Turn Signal

One would have a tough time envisioning two industries undergoing more change than the auto and insurance sectors. The first is being fuelled by technology developments at break-neck speed; the second is being advanced by explorations of how best to employ existing expertise and information to strengthen (or even just maintain) an auto book whose transformation is advancing quickly.

As elsewhere, the evolving uses and possibilities of vehicles is on the minds of many in Canada’s property and casualty industry. Current considerations include the increasing number of sensors that collect valuable data, rising consumer expectations, and players (old and new) jockeying for position to capitalize on whatever first-mover status brings. The expectation is that these developments will only accelerate as technologies further develop and possibilities reveal themselves.

With steady improvements in vehicle safety and the availability of fully autonomous vehicles possibly just a couple of decades away, where do p&c insurers stand?

One of the industry’s bread-and-butter books – personal auto – will, no doubt, continue to undergo dramatic change. Could vehicle safety diminish premiums? Will the risk that provides the basis for premiums be absorbed, in whole or in part, by other players? Will vehicle makers assume a larger role in car insurance offerings?

Insurers can either panic or view the unfolding circumstances as an opportune time to rethink what will be and choose a partner that will make the future dance as successful as possible.

Just what individual insurers do is for each to weigh and decide. But one thing seems clear: the status quo is not an option.

PICK A PARTNER

The innovation and technology changing today’s vehicle landscape are influencing the traditional property and casualty insurance lens on auto as well. Canadian insurers with at least some interest in auto are having to look at things differently not only because of what is happening today, but because of how things could unfold down the road. It seems likely the developing situation will require new approaches, new considerations and new partnerships to smoothly navigate what could be a bumpy road for the unprepared.

Insurers and car manufacturers “have not had the deepest relationships,” notes Tanguy Catlin, a senior partner with McKinsey & Company’s North American p&c insurance practice. Globally, the two have had relationships, Catlin points out, but these have been around improving vehicle safety, certain aspects of distribution (such as a manufacturer offering white-labelled insurance provided by an insurer) and some lobbying-type efforts, usually related to regulatory demands.

However, concrete advances in technology, combined with the increasing promise around data, seem to have ramped up the perceived value of partnerships.

There are already significant partnerships between insurers and automakers, says Karen Pauli, a principal for Strategy Meets Action (SMA), predicting that more are likely to come.

As examples, Pauli points to the following current collaborations:

• State Farm and Ford Motor Company – the program launched by the companies in 2012 allows the insurer’s customers with select SYNC-equipped Ford vehicles to reduce auto insurance premiums by using the Vehicle Health Report feature to report mileage;
• Tesla and QBE Insurance Group or AXA General Insurance Ltd. – InsureMyTesla is a policy offered by Tesla to owners of its electric cars in Hong Kong and Australia through those insurers; and
• BMW i Ventures, Allianz Ventures and Toyota Research Institute – the three are licensing technology from Nauto, an autonomous vehicle technology start-up.

Pauli’s take is that these sorts of insurer/automaker partnerships are a win-win. “Insurers not only learn about the technology the manufacturers are currently using, but also what they are in the process of developing,” she reports.

That heads-up “permits the insurers to anticipate and make adjustments to insurance products and rating earlier than they might normally be able to,” Pauli says. “It also gives the insurers a chance to influence what the manufacturers are doing,” she suggests.

Calling it “an ever-evolving issue,” an email from Andrew McGrath, media relations manager for Insurance Bureau of Canada, points out that the insurance “industry is becoming increasingly information-based, technologically connected and even more globalized.”

For now, “car manufacturers are racing to improve safety. Emerging technologies could lead to ‘zero fatality’ roads,” McGrath writes. “We already see high-end vehicles that warn if you drive too close, alert you to vehicles in your blind spot and even park themselves. When it comes to driverless cars, insurers will need to assess the risks and determine products and pricing based on those risks.”

But talk is expected to broaden – including to more evolved coverage and distribution – as technology advances, more data is collected and real adoption of autonomous vehicles nears.

Citing information in KPMG’s Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles, as autonomous driving features improve safety and help reduce accidents, incidents per vehicle are expected to drop by 80% by 2040, says Peter Hatges, managing director of KPMG Corporate Finance Inc. and national sector leader, automotive for KPMG in Canada.

“There will certainly be a lot of data available and a better understanding of the impact of the safety systems in place will be evidenced by experience,” Hatges suggests. “The insurance industry will be able to collect collision data frequency from their own records and Google is expected to have a significant amount of driving data,” he notes.

Last June, IHS Automotive, part of IHS Inc., reported global autonomous vehicle sales were expected to reach almost 21 million by 2035. “Global sales of autonomous vehicles will reach nearly 600,000 units in 2025,” predicted Egil Juliussen, director of research for IHS Automotive.

The IHS Automotive analysis takes into account, among other factors, ride-sharing and car-sharing programs, increasing investment in autonomy by original equipment manufacturers (OEMs), suppliers and technology companies, research and development centres under way and improved efficiencies.

“We believe that intelligent, autonomous shared fleets will be the future of transportation, particularly in our urban environments,” suggests Monika Federau, the senior vice president and chief strategy officer for Intact Financial Corporation (IFC).

“Shared will revolutionize the concept of the automobile, and remains the most disruptive trend over the long-term as people shift from individual ownership more to multi-modal and into shared services,” Federau continues.

The arrival of automated vehicles “on our roads will, no doubt, have an impact on auto insurance pricing, but it’s still too early to go into specifics,” suggests Valérie Lamarre, a spokesperson for Dejardins Insurance.

With respect to driverless cars, says McGrath, “it’s important to note that while testing is under way in Canada, a functional and available driverless car is a ways out on the horizon.”

Most car makers have started building – or have promised to build – autonomous vehicles. However, “there’s a few very significant pieces of technology that need to be invented,” Andrew Lo, president and chief operating officer of Kanetix Ltd., said during a recent event.

Plenty of work remains to be done on artificial intelligence and HD mapping (real-time high-definition mapping for self-driving cars so that they can navigate unusual circumstances), Lo pointed out.

Also needed is “ubiquitous vehicle-to-vehicle communication.” Autonomous vehicles, he noted, “aren’t going to be possible without a 5G (fifth-generation wireless technology) network, without sensors, without artificial intelligence.”

Currently, “some of the driver-assistance technology available (such as back-up cameras, blind-spot detectors, parallel parking assistance and adaptive cruise control) already has an impact on how we calculate insurance risk,” Lamarre says.

“As cars become more connected by the automakers, there is an opportunity for insurers to extract valuable data and information from vehicles,” Steve Millstein, president, North America for Intelligent Mechatronic Systems Inc., wrote in an article for Canadian Underwriter last December.

“The information gleaned from new data sources can provide insurers insight beyond just driving behaviour, helping them to better understand who their customers are and offering the possibility of expanding to lifestyle insurance services based on the digital information collected,” Millstein noted.

DATA DUEL?

Data will be key – not only to drive innovation, but also to open the door to potential new offerings and services and fill any gaps that may be created by vehicles becoming safer and, perhaps, being used less and shared more.

Exactly who owns the data remains an open question. Pauli says that vehicle manufacturers have data on models with embedded sensors and insurers with telematics offerings have that data. “But, the more that telematics evolves to measuring via a smartphone (versus dongle) the more you get the telcos in on information retention,” she suggests.

Hatges says the expectation is that established OEMs and technology companies like Google will own the data. A KPMG study on insurance and the auto industry shows “almost 87% of respondents expect Google to control driving data, with over half expecting the company will distribute insurance.”

Millstein noted in the magazine article that “access to the data and the desire of the automaker to control the flow may create a new battleground between OEMs and insurers.”

His take is that automakers likely “want a mechanism to replace the OEM subscription model – which includes embedded telematics paid for on a monthly basis by vehicle owners – to monetize revenue from these new sources. Monetizing driving and vehicle data gives OEMs a revenue stream that the subscription model never did,” he wrote.

“Insurers are realizing that they would want to price the risk on real driving behaviour other than credit scores and based on real usage other than paying for the year,” suggests McKinsey & Company’s Tanguy Catlin. “That information about the driving behaviour and the usage is a lot more easy to collect if the device that is capturing that information is embedded in the car, and the folks who are embedding those devices are the manufacturers,” he adds.

INSURER ENVY?

But will love of data woo car makers more deeply into the insurance realm? Do they want to become insurers?

“Never say never,” says Pauli, but quickly adds that with the exception of a random manufacturer, “it is not likely to happen. Becoming an insurer is very expensive and very complex, and certainly not a core competency. Most manufacturers will want to avoid that,” she explains. “Their goal is to sell more cars, not negotiate claims settlements.”

Hatges is definite: “No, I do not see automakers becoming insurers.”

While auto manufacturers have experience in the insurance business, primarily on the warranty side, in general, their competencies are not in the business of managing risk, IFC reports.

“There is a reasonable possibility that some auto manufacturers will provide maintenance insurance/programs for autonomous vehicles because software maintenance/upgrades will be highly critical to the proper operation of the vehicle,” Pauli notes. “This could go either way – self-insured or partnership,” she says.

“As the market size shrinks,” Hatges suggests, “we anticipate the potential for frenzied competition as firms attempt to maintain premium volume to cover operational expenses.” This additional competition “may put pressure on profitability and would be a deterrent for new entrants into the market,” he maintains.

INSURANCE ADJUSTMENT

Whatever the view, insurers need to be prepared for what may come. “You cannot fight the fact that now the data is available to underwrite differently,” says Catlin. “You cannot fight the fact that cars are becoming increasingly safer.”

What is not so clear, though, is “who has the upper hand,” Catlin says. “Is it the OEM? Or is it the insurance company?” he asks. “I think, realistically, you quickly come to the conclusion that it is the car manufacturers,” he suggests, pointing out they can generate the data that is valuable both for underwriting the vehicle and creating the next innovation transportation system.

When it comes to autonomous vehicles, “we believe insurance will continue to play a less visible, but critical, role in advancing these technologies to market and we look forward to demonstrating some of that expertise and strength,” notes information from IFC.

Saying that a closer relationship between auto manufactures and insurers will help underwriting be more effective, “I can envision a council on the impacts of autonomous driving to help shape premiums,” Hatges says.

“If cars are no longer always driven by the pilots of the car,” Catlin says, “there is a belief that the liability will transfer from a personal liability to a commercial liability and the manufacturers of the cars will carry a big part of that liability.”

MIXED TRAFFIC

“The blended world of autonomous and driver-operated vehicles will make for a very complicated environment for insurers, particularly on the claims end,” Pauli says. “But, clearly, the weight will shift from driver to vehicle capabilities over time. There will always be a need for physical damage coverage,” she adds.

“The slice of the automotive pie is expected to shrink and the allocation amongst other lines is expected to change. Commercial lines may take a larger share as the marketplace moves to car-sharing and mobility on-demand,” Hatges points out. “Losses covered by products liability policies will most likely increase due to the fact that sophisticated technology that underpins driverless vehicles will also need to be insured,” he adds.

Catlin reports “there is a belief that a significant portion of the risk will evaporate because cars will have fewer accidents and the frequency decline will be significantly larger than the severity increase.” Car manufacturers will probably want to hold on to a big part of the risk, “which means a big part of the premium will disappear for the insurer, certainly the personal lines insurer.”

Noting that the insurer, GEICO, spends approximately $1.4 billion on advertising each year, the approach has some insurers asking questions, Catlin suggests. “‘Well, rather than spending all that money on advertising, should I just spend the money to partner with a car manufacturer and embed my insurance product directly in the sale of the car, collect the data, underwrite better and then, after six months or a year, charge the consumer directly?'” he queries.

“Then from a distribution standpoint, if you are a car manufacturer and you see insurers spend that much money on advertising, you will want to charge a lot to embed your insurance product in the car at the point of sale,” Catlin points out.

“In a few years, we expect to see a majority of cars produced come with embedded connectivity and many safety features as standard, which will unlock new consumer experiences and data,” IFC reports. “The challenge for traditional auto manufacturers, technology companies and insurers will be getting effective access to the data and managing it.”

REGULATORY RESTART?

Jeremy Rudin, Superintendent of the federal Office of the Superintendent of Financial Institutions, noted in a speech last fall that “drone aircraft are already available, and autonomous vehicles may not be far behind, creating new areas of liability. In pursuing these new lines of business, we expect insurers to understand the risks and perform the due diligence that new products require.”

SMA’s Karen sees a need to rethink regulatory demands around autonomous vehicles given current and expected changes in auto insurance. In the United States, “many of the manufacturers are already talking about the need for a federal set of laws. Along with the ownership of data discussion, regulation is going to be a discussion that will go on for the foreseeable future.”

Hatges suggests that over the next 10 years, there may be an emergence of niche underwriters as new providers of insurance. “Regulatory requirements are likely to be shaped in context of the deployment of new technology, such as back-up cameras and front-collision sensors. In time, it is expected that more and more of these features will become standard and mandatory equipment,” he says.

“In the short term, we know intelligent vehicles are going to play a more critical role in the insurance world with new advanced driver-assistance systems helping to improve safety on our roads,” IFC explains. “We see this playing out in a stepped and modular fashion over the coming decades as there are still significant technical and regulatory hurdles that need to be crossed,” the insurer adds.

“We see shared as being an underpinning to the future of full autonomy,” Federau comments.

“Insurance products will definitely need to evolve,” Pauli suggests. “Given the potential for uncertain liability in an autonomous vehicle accident (was it the software, the person who performed maintenance, the actual vehicle configuration, operator error?), consumers might value something akin to identity theft coverage,” she expects.

“This could be an endorsement that provides coverage for money and time the vehicle owner has to expend to unravel the situation, including legal services,” Pauli explains.

“As the vehicle itself makes more driving decisions, determining who is responsible when an accident occurs will need to be clarified,” Hatges says. “Legal issues will resolve in parallel with advances in automotive technology, likely without hindering market advances.”

REVVING UP

Pauli advises that “insurers cannot wait until the vehicles are on the road in significant numbers to get involved in the changing auto market.” Her sense is that “having a telematics program will be important because it provides a pathway and baseline for changing vehicle operation outcomes, as well as data to drive new policy rating structures and product needs.”

Insurers “know that they are playing musical chairs,” Catlin says, and there are only so many partnerships available.

“When the partnerships are gone and the music stops, if you don’t have those partnerships, you are left without a chair,” he comments. “But at the same time, they are all looking for an angle where they will create economic value for themselves.”