Driverless cars to dent insurer profit
Driverless cars could conquer Australian roads and dramatically reduce accident rates, a trend that will be welcomed by consumers but heap pressure on the profit of motor insurers.
New research from Moody's Investors Service found accident avoidance features in smart cars, such as automatic braking and adaptive cruise control, will lead to fewer accidents in the next five to 10 years.
While this will boost motor insurer profit over the medium term, it could also dramatically cut insurers' gains over the long term as claims decrease and the costs soar of parts to repair high-tech cars.
Automaker behemoths including Ford, Nissan, Mercedes-Benz and Tesla have flagged plans to roll out driverless cars by 2020 to 2025. Moody's analysis found a majority of cars could be self-driving by 2045, and are likely to become universal in three decades.
"Many insurers will not lower their pricing right away as they wait to make sure the frequency declines are lasting, which could boost insurer profitability over the next five to 10 years," Moody's latest report on the sector says." That said, reduced accident frequency would be partially offset by higher costs of replacement parts with embedded technology."
The predicted increase in driverless car take-up would also mean a significantly lower demand for traditional car insurance, leading to lower premiums and profit.
"Given that personal auto is the largest P and C [property and casualty] insurance line in many countries, including the US, the insurance industry impact could be significant," the report says. About 38 per cent of the industry's premiums – or revenue – can be traced back to motor insurance.
"Regulators, lawmakers and courts will have to determine how liabilities are shared among insurers, automobile manufacturers, and technology companies," the report says.
Moody's expects insurers will not be sitting idle and watching their prize profit-churner fall away as driverless cars take root. Research from PwC found that the global insurance industry ranked second only behind media and entertainment as the industry that is most significantly affected by technological change.
"Despite the uncertainties self-driving cars cast over the auto insurance industry, insurers have time to innovate and diversify in order to stay competitive in a potentially narrower market," the Moody's report says.(From Financial Review)