There’s no question that driving is getting safer. Collision avoidance and other safety features in automobiles are becoming more sophisticated and ubiquitous, having worked their way down from high-end luxury vehicles to family sedans and subcompacts. Now automated traffic law enforcement and telematics could further reduce fatalities and insured losses, and the promise of Google’s self-driving car could remove driver error as the primary cause of collisions and injuries.
If these technologies are widely adopted by consumers, or mandated at the local and national levels, the net effect could be a dramatic reduction in traffic accidents, fatalities and insured automobile losses. Consequently, property/casualty insurers would see a major reduction in their auto insurance premiums revenue.
The adoption of these technologies is accelerating. Globally, the Pay As You Drive (PAYD) insurance market now has more than 2 million customers and the market is expanding geometrically, according to
“We expect it to be multiplied by 50 by the end of the decade,” said Frederic Bruneteau, managing director of Ptolemus Consulting Group, an international strategy consulting firm that recently released its “
Bruneteau explains that telematics give drivers control over their insurance rates because good driving habits are recognized and rewarded. Conversely, risky drivers would be recognized and pay more, but they also would have the opportunity to lower their rates by driving more safely.
“If you look at the business case for this, a lot of insurers are saying it’s nice, but why would I sell something that decreases my premium and creates additional costs? What’s the benefit?” Bruneteau said. “I think this is not the case. The key thing about telematics is that it is a tool that the user can control.”
Another positive consequence for insurers is that they attract safer drivers. “It is in your interest to have a customer who will pay a premium and have much lower risk and claims. And if you look at the statistics, you have a 15- to 50-percent decrease in claims. So that’s the main ingredient in the business case for telematics. It’s not about premiums anymore, it’s about cash flows,” Bruneteau said.
But it’s not all blue skies for insurers.
The Celent whitepaper describes a possible 10-year scenario in which federal and local governments in the United States encourage the use of three currently available technologies: telematics, collision avoidance and automated traffic law enforcement. The implications for property/casualty insurers would be enormous.
In that scenario, auto liability premiums decline to 20 percent of total 2012 industry premium over the first five years and to 10 percent of total 2012 industry premium over the following five years. Currently, liability premium stands at 25 percent of total 2012 industry premium.
Over the same periods, auto physical damage drops to 10 percent, and then 3 percent, from 14 percent of total 2012 industry premium. And total property/casualty industry premium drops by 9 percent from 2013 to 2017, and by 26 percent from 2018 to 2022.
“In terms of causation, accidents go down, insured losses go down, and therefore premiums go down,” said Donald Light, an insurance analyst for Celent. “Decidedly, it’s a good thing; auto accidents don’t create wealth, prosperity or economic growth, although a lot of people make their living because there are automobile accidents.”
However, the loss in revenues would mean that there would be less investment directed to the property/casualty business, and by extension the quantity and quality of people in the industry would decline, as would the insurance industry’s influence over legislation and regulation.
“Expanded telematics could provide a lot of data about driving habits, driving practices, who’s a safe driver, who’s not a safe driver and under what circumstances,” Light said. “And that becomes an opportunity to price more accurately. And that’s always a goal of insurance, to understand risk and price it more accurately. That’s an opportunity.”
However, the Celent study also presents five "existential" questions for auto insurers that are unable or unwilling to embrace and extend the technology:
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“If you are an insurance company and you are writing a good deal of auto insurance, you darn well better be tracking the progress toward this scenario actually happening,” Light said.
