Smart cars could nudge aside auto insurers
Bestowed with key driving data, manufacturers may decide to offer insurance themselves
As internet-connected and, eventually, driverless vehicles roll off production lines, traditional automobile insurers will have to adapt to ward off competition from car manufacturers.
Insurers have struggled for years to profit from car insurance due to intense competition and a rising tide of fraudulent claims. Now they face a much bigger threat as new technology sends key information about drivers' behaviour, including their speed when an accident occurred, directly to carmakers.
Car manufacturers, including Jaguar Land Rover, BMW, Ford and General Motors, are already making cars that are hooked up to smartphones, letting drivers do everything from honking the horn remotely to recording the force with which they brake and accelerate.
The data from these connections could then be used to price insurance policies.
Insurers, traditionally slow to embrace technology, need to catch up, acknowledged a top industry executive.
"Insurance is in the stone ages, while people are circling Mars in spaceships in other industries," said Mark Wilson, chief executive of British insurer Aviva. It has opened a digital hub to generate new product ideas and make them more accessible via tablet and smartphone in London's trendy Hoxton area, home to many tech firms.
"We need to build our own spaceship," Wilson said.
Insurers are also using telematics — black boxes installed in cars that can record and transmit everything from GPS position to speed, position, mileage, acceleration and braking — to monitor behaviour on the road and lure safer drivers with lower premiums.
Canada has been slower to adopt such policies than the United States, but there are hundreds of thousands of them in force through providers like Desjardins, the Co-operators and the Personal Insurance Co.
The advent of driverless cars, however, could tilt the balance further in the direction of manufacturers.
At $650-billion plus, the global auto insurance market is large but Graham Jackson, a partner at consultancy PwC, warns of the threat of an "existential crisis" for insurers.
Volvo Car Group will test its driverless cars in London next year. Volvo, Mercedes and Google have said they will take liability for accidents in their driverless cars, potentially meaning car owners will only need insurance for fire and theft.
"As the car becomes more autonomous ... we believe more of the liability will be absorbed by the manufacturer or the entity that has made the algorithms behind the brain of the car," said Jerry Albright, principal in KPMG's actuarial and insurance risk practice.
"At one point, does that become such a large portion that carmakers say, 'We will insure all these cars'?"
A 2015 KPMG report suggests the personal car insurance sector could shrink to 40 per cent of its current size within 25 years. In addition to manufacturers taking liability, the number of accidents should drop as driverless cars take off, reducing insurance premiums, KPMG says.
Insurers see their biggest threat as Google because of its strong brand and ability to use customer data, according to consultancy Capgemini.
"If there is profit to be made from underwriting, they will underwrite," PwC's Jackson said.
But others are less sure Google will be willing to enter the highly regulated insurance sector, pointing to its recent exit from running an insurance comparison website.
The insurance industry, which started life in London in 1688 in Edward Lloyd's coffee house, has already coped with the arrival of the car, the airplane and the space rocket.
It could adapt again, industry specialists say, by offering cyber insurance against the hacking of connected or driverless cars, or liability cover to car manufacturers.
"I don't think insurers are panicking," said Kymberly Kochis, partner at law firm Sutherland Asbill & Brennan's New York office. "I don't think this will cause the demise of auto insurance. This is an area for insurance companies to watch."
With files from CBC News