Celent analyst Donald Light has been tracking the impact of car technology on the insurance business – and downward pressure on premium is already beginning.
Four years ago, Celent analyst Donald Light issued a provocative report: “A Scenario: The End of Auto Insurance” It posited a future where incentives to reduce the human impact on driving reduce the risk of driving – and necessarily, the premium associated with auto insurance.
Today, Light has issued an update to his original piece. In “End of Auto Insurance: A Scenario or a Prediction?” he notes that in just the time since his first thought experiment, insurers are seeing real-world effects from the implementation of certain auto technologies.
Data from telematics and automated driver assistance technologies (ADAS) indicate that personal injury liability frequency has gone down 25% -- and high severity frequency has dropped 28% -- in cars equipped with those technologies relative to other vehicles.
“These technologies are going to substantially reduce accidents and auto losses, so lawsuits and premiums have to go down substantially,” Light says. “I’ve modeled what’s going to happen with premiums trailing as losses go down over a 15-year period, and you end up with a 22% drop in losses by 2030.”
That means about the same amount of revenue will leave insurers’ books, says Light – and as these systems proliferate, and driverless cars enter the marketplace at a higher rate, that will take even more accidents out of the equation.
“How many people want to own shares in a company where revenue is going to decline 20%?” Light asks.
In the months after Light’s initial report, some insurance leaders said that while it was likely that accidents would go down, the accidents that do happen will be more costly to fix, thus buoying the industry. After all, the computers that power ADAS and telematics aren’t cheap. But those computers aren’t just stopping accidents, Light notes. They are also reducing the impact of the accidents that do happen.
“Think about the network effects: When the ADAS slows down a car before collision, reducing severity for both cars, or eliminating an accident all together, instead of a two-car accident you have a zero-car accident,” he says. “The technologies start reinforcing each other and you get a multiplier effect.”
Insurers will get a bit of a reprieve in the short term before driverless cars have an effect, Light says. Despite the fact that human error is a major driver of accidents, perception of being “out of control” will likely slow adoption of driverless cars. But eventually, he says, data like his and others will improve public confidence, and regulators will approve driverless cars for use on a wide scale.
“Our view is that driverless cars aren’t going to be generally available until 2020, and then it’s another decade until they’re common on the road,” Light says. “After that period the decline in premium will accelerate up to 20% or 25%.”
But in the future world where drivers are assisted by technology and accidents drop, other kids of risks will reduce as well, Light says. For example, road rage incidents could fall.
“We’re predicting outbreaks of road tranquility,” Light says.
