How to Adapt to Driverless Cars

There is little doubt that the widespread adoption of autonomous vehicles will have a huge impact on the automobile insurance industry. Research and computer modeling conducted by Accenture in collaboration with the Stevens Institute of Technology indicates that as many as 23 million fully autonomous vehicles will be traveling U.S. highways by 2035 (out of about 250 million total cars and trucks registered in the U.S.) This rapid growth of autonomous vehicles will involve a major shift, not only in our driving habits and patterns, but in the ownership of vehicles. We believe that most fully autonomous vehicles will not be owned by individuals, but by auto manufacturers such as General Motors, by technology companies such as Google and Apple, and by other service providers such as ride-sharing services. Unlike individual car owners – whose vehicles typically sit idle most of the time — fleet owners can send autonomous vehicles out on multiple trips on a 24-hour basis, amortizing the cost of ownership. Automakers have already begun to experiment with fleet-based ownership of autonomous vehicles, with GM announcing an autonomous vehicle partnership with Lyft, Uber announcing a similar partnership with Volvo, and many others exploring similar avenues. Since insuring privately owned vehicles is what the auto insurance industry has been all about, insurers have every reason to be concerned about their future growth and profitability.  With fewer individual owners, there will be lower overall premiums. And since as many as 94% of accidents are attributed to human error, the number and severity of accidents and insurance claims will drop, also leading to lower premiums as insurers learn to price in accordance with real risk. Our forecast shows that the drop in individual premiums – due both to decreased private ownership vehicles and to safer vehicles — will begin in 2026, as large numbers of autonomous vehicles begin to appear, and could be as much as a $25 billion loss for insurers by 2035.  This is significant for a roughly $200 billion market. In addition to autonomous vehicles reducing the need for individual auto insurance, other trends, such as urbanization, ride-sharing, and a general lack of interest in car ownership among young drivers, are also cutting demand and putting pressure on premiums.  And, while our research was focused on private passenger vehicles, it is worth noting that large commercial fleets such as UPS, FedEx, and other trucking businesses will likely move to autonomous vehicles at a rapid pace. However, auto insurers have one factor weighing in their favor: The shift to fully autonomous vehicles will be gradual. It will likely be years before fully autonomous vehicles appear on U.S. highways in significant numbers, and they are likely to coexist with traditional “driven” vehicles and a host of semi-autonomous variants for decades. See also: Who Is Leading in Driverless Cars?   The Stages of Autonomous Vehicle Adoption If we look at autonomous vehicle adoption as a spectrum – with zero representing a universe consisting exclusively of traditional vehicles and five representing a world of fully autonomous vehicles – we are somewhere between zero and one right now.  Automakers are currently moving aggressively to Stage 1, which is the adaptation of some autonomous features. At Stage 2, at least two features (such as braking and cruise control) will be automated, and at Stage 3 the car will be partially autonomous, although a driver will still be needed for monitoring. We consider Stage 4 as vehicles having full autonomy, with a “human option” for the driver/passenger to take over at any time. And Stage 5 would be full autonomy, with no human option – meaning no steering wheel, brakes, or accelerator pedals. We believe the transition through the stages will be gradual, and insurers will have some time to adjust and react.  But our forecast says that by about 2050, there will be many more autonomous and semi-autonomous vehicles on the road than traditional vehicles. Finding New Sources of Revenue While the pace of adoption of autonomous vehicles is not easy to predict, it is clear that individual auto premiums will decline in a significant and likely escalating manner. This means that auto insurers need to create new revenue streams that offset the decline in individual premiums. Fortunately, new opportunities for insurers are emerging as well. With help from the Stevens team, we have identified three areas with significant potential for insurers in the period from 2020 to 2050:

1. Cyber security. As cars become more automated and incorporate more and more hardware and software, insuring against cyber theft, ransomware, hacking, and the misuse of information related to automobiles can generate as much as $12 billion in annual premiums.  This can be even more critical to entire fleets, for example, if Amazon deploys fleets of autonomous vehicles to deliver packages.
2. Product liability. Auto-related sensors and chips are expensive, but the real risk for manufacturers is the potential for failure through software bugs, memory overflow, and algorithm defects, and the resulting massive liability.  Insuring against this is a $2.5 billion annual opportunity.
3. Infrastructure insurance. Cloud server systems, signals, and other safeguards that will be put in place to protect riders and drivers offer an annual revenue potential of $500 million in premiums for property and casualty insurers who underwrite the value of the hardware and software in play. The need to secure and insure the public infrastructure is likely to be vast and much larger than $500 million, but governments often “self-insure” these risks so the opportunity for commercial insurance is likely to be lower.

In the aggregate, these areas can generate $81 billion through 2026 ($15 billion per year from 2020 to 2026, with some fluctuations) and can more than offset the losses in premiums expected through 2050. Planning for the Driverless Future In a future dominated by autonomous vehicles, auto insurers will face some stark strategic choices. They can continue to conduct business as usual, fighting for pieces of a shrinking pie – or they can change their thinking and their business models and adapt to new realities. The speed of the conversion to a driverless environment is impossible to predict exactly, but carriers should start creating the actuarial models that determine risk and pricing for different stages of autonomous vehicles.  At the same time, they should be developing new product offerings in areas including cyber insurance and product liability for software and sensors. We see four key steps that insurers can take now: First, they can build expertise in big data and analytics.  Playing effectively in the AV market means being able to control data generated by AVs and by the communications and software systems that support them.  Market participants who can collect, organize and analyze this data will have inherent advantages over those with less developed capabilities. Second, they can develop the needed actuarial framework and models.  We have already seen partially autonomous safety features such as automatic emergency braking systems change the safety profile of newer vehicles.  Insurers should be using sophisticated actuarial and modeling techniques to be ready as vehicles add more and more autonomous features. Third, they should explore the partner ecosystem.  Insurers will need to collaborate effectively with automakers, providers of communication and software systems, governments at multiple levels, and many other organizations.  Insurers not doing so already should be actively identifying and mapping out ecosystem partners. Finally, they should think about new business models.  Currently, insurers whose revenues derive primarily from personal automobile policies have an expertise in insuring thousands of small risks.  Such insurers may have to transform themselves into large commercial insurers writing policies on a small number of very large risks.  Insurers remaining in the personal lines market will have to re-think areas including product development, policy administration, and distribution. See also: Driverless Vehicles: Brace for Impact   It is also worth noting that decreasing premiums industry-wide may lead to an increase in mergers and acquisitions. There are many smaller insurance carriers that could end up being bought as larger carriers seek to maintain revenue. In short, change is inevitable for auto insurers, but the change can be positive.  Insurers that vigorously pursue the short- and medium-term opportunities presented by cyber insurance, product liability insurance, and infrastructure insurance – while making careful strategic decisions about their partner ecosystems, operating models, and value propositions – are most likely to thrive in a driverless environment. This article originally appeared at  Harvard Business Review.