Driving Disruption:  Accelerating Auto Insurance Transformation

Capgemini sought insights from industry leaders like myself about the future of mobility for its 2023 World Property and Casualty Insurance Report. It’s a pertinent question to ask when the velocity of change is punching the accelerator.

But the future is already here. As I told Cap’s research team, “The shift to the future is already happening as vehicles become smarter, connected, electrified—and sales of traditional, fuel-powered cars will decline.” For society, the changes created by this mobility revolution will redefine consumers’ relationship with personal vehicles and radically reshape what they need and expect from insurers.

For carriers, the crossroads we’re approaching is existential. According to Ernst & Young, connected car technology could shrink existing personal lines’ auto premiums by as much as 44% worldwide by 2035. In the U.S., as much as 75% of those revenues could be decimated. So the unavoidable question becomes: What will fill that enormous revenue gap?

To remain competitive in the face of new rivals and new realities, carriers must leverage the same technologies robbing them of personal lines revenues to innovate where astonishing new opportunities await: commercial lines. To understand what I mean, let’s explore some of the overarching trends transforming the auto insurance today—and the ecosystem and infrastructure enhancements insurers must put in place to master the future of mobility.

Connecting the Dots Embedded in the Road to Tomorrow

By 2025, connected cars will account for up to 90% of all new U.S. car sales, according to McKinsey. The shift toward smarter, cleaner automobiles will only quicken, precipitating a race to monetize the “vehicle-as-a-platform,” truly autonomous driving, and a transition from personal lines to innovative new forms of micro- and multimodal commercial coverages.

Today, the connected car experience most readily manifests in crucial ways. The first is by Tesla, Toyota, and the growing number of other auto manufacturers embedding insurance distribution directly into purchasing a new car and even moving into the risk-bearing side of the business.

According to Insider Intelligence, 79% of U.S. consumers between the ages of 26 and 42 report interest in buying insurance bundled with a vehicle. For three-quarters of them, the automaker’s website is the preferred channel for that transaction. By decade’s end, up to 30% of personal auto premiums is expected to be generated through embedded insurance offers.

For carriers, embedded represents an exceptionally efficient distribution model compared to the roughly 20% of revenue they spend on broker commissions and marketing costs. But that’s just for starters. As I told Capgemini, “Insurers have the opportunity to go beyond embedded insurance, ingesting data sources to provide end-to-end solutions that are more holistic.”

This includes telematics-based “pay-as-you-drive” auto policies. According to JD Power’s 2023 U.S. Auto Insurance Study, customers unhappy with recent rate increases are driving accelerated adoption of usage-based insurance (UBI). Today, demand for smartphone-enabled UBI is growing fast, with 17% penetration overall and 26% among new auto customers. By 2025, more than 60 million UBI subscribers are expected worldwide. But that’s just table stakes.

From ‘Freedom Machine’ to Cybernetic Concierge

Soon, current forms of UBI will be replaced by what I call “Cognitive Connected Coverage.” Think AI-based technology that goes beyond recognizing that you slammed on the brakes, for instance, to understanding that you did so to avoid a collision caused by a careless pedestrian or a crash ahead.

When accidents do occur, first notice of loss (FNOL) initiates automatically and instantly relays all pertinent telemetric data to your insurer. Based on connected diagnostics data, the technology summons a tow truck or first responders while notifying your spouse that you’re okay.

These same technologies promise to open up whole new avenues for creating value as cars evolve from “freedom machines” into something more: information-enveloped transportation bubbles that offer drivers and passengers a full range of novel experiences enhanced by continuous connectivity, AI, and intuitive new interfaces.

Like the cybernetic Cylon Raiders from “Battlestar Galactica,” connected car platforms will grow to work symbiotically with the driver—reacting to, or even anticipating, needs or desires in real time. Running late? Your car may suggest ordering ahead for pizza and then facilitate the transaction so that a large extra-everything is piping hot and waiting for you at home.

Consumers are likely to bite. After purchasing a vehicle, 39% of car buyers say they want to activate additional digital services, features, or over-the-air (OTA) upgrades. That figure rises to nearly 50% for owners of premium brand vehicles. In Germany, 38% of car buyers would switch brands for such services. In China, 54% would do the same. And according to a global survey of auto executives from Accenture, 83% believe such services could be the key differentiating factors for competitive advantage by 2040—to the tune of $3.5 trillion in additional revenue worldwide.

For car owners, this might mean paying a monthly fee to turn on heated seats during winter, which they can turn off during warmer parts of the year. For insurers, this could also mean offering extended services—on-demand coverage for passengers, active coaching for new drivers, or international insurance—available at the push of a button.

Fleet First into Autonomous Driving

Over the next 10 years, look for autonomous technology to evolve and integrate into personal vehicles, public transit, and the transportation of goods worldwide.

Sales of new L2 (partial autonomy) and L3 (conditional autonomy) are on pace to account for 63% and 4% of new vehicle sales worldwide, respectively, by the latter half of the decade. Entire commercial fleets with L3 (conditional autonomy) and L4 (high autonomy) could be on the roads in the second half of the decade.

This will shift the burden of insurance liability from the human driver to the commercial party associated with the autonomous vehicle (AV) technology and capabilities—often the OEM and autonomous vehicle software providers. It’ll also provide a market for insurers as billions in revenue shifts from personal lines to commercial lines coverage.

Autonomous, connected car platforms will do more than navigate, mind you. EV robo-taxis like Google-backed Waymo and GM-backed Cruise, shuttles, and more will work through current setbacks and set the stage for far more autonomy and new forms of connectivity—vehicle-to-vehicle (V2V), vehicle-to-infrastructure (V2I), and vehicle-to-cloud (V2C) that work to solve many of mobility’s most substantive pain points—road congestion, parking hassles, pollution, and more—with plenty for insurers to cover.

Significantly, these same technologies will also help reduce accidents, too. X, The Moonshot Factory, is just one of the companies looking to make imminently safe, self-driving vehicles ubiquitous. At the same time, startups like Kodiak focus on revolutionizing semiautonomous commercial trucking fleets for long-haul journeys. For insurers, this will enable whole new coverage models—shipping, delivery, transport, and more (for example, using telematics to monitor the temperature and spoilage of transported goods).

Ditching Personal Vehicles and Crashing Insurance Coverage

These aren’t the only changes on the horizon. By 2050, 80% of consumers worldwide will reside in cities. As a result, a growing number of consumers will forgo car ownership altogether. Even in the U.S., only 13.7 million vehicles were sold in 2022, a drop of 8% from 2021 and nearly 20% lower than 2019.

Yes, that’s on top of the havoc caused by the pandemic beginning in 2020, and more recent spikes in inflation and ongoing shortages of computer chips. But the truth is that sales of personal vehicles in the U.S. and Europe have been stalling out over the past decade. At the same time, ride-hailing services have been growing at 60% per year. As these trends continue, the impact on insurers will be profound.

KPMG estimates that by 2040, just 40% of overall auto premiums will be generated through personal lines worldwide. Much of that will require the new forms of distribution, products, pricing, and services I’ve described here. Thanks to improved safety and a dramatic reduction in personal miles traveled, billions in current personal lines premiums will evaporate while commercial lines revenues steadily trend upward.

While it won’t necessarily mean the end of the road for personal lines auto, it’ll feel like it.

To avoid irrelevance, insurers must put the data ecosystems and platform infrastructure in place to make a sharp pivot to embrace a whole new world of commercial lines opportunities. In fact, commercial lines can more than fill the enormous revenue gap created by the measured demise of personal lines auto. But that’s only if you ask fast.

Making the Switch: Innovating Commercial Lines

In this rapidly evolving landscape, insurers must innovate to support a shift to multimodal coverage models that toggle between personal and commercial auto insurance as liability moves between the driver and the commercial manufacturer, depending on usage, at the press of a button.

They’ll also need to embrace new service models like Allstate’s use of SparkCharge portable EV charging stations in roadside assistance offerings, coverage for micro-mobility startups with rapidly growing fleets of e-bikes, e-scooters, quadricycles, golf carts (yes, golf carts) and more—along with new forms of car rental companies.

It will also mean developing new “Mobility-as-a-Service” offerings that cover mobility journeys instead of assets. Whether for personal, commercial, or hybrid use, these models might include coverage for the policyholder’s use of their personal, subscribed, or on-demand car ride to the train station as part of their morning commute (collision, injury, personal property). The train ride into the city (personal or commercial loss, physical injury). The e-bike ride from the train station to the office (same). And the late-night ride-sharing service all the way home from the office.

According to Capgemini, 42% of policyholders worldwide already want a single policy that covers them irrespective of mode of transportation. Only 33% of insurers currently have one.

A Future Fueled by Data

It’s no stretch to say that for insurers, this future of mobility is about one thing above all else: data. Over the next decade, success in this sector will be measured by the ability to leverage exponential amounts of real-time driving and traffic data from a rapidly expanding universe of sources.

In addition to data piped from onboard systems and smartphone-based apps, insurers will also need ecosystems to draw and utilize data from public transportation systems and more. In the event of claim-triggering events, they’ll also need the ability to leverage data from nearby camera feeds or IoT sensors, radar, or Lidar to access accurate, real-time data needed to simplify, streamline, and automate the claims journey.

Savvy insurers will also tap sensor data to provide a unified, real-time view of intersections and roadways, aiding in accident prevention, traffic optimization, etc. One day soon, that could mean combining real-time data from infrastructure that sees a wayward pedestrian and alert autonomous vehicles (commercial or otherwise) that may not—creating safer, more efficient roadways for us—all while reducing exposures.

In this way, these technologies will help further shift insurance from a repair-and-replace to a predict-and-prevent business. They’ll also transform today’s fragmented, complex world of claims as insurers recognize their mobility ecosystem must include seamless integration and data flow between the carrier and their service and repair shop networks to expedite and streamline the claims process.

What It Takes to Win the Future of Mobility

Data and the ability to make it actionable will require a modern, cloud-based insurance platform like the Guidewire platform. Or, as I put it in Capgemini’s report, “Insurers need an intelligent insurance platform that enables meaningful insights by integrating real-time data from across mobility ecosystems.”

That means one that combines core, data, and digital using powerful forms of artificial intelligence—AI orchestration engines, if you will—that integrate with mobility ecosystem players (OEMs, third-party data and service providers, etc.) to interpret an expanding universe of data and support all transactions therein, from quote to claim and beyond.

In my view, carriers with this kind of platform infrastructure and proper data ecosystems will have a marked advantage in pivoting—indeed, pioneering—lucrative new commercial lines opportunities. Along the way, they’ll do more than remain relevant to the future of mobility. They’ll become its key enablers.