Self-driving cars could crash personal auto insurance sector

KPMG LLP, the international audit, tax and advisory firm, recently issued findings in the arena of autonomous cars and found the coming technology could bring an 80 percent potential reduction in accident frequency by 2040.

"This will result in a potentially drastic reduction in loss costs and premiums," KPMG said, but noted accident expense could increase from almost $14,000 currently to roughly $35,000.

A KPMG executive used the term "significant turmoil" to describe the future, with "business models flipped upside down."

Autonomous cars under the Google logo long ago crossed the million-mileslogged mark. In January, Apple registered the domain name Apple.Car.com. The blogosphere has the computer giant turning out cars that may or may not be autonomous by 2019. Apple, web sources say, is upping engineers on the project from the current 600 to 1,800 for the jobs needed.

KPMG said those cars will face a new insurance landscape, with 94 percent of industry survey respondents saying actual policy coverage will change; 52 percent saying property coverage will change; and 71 percent expecting coverage to change reflecting costlier vehicle parts replacement.

KPMG among the same data in its fall 2015 "Autonomous Vehicles Survey Report," also found competition for policies is expected to "rev up," as it said, with niche writers handling 42 percent of the market, new providers filling 39 percent of the market and consolidation in store for 29 percent of providers. A KPMG spokesman said the data were rechecked and the findings remained valid as of Feb. 16.

In a second KPMG report, titled "Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles," KPMG said, "A decline in accident frequency due to safer vehicles and the adoption of autonomous vehicles could shrink the U.S. personal auto insurance sector by 60 percent within 25 years."

"Autonomous vehicles are poised to completely transform the auto insurance industry, and underlying market forces, including technology enablement, consumer adoption, and regulatory permission, are already aligning to enable mass change," said Jerry Albright, principal in KPMG's actuarial and insurance risk practice. "The risk profile of vehicles is changing daily, and the subsequent drop in industry loss costs would reduce the size of the auto insurance market, trigger consolidation in the personal lines space, attract new competitors and force dramatic operational changes within carriers."

And Albright said that nearly accidentfree vehicles could be here before autonomous vehicles. "While a shift in business strategy could take years, insurers must act now to differentiate themselves and gain a first-mover advantage," he said.

As the size of the automobile insurance pie shrinks, the allocation of the slices across personal auto, commercial auto, and products liability could also change, according to KPMG's analysis.

"Commercial lines could take a larger share, as the marketplace moves toward car sharing and mobility on demand services," said Alex Bell, managing director in KPMG's CIO Advisory practice. "As the vehicle makes more decisions, the potential liability of the software developer and manufacturer will increase too. In addition, losses covered by product liability policies will most likely increase because the sophisticated technology that underpins driverless vehicles will also need to be insured."

Said Chris Nyce, principal in KPMG's actuarial and insurance risk practice, "The personal auto lines sector will likely bear the brunt of the transformation, as it will hold a smaller share of a smaller market. By 2040, we believe this sector will cover less than $50 billion in loss costs in nominal dollars, compared with the current $125 billion, with premiums moving nearly proportional. The shrinkage in real terms may be even greater."

KPMG said it anticipates "severe implications of a contracting premium environment," especially since, as it said, "the insurance industry as a whole has not generated * an underwriting profit in personal or commercial auto for several years in a normal' market environment."

Joe Schneider, managing director at KPMG Corporate Finance LLC, said the continued proliferation of automated vehicles will put strain on carriers.

"Many insurers don't have a profitability ~ cushion to erode and lack the structural agility to shed costs quickly in an environment of rapid change," Schneider said. "Once the massive market disruption begins and traditional insurance business models are flipped upside-down, we expect significant turmoil across the industry."