The motor insurance industry faces a significant shake-up from two waves of technological innovation – the growth of telematics and the development of driverless cars, according to Fitch.
Over the short term, telematics will have a bigger impact on the industry, particularly in the UK, where take-up could grow rapidly, Fitch said. In the longer term, however, self-driving vehicles from companies such as Google and Tesla could completely reshape the sector.
“Early movers in telematics could be at an advantage among insurers as it enables them to much more accurately price the risk of a driver than traditional pricing factors such as age, postcode and type of car,” Fitch emphasized.
“Evidence suggests that the lower premiums on these policies are more than offset by cost savings due to better risk selection and better driving behavior by policyholders with telematics.”
Fitch pointed to the fact that UK insurer Direct Line recently revealed “it has doubled the number of telematics policies in a year.” said Fitch, noting that these policies involve the use of equipment to monitor driving behavior, which allow the insurer to more accurately assess risk for individual policyholders.
Overall telematics penetration remains low at about 2 percent of Direct Line’s motor insurance policies, the ratings agency explained. Among the under-21 age group, however, it is around 60 percent, which reflects “the significant discount these policies can offer.”
The UK has some of the highest premiums for young drivers, and high rates of fraudulent claims, suggesting that telematics could provide significant benefit.
“Direct Line’s high take-up by young drivers and good retention rates point to strong growth of telematics policies over the coming years,” said Fitch.
This could accelerate further if the government provides incentives for the use of telematics products, the company continued.
“Attracting older drivers is likely to prove harder as the potential premium discount is likely to be smaller than for a new driver and because they may be warier of the monitoring technology,” according to Fitch.
But if telematics can develop a track record of identifying fraud such as “crash-for-cash” scams, the peace-of-mind benefit could make it more attractive, particularly in markets like the UK, where fraudulent claims add about £50 ($71) to every policy.
The European Union’s eCall initiative will require all new vehicles in the EU to be fitted with telematics devices by April 2018, giving insurers the opportunity to use the infrastructure.
(Editor’s note: In the event of a serious accident, eCall will automatically dial 112 – Europe’s single emergency number. It will communicate the vehicle’s location to emergency services, the time of incident and the direction of travel, even if the driver is unconscious. An eCall can also be triggered manually by pushing a button in the car.)
Fitch expects that driverless cars will take much longer to affect the insurance sector, principally because the technology is not yet developed to the point where it is allowed on the road in most countries. Even when it is permitted, only a small minority of new cars initially will be fitted with the technology.
But in the long term driverless cars could have a bigger impact by completely reshaping the insurance model, Fitch warned, explaining that both traditional and telematics policies are based on the driver’s profile, which would become irrelevant for a fully automated vehicle.
A premium would therefore probably consist mostly of product-liability insurance, or the liability could end up on the manufacturer, with insurance included as part of the purchase and servicing costs, the agency explained.
“Driverless cars could also lead to a reduction in direct ownership if they enable people to hire a car at very short notice whenever they need it, which would further complicate the insurance picture.”
As a result, the potential long-term impact on insurers is difficult to quantify, Fitch affirmed. Potential outcomes could range from increased commoditization of insurance cover, to writing policies that insure an auto manufacturer or hire company, to the gradual shrinking of the motor insurance sector, the ratings agency said.