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 insurance market now has more than 2 million customers and the market is expanding geometrically, according to Ptolemus Consulting Group, an international strategy consulting firm.
“We expect it to be multiplied by 50 by the end of the decade,” says Frederic Bruneteau, managing director of Ptolemus Consulting Group, an international strategy consulting firm that recently released its “Insurance Telematics Study.” “Telematic-enabled policies will then generate EUR 50 billion in premiums to insurers who have seized the opportunity,” he adds. The 400-page Ptolemus study is based on two years of research and more than 80 interviews with insurance and technology providers around the world.
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?” says Bruneteau. “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% 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,” says Bruneteau.
But it’s not all blue skies for insurers.
Celent also has been researching the confluence of these technologies and paints a different picture in a recent research paper “A Scenario: The End of Auto Insurance: What Happens When There Are (Almost) No Accidents.”
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% of total 2012 industry premium over the first five years and to 10% of total 2012 industry premium over the following five years. Currently, liability premium stands at 25% of total 2012 industry premium.
Over the same periods, auto physical damage drops to 10%, and then 3%, from 14% of total 2012 industry premium. And total property/casualty industry premium drops by 9% from 2013 to 2017, and by 26% from 2018 to 2022.
“In terms of causation, accidents go down, insured losses go down, and therefore premiums go down,” says 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,” says Light. “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:
1. Should it pursue acquisitions or a merger?
2. Should it put itself up for sale?
3. Should it grow its non-auto lines of business?
4. Can it maintain efficiency and margins by shifting its cost structure to increase variable costs and decrease fixed costs?
5. Should it simply do nothing, and accept a status as a smaller company?
“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,” says Light.
— Chris McMahon is the senior editor of Insurance Networking News, a SourceMedia publication.
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