Self-driving cars are here. What used to be the preserve of science-fiction is now becoming reality and it has the potential to change everything we have become used to in life.
Autonomous vehicles will change the way we travel, socialise and trade. And whilst it is obvious that the existing automotive giants, under threat from new entrants, will need to transform vehicle design, construction, marketing, fuelling and servicing, as well as their business models, to accommodate this new technology, major changes are also coming to the car insurance industry.
Estimates vary on when self-driving vehicles will reach critical mass. Deloitte predicts that up to half of the cars on the road will be ‘smart’ by 2025. The problem for the insurance industry is that we assume that self-driving cars will be safer than those piloted by human drivers.
Why are self-driving cars safer?
Self-driving cars don’t get tired like human drivers. They make fewer mistakes than humans. An estimated 90% of road accidents are caused by human error and, according to Google, every single incident that has happened during its testing of self-driving cars was caused by a human.
However, new risks will emerge with self-driving cars, such as cyber threats. It also remains to be seen how autonomous cars and human-driven vehicles will mix on the roads. Plus, even AI-enabled machines are vulnerable to damage and accidents caused by environmental factors.
So, assuming self-driving cars dramatically reduce the number of accidents on the road, what are the implications for the automotive insurance industry?
Will drivers reduce their insurance coverage?
Currently, drivers are required to insure themselves on the road. However, the reason most drivers take insurance options over and above the required minimum is to protect themselves against costly accidents. Drivers opt for fully comprehensive insurance, for example, to insulate themselves from the cost of repairing their own vehicle in the event of an accident that was their fault or that of someone uninsured.
When self-driving cars become the norm and accidents are less likely, will drivers want to pay those extra premiums? It’s likely that more drivers of all vehicles will only want to carry the mandatory minimum coverage. This will hit the insurance companies’ bottom line significantly.
Will premiums go down in price?
Now, insurance companies offer reduced premiums to drivers who have driven for years without making a claim. They also provide reductions to drivers who have safety features in their cars, such as parking sensors and driver telemetry.
When autonomous cars reach critical mass and driving becomes inherently safer, drivers will make fewer claims. Insurance companies will find themselves competing to offer the lowest possible prices to consumers, not the best coverage against multiple risks. This will drastically affect both their turnover and margins.
Will new sources of revenue arise?
However, it’s not all doom and gloom for the insurance industry. Self-driving cars will create new revenue streams, which insurers can tap into if they position themselves for this new era correctly.
Driverless cars are expensive and contain a lot of sophisticated technology. Owners may wish to insure themselves against high repair costs. Fleet companies may want to take advantage of this too, as well as insuring themselves against cybercrime – an increasing risk as cars become IT platforms on wheels.
What also remains to be seen is how insurance companies deal with the previously-mentioned time when self-driving and human-driven cars are on the road together. Will they raise premiums for traditional car drivers? It makes sense from a financial standpoint, but it could be a public relations disaster.
How will liability change?
Finally, in the event of accidents involving self-driving vehicles, where no fault can be placed on the human, who assumes liability? Currently, it’s the manufacturer. Google, Volvo and Mercedes-Benz already accept responsibility if one of their self-driving vehicles causes an accident, but that’s a vastly different proposition to when millions of such vehicles are on the road at any one time.
Manufacturers are already insuring themselves against this liability. If this assumption continues as self-driving cars gain traction, this shift will represent a significant new revenue stream for the insurance industry. Insurance companies will find themselves selling direct to large corporations and their legal departments rather than to individual drivers through intermediaries. This dictates an entirely different business model. Can they adapt in time?
Insuring against uncertainty
The advance of self-driving cars ushers in a period of uncertainty for insurance companies. The time for them to act is now. The companies who are best placed for these changes, who have systems in place to serve their existing customers as their needs evolve and find new and replacement revenue streams, will be the winners. The work they put in today will ensure their survival tomorrow.
When it comes to established insurers adapting for the future, one option is to look at M&A as a way of quickly absorbing innovative technology companies and expertise which can help these traditional players transform. But given the disruption afoot they need to think laterally.
A perfect example of this was the acquisition in 2017 of Bright Box by Zurich Insurance. Bright Box, the AI-first connected car technology platform, was advised by Hampleton Partners to connect with a strong international brand, with the vision to put its technology at the heart of an integrated automotive and mobility strategy. Now Zurich Insurance is positioning itself at the forefront of the automotive insurtech sector and motorists will soon be able to choose from its ‘smart’ insurance products.
If you would like to find out more about trends driving the fintech and insurtech sectors, download the Hampleton M&A market report today.
Here are some insurtech companies we’re keeping our eyes on:
Cuvva – Flexible pay-as-you-go car insurance
Marshmallow – Smarter car insurance for international drivers
The Floow – telematics and vehicle tracking software
Jonathan Simnett, Director & Sector Principal
Jonathan has been involved in the technology business for over three decades, founding, managing and turning around businesses and helping management and their investors in fast-growth technology segments to grow, manage change, enter markets, transfer technologies, acquire, merge and sell.
He holds a Master’s degree in Science and Technology Policy from The University of Manchester, attended the Stanford Graduate School of Business and blogs on technology innovation, marketing and management at “The World According to WestFour”.