The Future of Auto Insurance — A Reply

"On-board" technologies are not the only ones insurers need to consider as having the potential to reduce auto premium, insists Celent's Donald Light.

In "The Reshaping of Auto Insurance," published earlier this week at I&T, the authors disputed what they characterized as "doomsday predictions" about drops in auto insurance premium. It's hard to avoid the conclusion that they had in mind the May 2012 report "A Scenario: The End of Auto Insurance. What Happens When There Are Almost No Accidents," by Donald Light, director of Celent's Americas property/casualty practice. Whatever the case, Light has shared with I&T some relevant counterpoints.

[For I&T's original take on Celent's study, see Prepare for Deep Auto Insurance Premium Drop Scenario, Celent Report Advises.]

The authors of the "The Reshaping of Auto Insurance," Marik Brockman and Anand Rao of PwC, insisted that despite the emergence of telematics and other technologies, such as automatic braking, location awareness, vehicle-to-vehicle (V2V) communications, improved stability control for large commercial vehicles, and driverless cars, the auto insurance business would continue more or less as normal for the foreseeable future. Several of these technologies have been around for some time, and premium has held steady, they noted. Furthermore, they wrote:

While telematics have the potential to reduce premiums for some drivers – early adopters in particular are likely to be less risky customers and receive the greatest discounts – they actually may help the industry price policies more effectively overall.

Moreover, a series of cost factors and adoption resistance will continue to buoy premiums: high repair costs for increasingly complex vehicles, increasing medical costs for injuries, more frequent and devastating natural disasters, consumer advocates resisting potential privacy risks, and electronic malfunctions that fail to reduce accidents. Moreover, customers take time to adopt new technologies as they evolve due to lack of total understanding, high purchase costs, or the natural inertia of wanting to fully utilize durable products for much of their lengthy lifecycle. In fact, the age of American cars and trucks on the road has reached a record high of 10.8 years.

Both the PwC authors and Light acknowledge the possibility of significant auto premium decrease of some degree at some time in the future. Light faults the PwC report for considering only "on-board" technologies. "By doing so, it ignores the potential impact of automated traffic law enforcement — e.g. speeding and red light cameras," Light observes. "Depending on the political will — and desire for revenue — of state and local governments, these technologies may have a quicker and more dramatic impact than onboard technologies."

Governments could also mandate V2V communications as a way of increasing the carry capacity of roadways and avoiding costly construction. They might push adoption by characterizing V2V as a "green" technology with positive environmental effects.

Light implies that the concept of "risk shifting" featured in the PwC piece may support his contentions about the possibility of lower premiums. "If and when liability for many accidents shifts to the manufacturers of the automobiles — and/or the on-board equipment— it is likely that the frequency of accidents will be significantly lower, leading to lower losses, and lower premiums for auto insurers," he comments. "So change is coming for auto insurers in terms of business and operating models. The big question is how quickly."

[For the full text of the PwC-authored article, see The Reshaping of Auto Insurance.]

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio