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.