Racing to the future in the auto insurance market

The auto insurance industry is accelerating toward a new era, marked by swift changes in market dynamics, technological advancements, and the emergence of autonomous vehicles.

As insurers grapple with increased loss costs and complex challenges, four key areas stand out as critical to the evolution of the auto insurance market:

1. Consumer pricing trends

The auto insurance landscape has undergone a significant shift in consumer pricing, witnessing a notable increase in premiums over the past few years. This surge is primarily attributed to claims frequency returning to pre-pandemic levels, riskier driving behaviors, and the rising repair costs associated with more complex and technologically advanced vehicles. As cars become more intricate and interconnected, insurers face the challenge of balancing covering the expenses of cutting-edge repairs while remaining competitive in the market.

The increased complexity of vehicles is driven in large part by sophisticated vehicle design and vehicles equipped with advanced driver assistance systems (ADAS), have prompted insurers to reevaluate their pricing models.

Insurers must explore various strategies to better compete in the market with insurance rates rising steadily over the past few years — up 15% over the past year. Usage-based insurance and telematics emerge as crucial tools in tailoring premiums based on individual driving behavior, ensuring more accurate pricing for consumers and fostering a more sustainable insurance landscape.

2. Navigating the embedded insurance landscape

Insurers must also recognize the evolving landscape of embedded insurance, where seamless integration of insurance into the purchase, use, and upkeep of assets becomes increasingly prevalent.

As more auto manufacturers explore embedding insurance solutions into their offerings, insurers are urged to form partnerships to strengthen their ability to adapt to this transformative shift. Such a strategic move allows insurers to stay relevant and unlock value by converging insurance with various auto products and services, aligning with changing customer preferences and industry trends.

3. Advanced driver assistance systems

Integrating ADAS into modern vehicles offers the opportunity to approach reducing accident rates and associated costs proactively, but it also influences repair costs as the ADAS systems themselves are often located in the most vulnerable locations in the event of an accident. While ADAS is designed to decrease the frequency of accidents, insurers feel the increase in the escalating costs to repair the systems while so far seeing limited impact on loss avoidance.

The industry is grappling with assessing the actual impact of ADAS on claim frequency relative to the repair costs. More research and evaluation need to be done to determine when the industry or an insurer can reach the inflection point where ADAS is demonstrated to reduce claims frequency to a point where it clearly offsets the rising physical damage costs.

To this end, insurers are encouraged to adopt artificial intelligence (AI) and predictive analytics and leverage vehicle build sheet data to enhance risk evaluation and understand the intricate relationship between ADAS technology and claims.

4. Rise of self-driving, autonomous vehicles

By 2035, estimates suggest that 31% of all newly purchased consumer vehicles will have Level 2 or Level 3 self-driving systems installed, with significant growth expected in the next six years.

The emergence of self-driving and autonomous vehicles introduces a paradigm shift in the concept of liability within auto insurance. With autonomous technology promising to reduce human-caused accidents radically, insurers are entering uncharted territory. Today, humans are responsible for almost 94% of all vehicle accidents. How will self-driving technology change this dynamic? A debate over defining liability in insurance contracts for autonomous vehicle accidents is emerging. This debate will likely play out between insurers, regulators, vehicle manufacturers, and suppliers — and through legal challenges in the future.

Some advocate treating these incidents as traditional auto claims, while others propose holding manufacturers or tech providers accountable for technology-related failures. As vehicles progress towards higher autonomy levels (Levels 2 & 3), the responsibility for accidents may shift in some ways from drivers to technology, hardware, or software providers. This evolving scenario necessitates clarity in determining liability assignment, working with regulators, potentially developing specialized insurance products, and implementing new claims processes tailored to autonomous technology.

In this dynamic environment, insurers must expedite their ability to adapt and innovate to remain competitive. Embracing and adapting to changes swiftly will help insurers build more efficient products — and underwriting and claims processes — as well as facilitate the transition towards more personalized policies and drive cost savings for consumers.

Michael Anderson is the auto insurance industry advisory lead at Guidewire, a leading provider of technology solutions and innovation to the P&C insurance industry.

Opinions expressed here are the author’s own.

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