Automobile Insurance In The Era Of Autonomous Vehicles
Automobile Insurance in the Eraof Autonomous VehiclesChris NyceJoe SchneiderNate LoughinOctober 8, 2015
Automobile Insurance in the Era of Autonomous VehiclesPresentation OverviewAutonomous VehiclesEcosystem UpdateNotable happenings over the last yearKPMG Autonomous Vehiclesand Insurance SurveyResultsFeedback from carrier executivesConsumer AcceptanceHow quickly will consumers adopt the technology?Regulatory BackdropHow regulators are reactingImplications for InsurersPotential impact on losses, premium and profitabilityFuture StatePotential leaders and changes in a new insurancelandscapeWhat Now?Preparing for the future 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.1
Autonomous Vehicles Ecosystem UpdateAutonomous Vehicles and Insurance Powered by BottlenoseThe conversation around autonomous vehicles and insurance continues to expand,with more and more players becoming involvedSource: Bottlenose as of September 14, 2015 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.2
Autonomous Vehicles Ecosystem UpdateRapid Autonomous Vehicle AdvancementFord Research Centerin Silicon ValleyDaimler Shows OffConcept CarTesla’s Autopilot andSoftware Downloadsand GM V2VCommunicationMcity Test FacilitySecurity and Safety:Jeep Hacking andGoogle Car AccidentsSource: Press releases and company websites 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.3
Autonomous Vehicles Ecosystem UpdateFour Phases of TransformationNo one has a crystal ball to predict the future pace of change. As we synthesized ouranalyses, we envision there to be four potential incremental changes to thetransformation over the next 25 years, with the foundation laid for a “new normal”within a decade“TrainingWheels”Now - 2017“First Gear”2017 - 2020“Acceleration”2020 - 2025“Full Speed”2025 - 2040Introduction to autonomous vehicles as manufacturers roll out some of theunderlying technology. High-tech companies express interest in fast-trackingproduction of fully autonomous vehiclesIn 2017, partial driver substitution technology is introduced. A broader set ofconsumers experience this technology, witnessing firsthand its safety andsoundness. This helps shift market perceptions. Potential mandate from NHTSAfor V2V communicationsFive years from now, fully autonomous all-speed vehicles become more common.V2V capabilities are likely to be embedded in all new vehicles and the increase inscale drives down costs, making the technology accessible to a larger segment ofconsumersIn 2025, a broad-based transformation begins. All new vehicles have autonomouscapabilities and existing vehicles are potentially retrofitted. Over the next 15years, integrated driving emerges, a web of information is flowing betweenvehicles, and infrastructure tightens. A “new normal” is realized by 2040 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.4
Autonomous Vehicles Ecosystem UpdateFour Phases of TransformationThe interaction between the eight core elements will be an important dynamic, asadvances in one area will likely act as a catalyst for rapid progress in the others.Ultimately, the alignment across all areas will be needed to realize wide scale changeTodayPhase 1Phase 22020Phase 4Partial DriverSubstitutionFully AutonomousConverged Network –Sensor V2VCommunicationsCapabilityAccessibilitySelective Safety OptionsFull Product SuiteIDropping PriceAffordableTechnologyFull Car ationBroad m AdoptionBroad MarketAcceptanceRegulatoryPermissionLeader State AdoptionFull State AdoptionRule HarmonizationV2V MandateNew Vehicle/Potential RetrofitLegalResponsibilityConceptual DesignCore Strategies/Initial LawsuitsDiversity of OpinionICases and AppealsTort Law ClarifiedExisting ader V2IIntegrated DrivingCar Sharing andRide-HailingRise of Mobility onDemandAutonomous VehicleOptionsAutonomous Fleetson DemandVehicle 'black box'DataData SecurityProtocolsDriving System DataSecurity ResponsesPrivacy Rules FocusPreliminary Passive 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.2040“Full ty“First Gear”Phase 3DataManagementTechnology“Training Wheels”20175
KPMG Autonomous Vehicles and Insurance Survey ResultsExecutive Outlook on Autonomous VehiclesCurrently, there is significant skepticism among insurance leaders about the potentialfor autonomous vehicles to transform the industry - few insurers have taken action,most likely because many believe the change will happen far into the future, if at all10%23%68%74%84%Developed a strategic planLittle or no understanding of autonomous vehiclesNo budget allocated for preparation for autonomous vehiclesNot ready for autonomous vehiclesSignificant impact on business after 2025Source: KPMG LLP’s 2015 Automobile Insurance in the Era of Autonomous Vehicles Survey Results 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.6
KPMG Autonomous Vehicles and Insurance Survey ResultsRegulatory Impact on AdoptionMore than half of the survey respondents expect regulators to impede the adoption ofdriverless vehicles55%Will impede the adoption of driverless vehicles32%Will neither accelerate nor impede the adoptionof driverless vehicles13%Will accelerate the adoptionof driverless vehiclesSource: KPMG LLP’s 2015 Automobile Insurance in the Era of Autonomous Vehicles Survey Results 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.7
Consumer AdoptionThe Value PropositionEach driver has a unique value proposition, and autonomous vehicles offer broadappeal. Focusing on quality of life improvements will most likely result in consumertractionGetting the value proposition rightShortercommute timeAbility tomulti-task 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Freedom toturn self-drivingmode on or off8
Consumer AdoptionMobility ServicesCar-sharing is now a standard option for urban drivers, due to convenience and costadvantages for the user. Mobility on demand – like Uber and Lyft – take the trend to thenext level. Services like these may signal the end of the two car household and willalso potentially impact urbanization57.2%Households with Two or More Vehicles across the United StatesNew York City13.4%Washington D. las46.0%Houston46.7%Los Angeles47.5%San NOANLALAVAEVREARGE60.0%Source: U.S. Census Bureau, 2013 American Community Survey 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.9
Regulatory BackdropNHTSA Preliminary FindingsThe National Highway Traffic Safety Administration (NHTSA) released last year apreliminary findings report on autonomous vehicles that – from our perspective –stopped just short of a full endorsement. The Administration also recently issued aformal notice for feedback about a potential mandate for all new vehicles sold toinclude V2V communication capabilities (perhaps by 2020-2022)The opening comments of the NHTSA’s report summarized their view of the promise ofdriving autonomy:‘ exciting vehicle innovations have created completely new possibilities for improvinghighway safety, increasing environmental benefits, expanding mobility, and creating neweconomic opportunities for jobs and investment. The United States is on the threshold of aperiod of dramatic change in the capabilities of, and expectations for, the vehicles we drive. Infact, many are inspired by the vision that the vehicles will do the driving for us.’We agree.Source: Preliminary Statement of Policy Concerning Automated Vehicles, NHTSA 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.10
Regulatory BackdropState LegislationAs of earlier this year, sixteen states (including the District of Columbia) have passedor introduced bills related to self-driving vehicles. California, Michigan and Nevada arecurrently positioned to set the standards adopted by the othersWAMNORWISDNYMINHMANJDC (PASSED)MDNVCACOSCOKAZGATXLAFLHI2015 Current StatusPassedUnder ConsiderationWithdrawn / FailedSource: Stanford University’s Center for Internet and Society – Automated Driving: Legislative and Regulatory Action and Individual State Legislature Websites 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.11
Implications for InsurersIndustry (Lack of) ProfitabilityBased on underwriting profitability, the insurance industry is not well positioned forautonomous vehicle disruption – even in a “normal” market, there is no margin forerrorAutomobile insurance ‒ Industry combined ratioPersonal auto120%100%Only year %30.5%30.1%29.2%2013Loss ratio %201480%80%60%95.3%Commercial 120122013Expense ratio %Loss ratio %2014201020112012Expense ratio %Source: Gross combined ratios calculated by KPMG using statutory data from SNL Financial 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.12
Implications for InsurersAccident FrequencyGiven the new safety technology in autonomous vehicles, the KPMG Actuarial Teampredicts a potential 80% reduction in accident frequency by 2040Accident frequency per vehicle by year0.0450.040Incidents per vehicle0.0350.0300.0250.0200.0150.0100.005-Average incidents per vehicleSource: KPMG LLP actuarial analysis 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.13
Implications for InsurersAccident SeverityExpensive replacement parts – given that vehicles will be more like mobilesupercomputers in the future – will potentially increase accident severitySeverity per accident 34,90035,000Cost per accident ( )30,00025,00020,00015,000 13,60010,000Average severitySource: KPMG LLP actuarial analysis 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.14
Implications for InsurersExpected LossAs a result of technology making vehicles safer, when the severity and frequencyassumptions are combined, there could be a drop of roughly 50% in expected insuredloss per vehicleExpected loss(1)600100.0%Cost per vehicle ( %Percent of 2013 industry aggregate loss95.0%55055.0%250Average loss cost per vehiclePercent of 2013 industry aggregate lossNote: (1) Based on total auto insurance market. Source: KPMG LLP actuarial analysis 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.15
Implications for InsurersIndustry Loss CostsSafer vehicles could result in total auto insurance industry losses decreasing by 40%by 2040 with commercial and product liability accounting for a larger portion of the losspieExpected loss allocated to personal auto, commercial auto and products liability160,000Expected total loss 0%decrease inpersonalauto losses20,000-Personal autoCommercial autoProducts liabilitySource: KPMG LLP actuarial analysis 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.16
Implications for InsurersPremium and Underwriting Profitability ImpactLower premium is expected to follow lower losses – insurers with inflexible coststructures may face extreme underwriting implicationsImpacton pacton ed 0.0%95.0%1(Baseline)25%Combined ratio310%Reduction in premium425%Percent difference from baseline combined ratio116.9%550%% difference between baseline and combined ratioNote: (1) Illustrative example; and (2) In the reduction in premium scenarios, the difference between calculated combined ratios and the baseline ratio may not be exact due to roundingSource: SNL Financial and KPMG LLP analysis 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.17
Future StateAutonomous Vehicles Impact on the Insurance IndustryOver the next 10 years, many respondents expect the emergence of niche writers andnew providers of insurance to be a direct result of autonomous vehicles, whileroughly one-third of executives believe this new technology will have no materialimpact on the industryWill result in the emergence of niche writers42%Will result in new providers of insurance39%Will have no material impact on theinsurance industry32%Will increase industryconsolidation29%26%Will shift the mix ofpersonal andcommercial autobusiness10%OtherMultiple responses allowedSource: KPMG LLP’s 2015 Automobile Insurance in the Era of Autonomous Vehicles Survey Results 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.18
Future StateLeading the Insurance Charge on Autonomous VehiclesOther than insurance companies, survey participants believe OEMs, start-ups andtech firms will most likely take part in providing insurance in this new autonomouseraOriginal equipment manufacturers (OEMs)(Ford, Mercedes Benz, etc.)58%Start-up companies45%Established technology firms (Google, Intel, etc.)39%Capital providers (Venture capital, private equity, and other investmentfirms such as Andreessen Horowitz, Kleiner Perkins, etc.)32%Universities and research institutions (MIT, Stanford, etc.)0%OEM suppliers (Continental, Delphi, etc.)0%Other3%Multiple responses allowedSource: KPMG LLP’s 2015 Automobile Insurance in the Era of Autonomous Vehicles Survey Results 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.19
Future StateCurrent Insurance InnovationThe implications for the insurance industry may be profound. Most market participantsare not prepared for the change, while a few are positioning themselves to succeed inan evolving marketplaceACUITY Founded in 1925 and headquartered inSheboygan, Wisconsin Mutual P&C company with a focus oncommercial property insurance Recently, submitted a series of ratefilings, one of which addressestechnological impact categories such asaccident avoidance and driverlessvehicle featuresMetromile Founded outside of San Francisco in2011 Targets individuals driving less than tenthousand miles each year by providingusage-based insurance via an app andthe “Metromile Tag” using bluetoothtechnology Has developed supplemental personalcoverage for Uber driversSource: SNL, press releases and company websites 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.20
What Now?Business Model Strategic DifferentiationThe automobile insurance marketplace will potentially face unprecedented change, withtraditional business models up-ended. The turmoil could bode trouble for many butmay also provide opportunity for others that chart a course of differentiationAEat or be eatenWith the size of industrypredicted to contract,fewer places at the tableare expected. Weenvision ‘scale whales’and ‘mother mutuals’ todominate througheconomies of scaleadvantagesBDiversifyMove into otherproducts that couldpotentially shield thecompany fromchallenges across thepersonal auto line ofbusinessCInnovateWith new areas of risk,additional areas toprovide insuranceprotection areexpected to emerge.Identify these areasand launch newproducts to the meetthe needs, butrecognize thatcompetition will follow.Will there be a firstmover advantage? 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.DPartner and allyConsider newbusiness modelswhere insurance couldbe embedded into thecost of a car or part ofusage fees. Thesenew models willpotentially requirepartnering with others,but alliances may befew and fast to happen21
What Now?Preparing for the FutureEffecting change requires employee buy-in1Convince Your Organization thatthe Autonomous VehicleTransformation is Real! 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.22
What Now?Preparing for the Future (cont’d)Carriers need to approach the change precipitated by autonomous vehicles fromstrategic and tactical perspectives2Understand Your Exposure3Evaluate Your Business Strategy4Identify and Monitor Leading Indicators5Prepare Your Operations6Understand Cost Structures7Align with Other Insurers and Form Partnerships 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.23
Questions? 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.24
KPMG Related ReportsKPMG’s Insurance practiceKPMG’s survey on this topic, AutomobileInsurance in the Era of Autonomous Vehicles, hasbeen cited in a variety of domestic andinternational publicationsKPMG’s Automotive practiceIn case you missed them, you can download from KPMG’s websiteour previous papers related to the future of the automotive industry 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.25
KPMG Contacts 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm ofthe KPMG network of independent member firms affiliated with KPMG InternationalCooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 361827The KPMG name, logo and “cutting through complexity” are registered trademarks ortrademarks of KPMG International.NameChris NyceTitlePrincipalOffice 1 610 341 4803Emailgnyce@kpmg.comNameJoe SchneiderTitleManaging DirectorOffice 1 312 665 1006Emailjeschneider@kpmg.comNameNate LoughinTitleSenior AssociateOffice 1 610 230 2068Emailnloughin@kpmg.com
Automobile Insurance in the Era of Autonomous Vehicles Presentation Overview Autonomous Vehicles Ecosystem Update Notable happenings over the last year KPMG Autonomous Vehicles and Insurance Survey Results Feedback from carrier executives Implications for Insurers Potential impact on losses, pr emium and profitability Future State
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definition of the automobile. First, in the customary automobile medical-payments insurance, indemnity was formerly payable to the insured who sustained bodily injury while occupying an owned automobile, while occupying certain non-owned automobiles, and through being struck by an automobile. In the family auto-
