Vehicle Technology: End of the driver?

Despite talk of the benefits of telematics to both insurers and motorists, only around 2% of policies sold in the UK are telematics based. The reasons for this are several-fold, but the dead weight of legacy technologies and the associated underinvestment in the IT systems needed to support telematics are perhaps the factors that loom largest.

Coupled with the outdated technology is the downward spiral of motor insurance premiums – average premiums fell 14.1% last year, according to the AA. This makes it very hard for insurers to pitch the potential savings of telematics to consumers already enjoying cheaper motor insurance.

So, what will happen to the motor insurance industry when the next revolution looming in its wing mirror flashes past it in a blur? The driverless car is coming.

Nine car manufacturers, including General Motors, Honda, Audi, BMW and Hyundai, were exhibiting various prototypes of the autonomous, connected car at the Consumer Electronics Show in Las Vegas at the beginning of January. They are teaming up with the world’s technology giants – Apple, Microsoft and Google – to develop intelligent, ultra-safe cars that have the potential to get passengers from A to B without a driver, without ever having an accident and without getting stuck in a traffic jam.

And these cars could be on the road sooner than we think. According to forecasts published at the end of last year by American auto industry consultants IHS Automotive, driverless vehicles – cars that can drive with ‘no attention needed by the driver’ – will account for 9% of global car sales by the mid-2030s.

IHS expects the first vehicles to be available by the middle of the next decade, and predicts 230 000 self-driving cars will be sold in 2025 – about 0.2% of the 115m cars expected to be sold worldwide that year.

The implications for the insurance industry are profound. For most insurers, it is not a case of ‘if’ driverless vehicles will turn the market on its head, but ‘how quickly’? “I view the anti-collision technologies and driverless cars as far more groundbreaking than telematics”, says Mike Brockman, chief executive of specialist telematics insurer Insure The Box.

“I have been in the motor insurance market for 33 years, but within the next 33 years insurance might not exist in its current form. The thought processes just aren’t in place to understand the impact this is going to have,” he continues.
Gurpreet Johal, lead actuarial and analytics partner at Deloitte, feels the tipping point for the market will come even sooner: “The motor insurance industry as we know it today won’t be there in 25 years time – it may even disappear sooner, because the rate of technological change constantly wrongfoots the experts. Just look at the growth and development of smartphones. Every prediction over the last decade has turned out to be wrong,” he says.

The potential of the new wave of anti-collision technologies to reduce the number and severity of accidents is where the threat to the traditional motor insurance business model comes from.

Recent research by technology consultants Celent suggested the average motor insurance premiums could be cut by 60% by as soon as the middle of the next decade. In a sector that has barely made any money for a generation, and one that is saddled with expensive legacy IT systems, this could produce unsustainable pressures.

However, it is not all bad news for insurers. As other new vehicle technology – such as telematics – has shown, such developments like this can be beneficial to the insurance industry.

For example, telematics has huge potential to reduce claims, according to Andrew Miller, chief technology officer at the Motor Repair Research Centre at Thatcham. “The opportunity for the car to provide data to insurers so driver behaviour can be monitored and fed back has only just begun to be exploited. This can help speed up notification of claims and improve accident analysis,” he says.

And the connected car will take telematics another big step forward, says Bill McCarthy, managing director of Lexis Nexis Risk Solutions UK: “Connected vehicles are probably the most significant emerging technology – they offer real-time data feeds. The challenge will not be physically accessing this information, but having the skills to turn it into something that can be mobilised efficiently.”

Wealth of data
So how can insurers do this? The wealth of data offered by driverless vehicles creates new opportunities for insurers to communicate with their customers outside of the two traditional contact points of renewals and claims.

It also offers data analytics opportunities – the road-related risk analysis identifies peak accident times, the types of vehicle likely to be involved in the accidents and accident severity meaning, ultimately, more streamlined underwriting processes
and – importantly – improved customer safety.

Although cars are vastly safer than a decade ago – thanks to anti-lock braking systems, airbags, dynamic stability and other safety features – the new technology will build on and improve current safety features, something insurers are enthusiastic about.

Martin Smith, manager of Aviva’s technical claims services team, explains: “All technology on new vehicles will engage us, but what we are seeing at the moment is quite exciting because it is going to reduce the frequency and severity of accidents. However, it won’t eliminate accidents entirely because there is still a human being involved and that is the weakest link.”

Top of the list of these developments is the low-speed autonomous emergency braking systems, already being fitted in around 20% of new cars. They will prevent low-speed front and rear accidents. “AEB will have a limited impact to start with because of the low penetration, but hopefully it will reduce claims as it becomes a standard feature,” says Smith.

Miller agrees: “The silver bullet for us – and for insurers – is AEB. There are some great statistics already showing AEB saves around 20% of claims costs. Once they are widespread, there are huge potential savings.” Among these savings is the prevention of collisions with pedestrians and side-on crashes at junctions, both costly incidents for insurers.

Blind spot technology
Commercial motor underwriters are also keen to see blind spot technology promoted on lorries, says Gary Humphreys, group underwriting director at the Markerstudy group. “Devices like collision alarms and blind spot warning systems can only be a good thing, but since they’re still in their infancy, they tend to be restricted to top-end vehicles. Until the manufacturers are able to roll these out to a wider range of vehicles, their impact will be negligible,” he says.

“Lenses handed out to foreign truck drivers by the Highways Agency to help them see motorists in their wing mirrors have had a positive impact, which suggests blind spot warning systems could be the permanent answer here – and should be compulsory in left-hand drive lorries. Any device that helps a driver avoid an accident can only be a good thing.”

Everyone agrees these advances will greatly reduce accident frequency, but they caution that vehicle repair costs may rise for those cars that are damaged. “Some of this technology will be very expensive to repair because of the complexity and value. It needs a very high level of understanding and expertise. Safer cars are better for everyone – but it comes with a price tag,” says Smith.

This new safety technology, coupled with better use of telematics, will also have implications for the complex supply chain in the motor market, according to Jonathan Pritchard, national business development manager for Cunningham Lindsey’s Motor Solutions team.

He says: “Telematics assists us in making prompt liability decisions – we make outbound calls as soon the telematics notifies us that an accident has happened. But as other technologies reduce accident frequency and severity, we’ll be able to deploy a range of mobile repair solutions that will reduce [that] reliance on traditional bodyshops.”

Jon Dye, head of motor insurance, commercial, at Allianz, predicts the reduction in accident frequency – coupled with the need for bodyshops to invest – will prompt consolidation: “If you assume there will be far fewer collisions, then the motor repair industry will have lower volumes of business to pitch for. The bodyshops will also need to invest in new equipment to repair the next generation of vehicles. We will see some consolidation in the market as a result.”

Fighting fraud
The next generation of anti-collision technology is also expected to make a major contribution to the battle against motor fraud, says McCarthy: “It’s going to be a lot more difficult to fake a crash if the victim’s vehicle is recording every direction simultaneously. [It will be] even more difficult if the victim’s vehicle is capable of automatically avoiding the impending collision. The ability of on-vehicle technology to measure the forces involved in a collision will make it more difficult to claim fraudulent injuries as a result of minor collisions.”

More sophisticated technology brings with it its own challenges, however. “What we might see instead is an evolution of fraud, say towards a greater focus on system manipulation or hacking,” he warns.

There is also concern that some claims could become more complex as technology failure displaces driver error as a major cause of accidents, bringing product liability into the picture. “The technological advances won’t just change the cost of claims, but will change the nature of them,” says James Rakow, insurance partner at Deloitte. “Ultimately there will be more product liability claims than traditional motor insurance claims. Product recall may become a bigger area.”

This belief is also shared by Lexis Nexis. “We’ll definitely see a shift away from underwriting based on the risk posed by the driver to the risk posed by the technology. For example, insurers will need to rate on the reliability of a given car model’s systems,its effectiveness in different situations or even its effectiveness in preventing damage to either itself, its occupants or the surrounding area.

“Car insurance will begin to look a lot more like home insurance – a much reduced incident rate and a much higher cost per incident, especially as all this technology comes at a significant cost,” says McCarthy.

But the human factor will remain a crucial consideration for underwriters, cautions Dye: “There will be self-driving cars, but they won’t take over. People will still want certain cars as status symbols or just because they enjoy driving.”

Penny Searles, managing director of data analytics specialists at Wunelli, goes further, warning that reliance on technology could change the way people drive.
She says: “It creates an instant awareness to the driver of their behavior but could also increase a reliance on technology and not driving skills – for example, satnavs are a good example of how map reading is removed by the confidence of a technology that gives you directions. Trusting in that technology could lead you into driving without due care,” she warns.

These concerns are also at the forefront of the road safety lobby the Department of Transport says will be fully consulted during the legislative review and the on-road trials of driverless vehicles.

The need to ensure people can use the new technology effectively will be key, says Kevin Clinton, head of road safety at the Royal Society for the Prevention of Accidents.

He says: “It’s important to make sure that they do not overload the driver with too many things to check, and that drivers are trained in the use of the technology so they can use it correctly without over-relying on it.”

Clinton echoes this sentiment, saying: “Although technology is developing rapidly, it is still early days with regards to driverless cars and an awful lot of research is required to identify just how ‘self-drive’ these types of vehicle can be, and in what environments – for instance motorways only, or in urban areas too?”

This adds another challenge to the ever-lengthening list for motor insurers looking to position themselves in the brave new world of the driverless car – a world that may be here sooner than many expect.