arguably, it is a green technology. If and when liability for many accidents shifts to the manufacturers of the automobiles (and/or the on-board equipment); it is likely that the frequency of accidents will be significantly lower, leading to lower losses, and lower premiums for auto insurers. So change is coming for auto insurers in terms of business and operating models. The big question is how quickly.