New technologies such as driverless cars and automatic braking – plus your behavioural data - are accelerating change in the insurance industry
Have you been involved in a car accident that wasn’t your fault? This hackneyed insurance question may take on new meaning as new technologies such as driverless cars and automatic braking catalyse a new era in motor insurance that is fast spreading to other areas of the industry. Experts are predicting a re-evaluation of what insurance cover is for – and how much we pay for it.
This time next year, motorists visiting Milton Keynes may be startled to see a fleet of small, podlike vehicles negotiating the new town’s infamous roundabout network.
They will be taking part in the first UK open road tests of driverless vehicles, the most visible of the internet-connected devices that look set to transform our daily lives.
Within the next decade, if predictions prove correct, many of us will be commuting by driverless car. While we are checking our emails en route home, the internet-enabled car will send a message to switch the heating and oven on. Meanwhile, the intelligent fridge will have already ordered fresh supplies after spotting that stocks were low.
The insurance industry is set to be profoundly transformed by these technological changes, which promise to deliver dramatic reductions in accidents – and provide insight into why they happen. But how will this transform insurance business models, which have existed since the industry’s birth in the coffee houses of early 18th century London?
“We are going to see a massive range of innovations over the next 10 to 15 years,” says Direct Line Group motor insurance commercial director Gus Park.
Already cars are being sold with automatic braking systems and cruise control technology which will automatically keep vehicles in lane and at a safe distance from the vehicle in front. Within the next two to four years, the government has said there will be cars that can park and pilot themselves on A roads and motorways.
More advanced technologies will enable vehicles to evade hazards by gathering information from other road users and signs. Insurer AIG is working on a project with New York University to monitor vehicle “near misses” at traffic intersections, analysing how these mishaps occur. And fully automated vehicles are already being road-tested in the US by the likes of Google and Tesla.
Meanwhile the haulage industry is getting excited about so-called ‘platooning’, whereby leader and follower technology allows the first truck in a convoy to virtually ‘tow’ the vehicles behind.
David Williams, underwriting director at AXA UK, says a number of his company’s haulage and construction clients have already begun to invest in this technology.
If you can knock 5 per cent off the fuel bill by using this sort of technology it’s worth investing in
Current regulations dictate that each vehicle must still have an individual at the wheel, even if they are not driving. However, the greater fuel efficiency that can be achieved still makes the exercise worthwhile, argues Williams: “If you can knock 5 per cent off the fuel bill by using this sort of technology, it’s worth investing in.”
The proliferation of internet-enabled devices set to hit the home are also making waves in the industry. Like in the motor market, these connected devices have the potential to nip accidents in the bud. For example, sensors could monitor the build-up of pressure that leads to burst pipes. This will enable an engineer to be dispatched to fix the problem before any leak occurs, avoiding expensive claims.
Connected home technology could also make it easier to protect vulnerable people from burglary or fraud. When the vulnerable person’s doorbell rings, a relative could be alerted, enabling them decide whether to let the visitor in.
And innovation is spreading to the workplace too. In its US homeland, AIG has invested in Human Condition Safety (HCS), a start-up company that provides wearable technology for construction workers. The kit will detect when a worker is carrying too much weight or if they are bending in a way that can result in injuries. It could also monitor staff working with dangerous equipment or in difficult locations.
A brake on premiums
All this comes at a price, and Leigh Calton, head of research and development at insurer Ageas, warns that recent increases in insurance premium tax risk deterring innovation if consumers become too price sensitive. But technological developments should also make premiums cheaper in the long run.
While 9 per cent of motorists currently make a claim per annum, greater automation will drive that down to 2.4 per cent within 50 years
According to AXA’s Williams, 93 per cent of road accidents are caused by human error. The consultancy Autonomous Research recently predicted that while 9 per cent of motorists currently make a claim per annum, greater automation will drive that figure down to 2.4 per cent within 50 years. This trend will help push premiums down by 63 per cent by 2060, leading in turn to an 81 per cent drop in insurance company profits, Autonomous forecasts.
KPMG predicted in a separate report earlier this year that the personal motor insurance market, which accounts for just over 40 per cent of the industry’s total turnover, could be around a third of its current size within two decades.
Direct Line’s Park has little doubt that a reduction in accidents will mean fewer costly motor claims. “We have a pretty high degree of confidence that these technologies will reduce the cost of claims, and the frequency and severity of accidents, particularly on bodily injury side,” he says.
Direct Line is already offering discounts for vehicles that are fitted with automatic braking and related safety features.
“It would be lovely if motor manufacturers and people selling cars were able to point to cheaper insurance as a way of encouraging people to take up these features,” says Park.
But even pricing vehicles fitted with this new technology is a headache for insurers who generally rely on historic claims data. Instead, Park says insurers are having to make commercial judgements based on evidence of how the new technologies will improve safety. And as automated cars become more sophisticated, they will become more expensive to fix, he adds.
The situation for insurers is further complicated by the fact that the driverless car revolution will not be an overnight process. Consultancy Fehr and Peers predicts that fully automated cars will be in the minority in the US until the 2040s.
However, this time lag gives insurers time to work out answers to the vexed issue of where liability for accidents will sit in the automated driving world.
Currently motorists are personally liable, but the situation will become more complicated once responsibility is literally taken out of their hands. The first case of an individual dying at the wheel of a driverless car, in Florida in May, has underlined that this issue is not an academic one.
Liability is likely to end up divided between the driver, the car’s software programmer and its manufacturer. As a result, motor insurance could increasingly begin to resemble the product liability policies that cover consumer goods.
The government is keen to see the UK lead the way on the introduction of driverless vehicles and recently published a consultation paper on how to address some of these issues. AXA’s Williams, who also chairs the Association of British Insurers driverless cars working group, says he is encouraged by the government’s commitment to encouraging new technology.
One major question is who controls the vast amounts of data that will be generated by connected devices
One major question is who controls the vast amounts of data that will be generated by connected devices. Insurers are currently hiring armies of analysts to better understand this data and how it can be used.
But a connected home customer won’t want a plethora of data hubs sitting around the house, says Leigh Calton at Ageas. Instead, they are likely to prefer a single hub, which could be provided by a telecommunications provider or one of their device’s manufacturers.
Calton says: “There will be a number of brands that have a power relationship with a customer, and insurers may need to work within an eco-system of organisations to deliver an end service to a customer.”
Williams argues that the government should avoid this data ending up in single sets of hands. But the commercial risk for insurers is that they lose a direct relationship with the customer.
To guard against this scenario, forward-thinking insurers are keen to develop new business models that are more about helping to manage risks as opposed to their traditional role of providing cover against catastrophes.
Ashley Hirst, chief underwriting officer at AIG Europe, says: “We would love to be in a place not where we pay out when you have a flood but helping you avoid a flood in the first place.”
AXA’s Williams agrees. “To maintain a relationship with the consumer, we will have to offer services and not just insurance,” he says. “If we can provide a service linked to the technology so that we are trying to prevent things rather than waiting for them to happen, it could be one of the best things for insurance companies.”
While he acknowledges that such services can be expensive to provide, these costs can be mitigated if services can be automated and provided at scale, adding that this new model provides insurers with an opportunity to develop a better relationship with their customers than the current situation where many treat it as a “grudge purchase”.
“At the moment, if you want to find somebody who feels they have had value from their insurer, you need to find someone whose house has been burnt down or been flooded, which fortunately isn’t a large proportion of our customers.”
And the industry has no choice but to embrace the challenges and opportunities thrown up by internet-enabled devices. As Direct Line’s Park says: “You have two choices as an insurer: either leave it to other people and hope it takes a long time to break into the mass market or embrace it – and that involves building capacity and taking some commercial risk.”