Developments with self-driving cars and how significantly this technology could drive down property/casualty insurers’ future auto insurance revenues are popular topics in the news and among insurance industry analysts.  Rightfully so, carriers that write personal or commercial auto coverage already are beginning to plan for the day decades from now when auto insurance premiums account for a much smaller share of their revenue stream.

But insurers also should consider developing plans for another contingency: that the projected steep decline in auto insurance revenue has been overstated.

In this blog series, I’ll examine why insurers should plan for both possibilities, as well as offer a few ideas on how carriers might replace the revenue or maintain the profit margins that self-driving cars threaten.

According to a report earlier this year by rating agency Moody’s Investors Service, insurers likely will experience a slight increase in auto insurance revenues in the short term as new accident-avoidance technology in autos helps reduce the number of accidents. However, the report’s author states, “Longer term, self-driving cars could translate into significantly lower premiums and profits for insurers as the number of accidents declines dramatically.”

How much revenue is on the hook? Various estimates range from 60% to 80% of insurers’ auto revenues between now and the next 15 to 25 years. In 2015 dollars, that would mean a loss of roughly one-quarter to one-third of the property/casualty insurance industry’s $519.8 billion of net premiums, based on figures from the Insurance Information Institute (III).

However, we do not know yet just how this technology will evolve. I believe that will have a tremendous impact on insurers’ revenues.

Many of the revenue estimates seem to be based on the notion that autos will be fully autonomous. Indeed, various reports note that Google, for example, is working on autonomous vehicles that would not have even steering wheels, brake pedals and accelerators. At the same time, Google as well as a few carmakers developing self-driving vehicles have stated that any carmaker offering this technology should assume liability if the vehicle crashes because of a technology failure. That shift in risk and liability, plus the presumed reduction in claims due to these vehicles’ accident-avoidance systems, form the foundation of the reduced-revenue estimates.

Other companies working on self-driving technology are pursuing a more traditionally designed vehicle—one with auto-pilot technology that could be disengaged. This would allow the driver to take control of the vehicle if the technology fails. That seems to be an approach consumers would be more comfortable with. The III reports that 55 percent of consumers it surveyed this spring said they would not ride in autonomous vehicles. The III also reports that 75% of consumers would be unwilling to pay extra for such a car to cover the carmaker’s potential liability for an accident. A J.D. Power survey found that distrust of the technology was greater among older drivers–those in Generation X and the Baby Boom Generation—than among Generation Y and Generation Z. Still, even about 45 of 100 younger drivers are dubious about the technology, the survey found. Meanwhile, 59 percent to more than 80 percent of older drivers distrust it, the study found.

But if carmakers eventually shift to auto-pilot technology that can be disengaged, surely drivers would still need liability insurance for those periods they control their vehicles. The cost of the coverage likely would be far less than it is today, since drivers presumably would be using the auto-pilot feature far more often than not. Auto insurers’ revenues still would be pinched in this scenario but not as severely as if drivers had no ability to take control of their vehicles.

How likely will autos be fully autonomous as opposed to self-driving with an option to disengage the auto-pilot feature?

That will depend on a few factors. We’ll explore those next time.

Next time:  The potential impact of consumers, regulators and insurers.

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