Future cars and the potential impact on short-term insurance companies

There have been major developments in the past decade in mobility, with the likes of Uber for instance, and advances in technology of self-driving cars. This is expected to accelerate further and have a profound impact on how vehicles are used and also on vehicle ownership. Although autonomous vehicles are a long way off, these changes could have an overall negative effect on short-term insurance companies’ revenues, particularly companies with big motor books.

Cars are only used for 4% of their lifecycle, on average. This fact opens the discussion for more efficiency and ride sharing services. Cars are one of the highest spending categories in people’s budgets. In Europe, the cost of car ownership (including monthly instalments, maintenance, insurance and fuel) typically constitutes c.15% of people’s budgets, or c. $600 per month.
To most people, a car represents freedom. However, as shared mobility and autonomous vehicles become more cost effective, people are likely to not see the point of owning a car anymore.

At a recent conference hosted by Merrill Lynch, we found presentations from Drover and Ola particularly interesting. Drover follows a flexible car subscription model where one pays a monthly subscription for the use of a car, insurance and maintenance. On the higher end, one can choose to drive a different Porsche every week or select to drive a Volvo for 18 months and then change the car should their needs change, for example if a new baby comes along. These subscriptions are very flexible and can be cancelled at any time.

A company similar to Uber was started in India that offers up to 14 different vehicle types and options including baby seats and family friendly options.
This operator prefers to operate in smaller cities where Uber doesn’t necessarily operate. The CEO presented on the vertically integrated model that allows the company to keep down costs. The battery-operated vehicles selected are most economical in terms of running and maintenance. Efficiencies are present in the value chain where mechanics are specifically trained to fix the specific cars, the company require limited parts for these specific cars, and the cars are the same colour. The company self-insures to keep costs down. The electric batteries are recharged using solar power. Batteries are switched out when needed (at a pit stop) without the car needing to stay there to charge. The recharge process is customised to maximise the life of the batteries, all adding to the cost savings.

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Autonomous vehicles: what does it mean and its complexities

Autonomous vehicles, more than shared driving, are expected to be the most disruptive aspect in future cars. The experts agreed that self-driving cars are more than 10 years away.

Interesting concepts exist where autonomous cars can include a bed, or a desk, or a very luxurious couch with champagne, food and a suit press. There are six different levels of automation for autonomous cars. Full vehicle automation (level 5) is estimated to be more than 10 years away.  Some vehicles are already equipped with level 1 and level 2 automation. Level 1 can include features like cruise control. Level 2 is present in certain cars that can park themselves, cars that offer automatic emergency brake assistance, and lane-stay assist. Tesla Autopilot qualify as level 2 automation. Car manufacturers (including Audi, BMW and Volvo, etc.) are all currently busy building concepts for level 3 automation, which still requires a person to be ready to take control of the vehicle.

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The complexities that artificial intelligence and technology companies are testing for and need to address are vast. As an example, the sensors in an autonomous vehicle will need to continuously assess the objects in its vicinity, the location of objects, the size of objects, the speed and direction in which objects are moving or whether it’s standing still. The vehicle will also need to be able to adapt to different road conditions, operate in different temperatures from very hot dry conditions to cold and weather conditions from sunshine to rain or snow. All of this will require millions of iterations and calculations that need to be done rapidly. Data transmission availability and reliability will also be crucial.

Motor insurance premiums are expected to reduce with the introduction of autonomous vehicles

The impact of ride sharing services and autonomous vehicles are expected to reduce the absolute number of cars that are owned. Cars are also expected to be used more efficiently.

Did you know that most motor accidents are caused by driver error while a big component of motor claims are from maneuvering and parking? With ride sharing, driver error will still be present. Increased adoption of ride sharing services could reduce the number of vehicles on the road. As ride sharing becomes more affordable, people who would have normally purchased a car, could potentially no longer see the need of owning a car. This could have an impact on short-term insurers in terms of less cars needing to be insured. However, a larger change on short-term insurance companies’ income statements are expected when autonomous vehicles become common.

When autonomous vehicles become present, the frequency of accidents are expected to reduce substantially. This will result in reduced claims and reduced premiums for motor insurance. However, weather events like hail or for example a tree falling on an autonomous car will still need to be covered.

There will still be a need for motor insurance, just in a different form. The claim liability is expected to shift from the driver to the vehicle manufacturer and/or technology company providing the autonomous functionality. Commercial vehicle insurance will still be needed by vehicle manufacturers and there is expected to be an increased need for liability (bodily injury) and cyber insurance (for data hacks).

Total motor insurance premiums of short-term insurance companies are expected to reduce if/when autonomous vehicles become the norm by virtue of less cars expected to be on the roads and by the lower occurrence of accidents. Business lines like liability insurance and cyber insurance are expected to increase. Short-term insurance companies will need to adapt to the changing demand of motor insurance. Motor insurance is a significant business line for many insurers. Short-term insurance companies with a more diversified insurance type offering are expected to be more resilient. There is uncertainty as to the timing of the changes and the extent of the changes. In the South African context, we believe that Santam (as a company to invest in longer term) is well positioned to adapt to the changing landscape. Santam is well diversified in its business lines and has a history of adapting to the changing regulatory and insurance environment.

Other interesting observations – it’s a massive market and spill overs into other industries

Lukas Nechermann highlights (Neckermann is a consultant and car development expert) that car manufacturers are not being proactive enough about future autonomous developments in cars, not investing enough in research and development and are not adding sensors to cars in anticipation to future changes. Tesla, on the other hand, already include numerous sensors in their cars that are not connected as yet but makes the car ready for any future autonomous developments.

The experts also agree that no one player will dominate the space – it will be several players that will play in the space. The total addressable market of all passenger vehicle and public transport trips according to Uber was $5.7 trillion in 175 countries – which is massive.

The knock-on impact on other industries is expected to be profound - for example, lower tax revenue for governments on imported cars, increased data usage by cellphone companies, to movies and content that people could possibly keep themselves busy with while commuting somewhere without the need to be focused on driving, less use of parking garages etc.