A decline in accident frequency due to safer vehicles and the adoption of autonomous vehicles could shrink the US personal auto insurance sector by 60% within 25 years, according to KPMG LLP, the US audit, tax, and advisory services firm.
The new research report is titled "Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles".
KPMG’s Insurance practice estimates an 80% potential reduction in accident frequency by 2040. This will result in a potentially drastic reduction in loss costs and premiums, though KPMG estimates that accident expense could increase from almost $14,000 currently to roughly $35,000.
"Autonomous vehicles are poised to completely transform the auto insurance industry, and underlying market forces, including technology enablement, consumer adoption, and regulatory permission, are already aligning to enable mass change," said Jerry Albright, principal in KPMG’s Actuarial and Insurance Risk practice.
"The risk profile of vehicles is changing daily, and the subsequent drop in industry loss costs would reduce the size of the auto insurance market, trigger consolidation in the personal lines space, attract new competitors, and force dramatic operational changes within carriers."
Albright says that nearly accident-free vehicles could be here before autonomous vehicles, and "while a shift in business strategy could take years, insurers must act now to differentiate themselves and gain a first-mover advantage."
As the size of the automobile insurance pie shrinks, the allocation of the slices across personal auto, commercial auto, and products liability could also change, according to KPMG’s analysis.
"Commercial lines could take a larger share, as the marketplace moves towards car sharing and mobility on demand services," said Alex Bell, managing director in KPMG’s CIO Advisory practice.
"As the vehicle makes more decisions, the potential liability of the software developer and manufacturer will increase too. In addition, losses covered by products liability policies will most likely increase because the sophisticated technology that underpins driverless vehicles will also need to be insured."
Added Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice: "The personal auto lines sector will likely bear the brunt of the transformation, as it will hold a smaller share of a smaller market. By 2040, we believe this sector will cover less than $50 billion in loss costs in nominal dollars, compared with the current $125 billion, with premiums moving nearly proportional. The shrinkage in real terms may be even greater."
KPMG anticipates severe implications of a contracting premium environment, especially given that the insurance industry as a whole has not generated an underwriting profit in personal or commercial auto for several years in a "normal" market environment.
Joe Schneider, managing director at KPMG Corporate Finance LLC, says the continued proliferation of automated vehicles will put considerable strain on carriers.
"Many insurers don’t have a profitability cushion to erode and lack the structural agility to shed costs quickly in an environment of rapid change," Schneider said. "Once the massive market disruption begins and traditional insurance business models are flipped upside down, we expect significant turmoil across the industry."
KPMG has identified possible business strategies for insurers:
Consolidate: For those existing carriers with scale, consider acquisition opportunities to leverage large existing platforms.
Diversify: Move into other products that could potentially shield from challenges across the personal and commercial auto lines of business.
Innovate: With new areas of risk, identify new areas to provide insurance protection and launch new products to meet needs.
Partner and ally: Consider new business models, which will likely require partnering with others, where insurance could be embedded into the cost of a vehicle or part of usage fees.