ADAS Cuts Risk But Still Raise Insurers’ Costs

The word “revolution” is perhaps used too frequently when pundits talk about connected cars.

This is particularly true of the massive vehicle insurance business, which those-in-the-know tell us will change beyond recognition as we barrel towards autonomous operation. One aspect of this, they say, is a shift from a business-to-consumer (B2C) model of policy writing, to a business-to-business (B2B) regime. After all, the theory goes, people will forego the costs and hassle of vehicle ownership, opting instead for frequent use of ride-sharing or rental services largely because of ease of use.

Not necessarily, opines Roosevelt Mosley, principal at Illinois’s Pinnacle Actuarial Resources. “I believe this shift will come to pass to a degree but I do not believe that it will come to pass on a complete scale unless there is some kind of mandate to make it so,” he said. According to Mosley, this is down to two key reasons. First, owning a vehicle provides not only a “spirit of independence,” as he puts it but also confers great flexibility – we can simply jump in our cars whenever we need to go someplace. For many, this will beat soliciting and waiting for a ride-sharing vehicle to come to their location.

Mosley’s second reason, which is an even more compelling one if said location is remote or the timing isn’t ideal, renting or ride-hailing might not be viable options at all. Recently, your humble correspondent traveled to Prague in the Czech Republic for an extended working visit. Arriving just after 10pm in the city’s main airport, he duly fired up the Uber app on his phone. Upon learning that the closest ride was still 40 minutes away, he decamped to the bus station and eventually reached his lodging purely via public transportation. So much for the new paradigm of mobility.

Nevertheless, it’s clear that B2B policies insuring the vehicle fleets of the Uber, Lyft and other corporate bodies will become more commonplace. Probably this will lead to a decrease in the number of overall policies. Also, it’s more than possible that premiums will drop with the growth of accident-avoidance technology.

Happily, insurers have some leeway in how they can adjust to this change. “They have several options which they will pursue,” said Donald Light, director of the North America property and casualty practice at research firm Celent. “Some like Allstate will make acquisitions in adjacent areas to fortify their top and bottom lines… Others like State Farm will partially reposition themselves as ‘here to help life go right’ – e.g. emphasizing savings and investment products, as well as loss avoidance and mitigation.”

In the former instance, Light cites the example of Square Trade. In 2016, Allstate signed a $1.4Bn deal to acquire the company, a US operation that provides extended warranties and other consumer protection plans. Square Trade has close working relationships with Amazon, big American retailers Best Buy, and Target, among other names, so it’s quite a robust business (hence the big price tag). Granted, Allstate is a sprawling insurance provider with numerous other lines besides automotive but the Square Trade deal shows one way for insurers to wean themselves off vehicle dependence.

No matter the degree to which auto insurance becomes a more B2B enterprise at the expense of B2C relationships, the role of the underwriter will shift to harmonize with the latest technology. It almost goes without saying that insurers will need to prepare for this. For Mosley, one major concept is paramount. “The idea of fault will change the role of car insurers,” he said. “Currently, the insurance transaction occurs between the person and the company, and the determination of fault generally means determining whether the policyholder is at fault or not. With autonomy, there are a number of other parties to whom fault can potentially be assigned, including the vehicle manufacturer, the software provider, and even those responsible for the infrastructure within which the vehicle is operating.”

Finally, there’s a purely technical problem – cutting-edge ADAS technology is, of course, still quite expensive. The price of replacing certain systems can easily be prohibitive, thus claims might cost an insurer a pretty penny. On top of that, to put it charitably some ADAS solutions are possibly not yet road-ready. Look at the numerous difficulties Tesla has had with some of its more advanced systems, for example.

Light believes that both manufacturers and insurers must keep their many eyes on the ball here. “The key challenge for manufacturers of ADAS solutions, and for the OEMs that install those solutions, is to make sure they work as intended,” he said. “For example, active lane keeping solutions have to actually keep a vehicle in its proper lane in a wide variety of operating conditions. Insurers’ key challenge is waiting for the replacement cost of these ADAS solutions, in damaged vehicles, to come down quickly enough to avoid having to write-off the entire vehicle as a total loss.”