How will motor insurers fare in the move to autonomous vehicles?

By Henry Gale

June 19 - (The Insurer) - If vehicles start to look more like product liability risks, motor insurers’ business models could be called into question.

Many predictions of self-driving cars dominating the streets came too early. The technology required for autonomous vehicles (AVs) to be safe and reliable has taken longer to develop than some thought.

But consumer cars are now being sold with ever-more-advanced automated driving capabilities, albeit short of full autonomy. Meanwhile limited commercial pilots of AVs, from robotaxis to delivery services, are occurring in cities around the world.

Those pilots have predominantly been insured on a product liability basis, because that was what technology firms and car manufacturers decided they needed to provide AV services safely, explained Rob Bauer, president and chief growth officer of Bolttech, at the Insurtech Insights Europe conference in London last month.

So-called “level four” autonomy, which allows vehicles to drive without human intervention within constraints such as a local area, is the tipping point at which “car insurance would most likely morph into product liability insurance”, investment research firm Morningstar said in a note published last September.

Rebecca Marsden, vice president of commercial finance at AV software company Oxa, told The Insurer that deployments of those advanced AVs require a new approach to classifying risks, with policies that take into account property damage, liability, cyber and other risks.

The latest public projections from S&P Global (September 2023) and Goldman Sachs (August 2024) put the percentage of new car sales in 2035 that are level four or above at 6.0% and 7.1%, respectively. Goldman Sachs predicted those AVs would make up 14.4% of new car sales by 2040.

From there, the route to the majority of cars on the road being highly or fully autonomous looks clearer. If those vehicles are predominantly insured on a product liability or similar basis, traditional motor insurance would be facing obsolescence.

Publicly traded insurers are likely to cease their motor insurance operations when the percentage of level four or above cars approaches 60%, Morningstar said in its note. What then for those whose businesses dependent on motor insurance?

EXPOSED MOTOR INSURERS

In Morningstar’s “worst-case” scenario for motor insurers, the 60% mark would be reached by 2044, while a moderate scenario would see the threshold met in 2060.

“We don’t think investors should be discounting these stocks today, but we do think there should be a ceiling on the book multiples for auto insurers, given that these franchises might not exist in 20 years,” Morningstar said.

The firm estimated that, in its worst-case scenario, Allstate’s fair value would decline by between 13% and 15%. Progressive would see a larger impact, while the effect on Travelers would be modest.

“For Travelers and Allstate, both auto and homeowners are self-sufficient and each line is expected to generate an acceptable return,” Morningstar said. “As a result, we think the homeowners business for these two would remain in operation even if they exited personal auto.”

But it is fair to assume Progressive would have to shut down its operations if it exited motor insurance, Morningstar said, arguing that the company’s small homeowners portfolio is used as “a loss leader to drive growth in its profitable personal auto business”.

While Morningstar’s analysis focused on U.S. insurers, the same risks apply to motor insurers around the world. In the UK market, Admiral is one of the largest firms to be highly dependent on motor premiums.

Seventy-three percent of Admiral’s 2024 turnover came from its UK motor business, with an additional 14% from international motor underwriting. Motor also represents the majority of 2024 premiums for its rival Direct Line, but the latter is set to be acquired by Aviva, which has substantial life and home insurance books.

ADAPT OR DIE?

Admiral in its 2024 annual report recognised “disruptive technology” and “new mobility solutions” as two of the emerging risks with the greatest potential to affect its business in the near term, while contending that both come with significant opportunity.

Admiral first partnered with AV software company Wayve in 2018 and continues to insure Wayve’s entire autonomous fleet in the UK. This included recent tests of self-driving delivery vehicles by grocery retailers Asda and Ocado.

Allstate and Travelers have also disclosed initiatives focused on adapting to self-driving vehicles. In 2016, Allstate sponsored a research project at Stanford University, which later released a study on AV risk assessment, while Travelers’ research arm published a position paper on insuring autonomy in 2021.

LinkedIn profiles show both insurers have employees working on strategy for the transition to self-driving vehicles, although the companies have not made more recent announcements about insuring AVs.

State Farm, whose direct premiums written were 64% motor in 2024, also employs AV specialists and made a strategic investment into autonomy startup May Mobility in 2022. The group was excluded from Morningstar’s analysis because it is privately owned.

In Progressive’s case, The Insurer could not find employees on LinkedIn working on AV strategy or publicly announced AV initiatives.

It is possible that the creeping automation of driving could be less disruptive to motor insurers’ business models.

Travelers’ 2021 paper argued that current motor insurance structures, not product liability covers, would be best suited to insure AVs, due in part to the different legal and regulatory systems.

Morningstar’s recent note also envisioned a potential positive scenario for motor insurers, where partially autonomous cars improve safety but level four or above proves difficult to achieve. Traditional motor insurance would remain relevant and could even be more profitable.

However, with AV tests continuing around the world and being insured with fleet policies that encompass product liability and other risks outside the traditional framework of vehicle insurance, motor insurers have no room for complacency.

This week, The Insurer is considering how the prospect of autonomous vehicles could change the motor insurance market. The other articles in the series look at those already providing AV insurance, loss frequency and severity and product innovation.