As autonomous cars become more prevalent, insurers will need to answer difficult governance and compliance questions in policies to address scenarios where a bug in an autonomous car’s software, hardware failure, or erroneous decision in an algorithm leads to an accident. (Photo: metamorworks/Shutterstock)The automotive industry has gone through an enormous upheaval in the last year. Primarily due to COVID-19, worldwide auto sales fell by 16% in 2020. Some countries saw even more significant impacts — in the U.K., new car sales were down 97% in April 2020, and purchases dropped by 29% in November 2020.
ING Group estimates that car sales will rebound by approximately 8% this year. Most experts agree that a significant recovery is likely as economies worldwide move on from the shock of the crisis.
However, looking forward, it’s clear that the legacy of COVID-19 in the automotive sector will be extensive. Amid lockdowns, consumers have adapted their lifestyles to make do with reduced opportunities for travel. For many, being forced to leave vehicles unattended on their drives for months has led to questions about how much they require perpetual access to a car. Also, if the shift to widespread remote-working becomes permanent, commuters used to traveling by road will be clocking up far fewer miles in the future.
In this article, I’ll go beyond the pandemic and share my research into the future of mobility and other significant emerging risks facing the auto sector, focusing specifically on motor insurance. Keep reading to find out how you can employ smart strategies to mitigate unforeseen risks that emerge from cybersecurity, technology, and changing consumer behavior.
Turning up the voltage on electrification
Over the next few years, increasing public awareness of climate change will combine with regulatory efforts to reduce fossil fuel consumption, driving change in how cars are produced and used. Electric vehicles will become commonplace, particularly in cities where expanding low emission zones push out particulate-generating combustion engines. This multifaceted trend is sure to cause problems for manufacturers that don’t transition to cleaner, more efficient vehicles.
In many ways, the electric revolution is already here — while global car sales slumped last year, approximately 40% more electric cars were bought globally than in 2019. Until now, the electric car industry has been dominated by a single name, Tesla, but the sector will shortly become more crowded with GM committing to an all-electric line-up by 2035, Volvo announced that its entire model line-up would be fully electric by 2030, and Jaguar Land Rover’s complete model range by 2025.
In the coming decade, as new infrastructure facilitates greater uptake of elective vehicles (EVs) and traditional manufacturers continue to electrify their vehicles, the EV-owning market demographic will explode in size. Deloitte expects EVs to account for 32% of new car sales by 2030.
Motor insurance providers need to pay careful attention to this shift because it exposes them to both new risks and opportunities. For one thing, electric vehicles are likely to come with more advanced technology to log driver behavior data — that’s one of the reasons why Tesla has created its own insurance package — providing a significant opportunity to implement customer-specific policy pricing.
Simultaneously, EV premiums are typically higher than those of other cars, demonstrating that insuring an EV generally is riskier for insurers than being bound by a policy for a comparable gas-powered vehicle. This is because EVs are more expensive to repair — few workshops are qualified to fix them, parts are costly, and unibody construction techniques lead to more cars being totaled following low-speed crashes.
Autonomous driving is the real game-changer
Back in 2015, a research paper made headlines when scientists demonstrated that road accidents could be reduced by 90% before 2050 through the widespread use of self-driving cars. Already, that future is starting to become a reality with platforms like Tesla’s Full Self-Driving mode and Volvo’s Pilot Assist.
However, the impact of autonomous cars is likely to be far broader than merely reducing accidents. For one thing, widespread self-driving may increase the number of intoxicated people “in control” of cars as drivers become over-reliant on assistive technology. Electric fully autonomous vehicles may also have reduced range due to the amount of power drawn by the positioning sensors, potentially reducing vehicle life spans and utility.
More broadly, insurers will need to answer difficult governance and compliance questions in policies to address scenarios where a bug in an autonomous car’s software, hardware failure, or erroneous decision in an algorithm leads to an accident. Depending on how future legislators treat the problem, much of the risk currently held by individual drivers may be passed on to vehicle manufacturers under these circumstances. In the case of Tesla, an AI-involved pedestrian fatality in 2018 has led to such a lawsuit.
The impact of connectivity
A connected car is a vehicle that’s able to exchange data with the outside world. There are different types of connectivity — for example, a connected car might send speed and position data to the infrastructure around it or communicate potential hazards to other connected vehicles nearby.
Analysts expect that 70% of worldwide light truck and car sales will qualify as “connected” by 2023, equating to approximately 76 million units per year. The rapidly expanding network of interconnected traffic should be of vital interest to insurers as a driver’s risk profile may change dramatically depending on their vehicle’s connectivity.
Take the example of bi-directional data being fed into a collision-prevention system — this could dramatically reduce the likelihood of multi-car crashes under certain conditions, potentially allowing insurers to mark down their premiums and gain an advantage over competitors. Simultaneously, repair and warranty costs could fall as car sensors feed data to manufacturers who can then proactively recall vehicles for preventative care.
On the other hand, increased connectivity could raise privacy issues and the risk of cybersecurity attacks on inter-connected fleets, leading to accidents or cars being remotely disabled by hackers. When selling policies to drivers of connected vehicles, insurers need to consider how liability will work if this occurs.
New technology enables new driving habits
Another source of connectivity-related risk for motor insurers stems from the new driving habits that so-called “smart” cars facilitate. Because connected-car usage can be monitored remotely, some businesses turn to subscription driving, servicing, and financing business models.
This new generation of automotive hire agreements will be based on flexible vehicle use rather than static, multi-year agreements, requiring insurers to re-evaluate the risks associated with driving. As these arrangements become more popular, consumers and manufacturers will demand “journey-by-journey” style insurance products that facilitate on-demand car use, and as vehicle manufacturers gain access to increasing amounts of data, will this open up new opportunities for them to broaden their offerings to incorporate introduce new services such as integrated claims management to ensure that vehicles stay within their networks.
The best way for automotive organizations to address emerging risk is to search out sources of relevant, actionable data to produce better on-demand insurance products. For example, insurers can look to the telemetric data-producing smartphones that are already replacing black box devices and on-board diagnostic dongles.
Strategies for emerging risks
As we’ve seen, seismic shifts are coming to the automotive space in myriad ways. To successfully navigate the changing landscape, you should develop a strategy playbook applied to multiple risks.
One of the most reliable ways to do this is to employ a corporate-venturing approach. Targeted corporate venturing enables organizations to absorb the benefits of new technologies while increasing their capacity to deal with unexpected scenarios.
Your approach to corporate venturing should always be tailored to your unique market position. Nevertheless, once you’ve identified a new emergent risk that could impact your business model, the following four-step methodology is a great place to begin:
- Discover: Look for the market, tech, or customer-driven strategies to mitigate emerging risks. This could mean, for example, acquiring the capacity to evaluate your real-time exposure during transactions.
- Validate: Employ iterative sprints to identify effective risk mitigation strategies. Bring your stakeholder and consumer groups on board to understand the impact of taking a new approach.
- Incubate: Once the risk mitigation strategy is identified, find a way to incorporate it into your business model. Unless you possess the resources to develop a new internal ecosystem, the best way to execute this step is to partner with growth ventures.
- Commercialize: Finally, bring your new business or product to market and restart the cycle. Growth is best sustained by perpetually identifying opportunities to develop new products and services.
Conclusion
Mobility and travel are constantly changing, and we’ve entered a crucial period of flux for the automotive industry. To stay ahead of the pack, stay mindful of the emerging risks and critical trends discussed here.
Manjit Rana has over 30 years of experience working in the insurance space, including co-founding a number of startup businesses and driving internal innovation for large global corporations. He has a strong understanding of trends, developments, and issues in the insurance sector in the U.K., Europe, North America, and APAC regions and is widely considered an expert and thought leader on technology-based innovation in the industry.
This article was originally published by Alchemy Crew and is republished here with permission.
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