Judging the Insurance Risks of Connected Cars

Connected cars are here and will only get more connected as the industry players vie for control of the user’s data.

“Most, if not all vehicles built today and in the future will be connected for OEM data collection, consumer infotainment/convenience, C-V2X safety and likely other reasons we haven’t yet come up with,” says Sam Lauzon, engineer in research, lead for UMTRI Cyber-security Research. Lauzon believes that the risks of the connected vehicle, such as hacking, are generally balanced out with the advantages of additional safety. He believes that this makes them likely similar to traditional vehicles from a vehicle cyber-security perspective.

“While cyber-security and hacking are more significant risks for a connected vehicle, no manufacturer wants to be the one that gets hacked,” Lauzon explains. He points out that since no vehicle equipment is exactly the same, evaluation risks from a cyber-security perspective can only be carried out with a complete risk assessment against a vehicle and its particular equipment and feature-set.

Another interesting possibility comes with vehicles that have the ability to identify the driver. Speeding, mileage and maintenance behavior can be collected by the car and passed on to insurance companies for human risk assessment. “Connected vehicles will pose a challenge as software updates may change previously evaluated behavior,” Lauzon says. The frequency of software updates, new or changing privacy laws and the cost of vehicle maintenance can all play a factor in how insurance will change.

According to Lauzon, consumer demand and legal implications will probably drive the rollout of connected vehicles. As ride-sharing, autonomy and fleet-only focus will become relevant, the insurance industry will need to be included simply owing to liability concerns. “It will most likely be up to drivers as to whether they decide to share data with their insurance company,” argues Lawrence Williams, founder and CEO of Merlin Mobility. He indicates that Tesla is already offering its own insurance and employing their own fleet data and repair cost models to offer dramatically lower costs.

Williams believes that, as the hardware and software in new vehicles increase in complexity, insurance companies must enhance their databases. The key players in the connected or self-driving car space have multiple partnerships of integration. Insurance companies would benefit from automaker data but in return the insurance companies would need to share data with those manufacturers.

“GM rolled out OnStar in 1996 and vehicles have since become increasingly connected,” says Williams, “Today, Tesla updates its software over-the-air and other manufacturers are beginning to follow suit. As ADAS and increasing levels of autonomy become standard, there is every reason to believe this trend will continue.”

Manufacturers are seeing customer demand for improved connectivity with vehicle location and tracking, locking and unlocking doors as well as connecting drivers to emergency services when necessary. Williams acknowledges that despite demand, many of the current solutions can be distracting to a vehicle driver.

“Automotive technology and insurance have a complex relationship. Some technology, such as anti-lock brakes has undoubtedly decreased accidents, therefore, lowering the risk and cost of insurance. However, some of the new ADAS technology has also resulted in expensive components (sensors and cameras) being installed on vehicle bumpers, which can make accidents more expensive.”

Since new products often result in increased uncertainty, Williams believes that connected cars will greatly increase the quantity and quality of data. This should result in a more accurate pricing model. However, insurance companies will need access to accident and repair data in order to price these new products accurately. A connected vehicle may evaluate a safe driver as more cautious and assign that driver a lower premium.

“The usage-based insurance market is expected to reach $123Bn by 2022,” Williams says. “UBI is gaining popularity in the USA and more companies have begun to provide the option. Internationally speaking, European countries were among the first early adopters of UBI and remain the largest market due to the amount that most Europeans drive. China and Japan are driving the adoption of UBI policies across APAC’s domestic markets, while Latin America & Middle Eastern UBI adoption is anticipated to grow over 25% from 2019 to 2026.”

Roger C. Lanctot, director of Automotive Connected Mobility believes that usage based insurance is, by definition, an invasion of privacy and works against the interest of the customer. It is only suitable for drivers unable to gain affordable auto insurance under any other circumstances owing to poor driving history or demographic issues such as young age. “The challenge for the insurance industry is to offer any discount in connection with a program that has its own costs. The trade-off is to ‘poach’ low-risk drivers/car owners from other insurers and to reduce churn/increase retention.”

According to Lanctot, there is no difference in underwriting connected or not connected vehicles. Although there is an advantage in accessing the vehicle data from those vehicles, including the amount of driving, time of day of driving, hard braking and harsh acceleration.

“Governments are very interested in supporting usage-based insurance as participants in these programs are generally identifying themselves, by their participation, as safer drivers,” Lanctot says. “Their program participation generally leads to fewer miles driven, less congestion, lower emissions, and fewer crashes.”

Automakers should take a more assertive role in helping their customers manage their insurance relationships with the goal of capturing more vehicle repair and replacement opportunities, explains Lanctot.

Carmakers have a vested interest in seeing that cars are repaired with genuine OEM parts especially in the case of restoring safety systems to original specifications and performance.  Billions of dollars are at stake and this issue is as-yet unresolved.

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