- Where Insurance & Technology Meet

What is Driving Auto Insurance Down? And Can Smart Technology Drive It Up?

Those of us who have been involved in automobile insurance, including the machinations of market swings and government interventions,  might have quietly bemoaned the hoops we have had to go through to write this business.  However, none of us (in our sober moments at least) have wished for the a significant cut in the size of the automobile insurance market.  Nevertheless, a recent report and an examination of some related data suggest just such a scenario might be at play.  And, while technology might be one of the the prime drivers (pun intended) of the trend, in service to great irony, it seems that technology will be required to monitor and profitably manage the impact of the trend in any event.

In a recently published report, Donald Light, Senior Analyst in Celent’s Insurance Practice, constructs a scenario in which the use of three currently available technologies (telematics, collision avoidance, automated traffic law enforcement) and one emerging technology (robot cars – like the one recently licensed in Nevada) cause a substantial reduction in traffic accidents and insured automobile losses. As a result, property/casualty insurers could see a major reduction in their auto insurance premiums revenue.

According to the analysis, the result could be a decrease in the auto insurance portion of total (US) P/C premium from 39 percent to just 13 percent.  However, Light’s analysis suggests that these elements will play out over the next decade, if the scenario actually plays out at all.

But, before we become too comfortable, there are data that suggest that other factors, independent of those in the Celent analysis, could be accelerating a trend towards lower automobile insurance revenue.

Growth in the North American automobile industry is slowing, especially in comparison to Asia and Latin America.  According to the recent Scotiabank Global Auto Report, Asia car sales grew by 38.0% in the period 2009 – 2012, while North American sales grew by 31.8%.

The situation gets worse when we look at where the softness lies.  For some time now, commentators in Canada and the US have been noting a waning of interest on the part of Gen Y for personal automobiles.’s Alison Linn, writing about the US experience in early 2010, said: “A confluence of events — environmental worries, a preference for gadgets over wheels and the years long economic doldrums — is pushing some teens and twentysomethings to opt out of what has traditionally been considered an American rite of passage: Owning a car.”

Linn goes on to note, “The percentage of new cars sold to 21- to 34-year-olds hit a high of nearly 38 percent in 1985 but stands at around 27 percent today, according to CNW research.”  Worse still, some other leading indicators are moving lower as well: “In 2008, 82 percent of 20- to 24-year-olds had their driver’s license, according to the Federal Highway Administration. Although that’s gone up a tiny bit in the past few years, it’s down from more than 87 percent in 1994.”

Urbanization is also putting pressure on individual car ownership.  There is a clear trend for Gen Y to elect to live in downtown areas, frequently sacrificing car ownership for the privilege.  Famously, at least one new condo construction in Toronto features space for bicycles, and a car share facility, but no individual parking spots on the premises.

So what shall we do to prepare for this trend? There are a number of complex, interdependent factors that will be impacting the results for insurers.  The loss of younger drivers, and the reduction in claims frequency and severity of auto claims does not mean all insurers’ revenues will be negatively impacted.

Light’s suggestion is to use technology to understand and potentially profit from developments as they occur: “In the near term, an auto insurer should be asking itself three questions,” he says.  “First, how is it monitoring technology-driven changes in insured losses, (i.e., the progress of the scenario)? Second, do scenario technologies provide new kinds of data and analytics-driven changes in pricing, underwriting, etc.? And third, what should it do differently this year and next?”

In other words, it might be time to work smarter by putting our analytic pedal to the metal.  Hope your vehicle is equipped with that feature.

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