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How to Adapt to Driverless Cars

There is little doubt that the widespread adoption of autonomous vehicles will have a huge impact on the automobile insurance industry. Research and computer modeling conducted by Accenture in collaboration with the Stevens Institute of Technology indicates that as many as 23 million fully autonomous vehicles will be traveling U.S. highways by 2035 (out of about 250 million total cars and trucks registered in the U.S.)

This rapid growth of autonomous vehicles will involve a major shift, not only in our driving habits and patterns, but in the ownership of vehicles. We believe that most fully autonomous vehicles will not be owned by individuals, but by auto manufacturers such as General Motors, by technology companies such as Google and Apple, and by other service providers such as ride-sharing services. Unlike individual car owners – whose vehicles typically sit idle most of the time — fleet owners can send autonomous vehicles out on multiple trips on a 24-hour basis, amortizing the cost of ownership.

Automakers have already begun to experiment with fleet-based ownership of autonomous vehicles, with GM announcing an autonomous vehicle partnership with Lyft, Uber announcing a similar partnership with Volvo, and many others exploring similar avenues.

Since insuring privately owned vehicles is what the auto insurance industry has been all about, insurers have every reason to be concerned about their future growth and profitability.  With fewer individual owners, there will be lower overall premiums. And since as many as 94% of accidents are attributed to human error, the number and severity of accidents and insurance claims will drop, also leading to lower premiums as insurers learn to price in accordance with real risk.

Our forecast shows that the drop in individual premiums – due both to decreased private ownership vehicles and to safer vehicles — will begin in 2026, as large numbers of autonomous vehicles begin to appear, and could be as much as a $25 billion loss for insurers by 2035.  This is significant for a roughly $200 billion market.

In addition to autonomous vehicles reducing the need for individual auto insurance, other trends, such as urbanization, ride-sharing, and a general lack of interest in car ownership among young drivers, are also cutting demand and putting pressure on premiums.  And, while our research was focused on private passenger vehicles, it is worth noting that large commercial fleets such as UPS, FedEx, and other trucking businesses will likely move to autonomous vehicles at a rapid pace.

However, auto insurers have one factor weighing in their favor: The shift to fully autonomous vehicles will be gradual. It will likely be years before fully autonomous vehicles appear on U.S. highways in significant numbers, and they are likely to coexist with traditional “driven” vehicles and a host of semi-autonomous variants for decades.

See also: Who Is Leading in Driverless Cars?  

The Stages of Autonomous Vehicle Adoption

If we look at autonomous vehicle adoption as a spectrum – with zero representing a universe consisting exclusively of traditional vehicles and five representing a world of fully autonomous vehicles – we are somewhere between zero and one right now.  Automakers are currently moving aggressively to Stage 1, which is the adaptation of some autonomous features.

At Stage 2, at least two features (such as braking and cruise control) will be automated, and at Stage 3 the car will be partially autonomous, although a driver will still be needed for monitoring.

We consider Stage 4 as vehicles having full autonomy, with a “human option” for the driver/passenger to take over at any time. And Stage 5 would be full autonomy, with no human option – meaning no steering wheel, brakes, or accelerator pedals.

We believe the transition through the stages will be gradual, and insurers will have some time to adjust and react.  But our forecast says that by about 2050, there will be many more autonomous and semi-autonomous vehicles on the road than traditional vehicles.

Finding New Sources of Revenue

While the pace of adoption of autonomous vehicles is not easy to predict, it is clear that individual auto premiums will decline in a significant and likely escalating manner. This means that auto insurers need to create new revenue streams that offset the decline in individual premiums. Fortunately, new opportunities for insurers are emerging as well.

With help from the Stevens team, we have identified three areas with significant potential for insurers in the period from 2020 to 2050:

  1. Cyber security. As cars become more automated and incorporate more and more hardware and software, insuring against cyber theft, ransomware, hacking, and the misuse of information related to automobiles can generate as much as $12 billion in annual premiums.  This can be even more critical to entire fleets, for example, if Amazon deploys fleets of autonomous vehicles to deliver packages.
  2. Product liability. Auto-related sensors and chips are expensive, but the real risk for manufacturers is the potential for failure through software bugs, memory overflow, and algorithm defects, and the resulting massive liability.  Insuring against this is a $2.5 billion annual opportunity.
  3. Infrastructure insurance. Cloud server systems, signals, and other safeguards that will be put in place to protect riders and drivers offer an annual revenue potential of $500 million in premiums for property and casualty insurers who underwrite the value of the hardware and software in play. The need to secure and insure the public infrastructure is likely to be vast and much larger than $500 million, but governments often “self-insure” these risks so the opportunity for commercial insurance is likely to be lower.

In the aggregate, these areas can generate $81 billion through 2026 ($15 billion per year from 2020 to 2026, with some fluctuations) and can more than offset the losses in premiums expected through 2050.

Planning for the Driverless Future

In a future dominated by autonomous vehicles, auto insurers will face some stark strategic choices. They can continue to conduct business as usual, fighting for pieces of a shrinking pie – or they can change their thinking and their business models and adapt to new realities.

The speed of the conversion to a driverless environment is impossible to predict exactly, but carriers should start creating the actuarial models that determine risk and pricing for different stages of autonomous vehicles.  At the same time, they should be developing new product offerings in areas including cyber insurance and product liability for software and sensors.

We see four key steps that insurers can take now:

First, they can build expertise in big data and analytics.  Playing effectively in the AV market means being able to control data generated by AVs and by the communications and software systems that support them.  Market participants who can collect, organize and analyze this data will have inherent advantages over those with less developed capabilities.

Second, they can develop the needed actuarial framework and models.  We have already seen partially autonomous safety features such as automatic emergency braking systems change the safety profile of newer vehicles.  Insurers should be using sophisticated actuarial and modeling techniques to be ready as vehicles add more and more autonomous features.

Third, they should explore the partner ecosystem.  Insurers will need to collaborate effectively with automakers, providers of communication and software systems, governments at multiple levels, and many other organizations.  Insurers not doing so already should be actively identifying and mapping out ecosystem partners.

Finally, they should think about new business models.  Currently, insurers whose revenues derive primarily from personal automobile policies have an expertise in insuring thousands of small risks.  Such insurers may have to transform themselves into large commercial insurers writing policies on a small number of very large risks.  Insurers remaining in the personal lines market will have to re-think areas including product development, policy administration, and distribution.

See also: Driverless Vehicles: Brace for Impact  

It is also worth noting that decreasing premiums industry-wide may lead to an increase in mergers and acquisitions. There are many smaller insurance carriers that could end up being bought as larger carriers seek to maintain revenue.

In short, change is inevitable for auto insurers, but the change can be positive.  Insurers that vigorously pursue the short- and medium-term opportunities presented by cyber insurance, product liability insurance, and infrastructure insurance – while making careful strategic decisions about their partner ecosystems, operating models, and value propositions – are most likely to thrive in a driverless environment.

This article originally appeared at  Harvard Business Review.

New Challenges as Startups Consolidate

U.S. startup founders expect mergers and acquisitions among emerging tech firms to climb in 2017. Greater consolidation among fintech firms will present new challenges to major insurers.

Compete, collaborate, consolidate. Innovative tech startups muscled their way into the financial services industry a few years ago as aggressive competitors to long-established corporations. During the past year or so we’ve seen these fintech firms increasingly collaborate with big insurers and other financial services providers. They’re sharing their technology, expertise and business models in return for vital funding, market reach and industry knowledge. Expect 2017 to be marked by widespread consolidation among fintech start-ups – including insurtech firms.

Around 72% of the founders of U.S. tech startups canvassed by venture capital firm First Round forecast more mergers and acquisitions among their ranks in the year ahead. Over a quarter of the more than 700 startup founders surveyed expect far more consolidation than in 2016.

See also: Top 10 Insurtech Trends for 2017  

What’s the cause of this anticipated consolidation? Several factors:

Funding: About 55 percent of the start-ups in the survey expect it will become more difficult to raise venture capital in the year ahead. Raising the next round of capital will be challenging, according to 83 percent of respondents, while 35 percent anticipate that it will be very challenging or extremely challenging.

Control: Scarcity of capital is giving investors increasing sway over tech start-ups. Around 67 percent of the firms canvassed believe investors will, in the next few years, have more power than entrepreneurs in engagements between the two parties.  Most believe this is a reversal of the situation in the recent past.

Costs: Over a half of the fledgling tech firms surveyed by First Round acknowledge that their “burn rate” has increased over the past year. Around 65 percent agree that curbing their burn rate is a critical priority. Only 13 percent of the more than 700 firms described themselves as profitable while 48 percent expected to be in the black within one to three years.

Skills: Finding good talent was the biggest concern of most of the start-ups surveyed. Increasing competition for digital expertise and experience is likely to increase the short-fall of key skills.

Focus: Nearly half the start-ups reviewed identified engineering as the most important driver in their company. Only 18 percent pointed to design and a mere 2 percent were driven by their customers. Rising demand for innovative digital solutions that please customers, rather than perform specific functions, could flat-foot many narrowly focused start-ups.

How will insurers be affected by the growing consolidation of tech start-ups? Here are some likely outcomes.

  • Opportunities for insurers to collaborate with, and invest in, innovative insurtech firms will shrink as emerging tech firms mature and align themselves with big partners.
  • Insurers that have already cemented strong ties with tech startups, through partnerships and funding, will amplify their first-mover advantage by rolling out digital distribution and back-end solutions that competitors will struggle to emulate.
  • A few insurtech firms will gain critical scale and market influence by merging with other start-ups. This will increase significantly the strength of their . research, marketing and sales and as well as their ability to remain independent from major insurance providers.
  • Closer relations between insurtech firms and big insurers will not always succeed. Likely stumbling blocks include the unwieldly organizational culture of many major insurers as well as the loss of focus among some insurtech firms acquired by bigger partners.

See also: Which Rules Should Insurtech Break?  

The insurtech landscape will change substantially in the coming year. Traditional insurers should move quickly to deepen their relations with key start-ups to ensure long-term access to innovative digital technology and new business models.

InsurTech Start-Ups: Friends or Foes?

This is the second of two parts. The first was, “The InsurTech Boom Is Reshaping the Market.”

What is your strategy to respond to Insurtech? Yes, InsurTech start-ups may be rivals and disruptors….but savvy insurers are starting to recognize that InsurTech start-ups can also be partners. The benefits of InsurTech collaboration are substantial.

While some carriers view the rise of insurance technology start-ups with trepidation, others have been quick to seize on the InsurTech trend as an opportunity. Major insurers are some of the biggest investors in fledgling InsurIech firms. Far from seeing these new companies as rivals, they’re embracing them as partners.

The venture investment funds of prominent insurers such as AXA, Aviva, Allianz, American Family, MassMutual, TransAmerica and Ping An, have made significant investments in insurtech start-ups. Recipients include PolicyGenius, NextCapital, CoverHound and Limelight Health.

Funding of emerging technology firms by big insurers looks set to climb this year. CB Insights reports that insurers completed 20 investment deals in the first quarter of this year. The same group of insurers concluded only eight deals in the first three months of 2015.

See also: A Mental Framework for InsurTech

The shift to collaborate, rather than compete, with technology start-ups is gathering pace throughout the financial services industry. Investment in start-ups aiming to collaborate with established financial services providers jumped 138% last year. It accounted for 44% of the total funding for financial services technology, FinTech, in 2015 – up from 29% in 2014.

Start-ups looking to compete with financial services companies still attract the bulk of investment. However, there’s growing enthusiasm for cooperation among investors and start-ups. The extent of this support varies across geographic markets. In New York, investment in collaborative start-ups accounted for 83% of total FinTech funding, while in London and the rest of the U.K., where the regulatory environment is more conducive to new competitors, the proportion was only 10%.

The illustration below shows the growing interest in cooperation across the financial services industry. Investors are increasingly supporting firms that can help established service providers reduce costs and risk and capitalize on new markets.

Friend or foe. Big insurers shift stance on insurtech start-ups_Cusano (Figure 1)

This trend is only beginning to affect the insurance industry. But as the InsurTech sector grows it will become much stronger.

Increasing cooperation between insurers and new technology firms is a sure sign of the growing maturity of the InsurTech sector. Many major carriers no longer worry that InsurTech firms might erode their business. Instead, they’re eager to benefit from the new insights, attitudes and technology they bring to the industry.

See also: Blockchain Technology and Insurance  

The benefits of collaborating with InsurTech firms can be compelling and include:

  • Insurers can get early access, first mover advantage on disruptive technologies.
  • Big insurers’ decisions to use new technologies often decide whether a new company will be successful….so combining use of a new InsurTech with an investment is a double win.
  • Insurers will get the ability to influence the strategy of the new start-up.

In my next blog post, I’ll discuss the shift in FinTech funding to developing economies and explain why this is good for insurers.

This article originally appeared on Accenture.


InsurTech Boom Is Reshaping Market

Investment in insurance technology, InsurTech, is climbing fast. It’s going to have a big impact on insurance providers around the world. What is your strategy to stay abreast of the new opportunities and threats posed by InsurTech?

Global investment in financial technology, FinTech, continues to soar, and insurance is emerging as its next big target market.

Investors around the world poured $22.3 billion into FinTech deals last year – a 75% leap from 2014. InsurTech attracted around $2.6 billion of this outlay. This is still a small slice of total FinTech spending, but it’s a big step up from the previous year’s $800 million. And spending on InsurTech looks set to surge.

See also: InsurTech Forces Industry to Rethink

In the first quarter of 2016, more than 45 InsurTech deals were sealed, with funding totaling $650 million, according to researcher CB Insights. This is the most deals in any quarter and the second highest amount of investment for such a period. InsurTech firms that attracted funding included Oscar Health, Next Insurance, Lemonade and Slice Labs. Backing came from venture capital firms, private equity companies and the investment arms of big insurers.

Why the big interest in InsurTech?

One of the reasons is that the FinTech market is maturing. The illustration below shows that, in the clamor for funding, early investment targets such as retail payments and merchant acquisition are being overtaken by new growth sectors, particularly retail lending and retail investments. InsurTech is fast emerging as a new investment opportunity.

Insurtech boom will reshape the global insurance market_Cusano (Figure 1)

Another reason is that FinTech investors realize that the insurance industry is ripe for disruption. With annual premium revenue of around $5 trillion and assets under management heading toward $15 trillion, the global insurance industry is a huge market. It lags other sectors, notably the banking industry, in adopting digital technology. Insurers need to raise their spending on innovation to ward off rising competition and lure much-needed new customers.

See also: Secrets InsurTechs Need to Learn  

The upswing in investment in InsurTech firms will have a major impact on the insurance industry around the world. Expect a host of new arrivals to appear in the insurance industry in the next 12 to 18 months. Some of these firms will be marketing niche solutions to established carriers and brokers. Others will be looking to grab a slice of the insurance market by offering specialized insurance products and services built around digital technology.

Bottom line…if you haven’t done so already, it’s time to decide how you will respond to InsurTech.

This article originally appeared at Accenture.

Stretching the Bounds of Digital Insurance

Last year, we began to see industry leaders respond positively to disruption and start to reimagine their businesses for the digital insurance era. We predicted that insurance’s “Digital Transformers,” many with deep resources, huge scale and process discipline, were about to rewrite much of the digital playbook. They would use technology not just to improve their internal processes but also to create and exploit entirely new opportunities for growth.

This year, our Technology Vision shows how these pioneering insurers are fundamentally changing the way they look at themselves; leading carriers are quickly mastering the shift from “me” to “we.” They are stretching the boundaries of digital insurance by tapping into a broad array of other digital businesses, digital customers and digital devices at the edge of their networks. In the process, these forward-thinking companies are not just transforming insurance but are looking to reshape entire markets and change the way we work and live.

Every year, Accenture’s Technology Labs collaborates with Accenture Research and a large number of business and technology specialists to pinpoint the emerging technology developments that will have the greatest business impact on insurers in the next three to five years.

This year’s Accenture Technology Vision highlights five themes that will catalyze the growth and transformation of the insurance industry’s digital power brokers of tomorrow.

1. The Internet of Me is changing the way people around the world interact through technology, placing the end user at the center of every digital experience.

2. Digital devices at the edge, where the digital and physical worlds meet, are powering an Outcome Economy and enabling a new business model that shifts the focus from selling things to selling outcomes.

3. The Platform (R)evolution reflects how digital platforms are becoming the tools of choice for building next-generation products and services—and entire ecosystems in the digital and physical worlds.

4. The Intelligent Enterprise is making its machines smarter—embedding software intelligence into every aspect of its business to drive new levels of operational efficiency, evolution and innovation.

5. Workforce Reimagined sees advances in more natural human interfaces, wearable devices and smart machines extending intelligent technology to interact as a “team member” and working alongside employees.

Beyond insurance

The emergence of the new “We Economy” is sure to bring profound change to the insurance industry. The transition has already started, led by those carriers that welcome disruption as an opportunity to outpace their less agile competitors and to discover new paths to growth.

Shaping a positive response to such far-reaching change is not a trivial issue. Insurers face extensive transformation as they seek to redefine their role in the face of rapid advancements in big data, robotics, nanotechnology, genetic engineering, artificial intelligence and many other technologies that promise to change our world dramatically in the next decade.

75% of insurers believe that, in the future, industry boundaries will dramatically blur as platforms reshape industries into ecosystems. But most insurers are still tied to a business model based on pooling risk, calculating average pricing and generating gross premium income. This model will come under increased threat in the future as the Internet of Things, big data, digital channels and artificial intelligence enable carriers to assess and price risk directly and individually.

The leaders are already thinking about what their role will be in an economy where service is personalized and real-time, measured by outcome and delivered through powerful digital ecosystems. They are preparing to use their digital advantage to stretch their businesses beyond the boundaries of the enterprise—and of traditional insurance. 35% of insurers are comprehensively investing in digital technologies as part of their overall business strategy; 29% are investing in selected business units.

For brave insurers, digital technologies and new sources of rich data also bring new possibilities for underwriting, opportunities to take out significant costs though machine learning and other automation strategies and powerful ways to differentiate by finding new sources of customer value and enhancing the customer experience.

The Digital Transformers are thus taking a two-speed approach to exploiting new technologies.

They’re addressing their short-term needs by improving specific processes and products, while at the same time investing in their future by exploring the transformative potential of digital. They tend not to have a digital strategy as such, but a business strategy that is altogether digital. Their digital investments are directed less at specific processes or operations than across the enterprise value chain.

These pioneers have realized that digital technology is not just about driving market differentiation, stronger customer relationships and better quarterly returns. It is also about collaborating with other organizations to effect long-term change and shape business outcomes in ways that were not possible before. And it is about insurers revisiting their core purpose within society and what that means in the digital world.

The objective of insurance has always been to manage the risks inherent in growth, progress and innovation, and that is a purpose that is more relevant than ever in a world of accelerated change. When automobiles upended the ways that societies and economies worked in the 20th century, insurance helped smooth the risks and make the horseless carriage a safe reality. Now, with the first driverless vehicle poised to become a commercial reality, insurers once again have the opportunity to be the enablers of a disruptive technology that will change the way we live.

Here, as before, it is insurers who should mediate the changes and mitigate the risks. There is no innovation without regulation, and no industry better placed than insurance to take on the responsibility of governing the dangers of disruptive new technologies.

Everything is connected

Consider the rapid growth of the Internet of Things. It is potentially bringing every insurable asset, life and activity into the digital realm, creating a new world of possibilities for insurance. Forward-thinking insurers are using these connections to offer new services, reshape customer experiences and enter new markets by creating digital ecosystems.

In the emerging vision for the connected home, the entire home will soon become a single connected entity, both internally and with an ecosystem of service providers, each of which monitors and reacts to data that’s relevant to itself. This includes the security team, emergency services, and of course, the insurer.

Home owners will receive a variety of data, from energy consumption levels to alerts and even surveillance video feeds, on their mobile devices or any other channel they prefer. In this ecosystem, how can the insurer go beyond offering cover to help customers manage risks and prevent accidents that would lead to a claim? And how can it mitigate the risks of this technology breaking down or malfunctioning?

BNP Paribas Cardif in Italy already offers Habit@t, an insurance package that uses technology to secure customers’ homes. Habit@t employs sensors to monitor the home, even when no one is in. In case of danger—fire, smoke, flooding, lack of electricity—it alerts the customer and the operations center.

According to BNP Paribas Cardif: “These types of offers will typify your future relationship with your insurance providers: they are no longer there simply to assist you after an incident. They now help you anticipate incidents and limit their consequences, while improving your comfort and security on a daily basis.”

In healthcare, Apple and Humana in the U.S. have partnered to let consumers share Apple HealthKit data with the Humana Vitality app. HealthKit brings together wellness data from wearable devices and apps, letting consumers track and share their daily steps walked, calories burned, heart rate readings and other data.

In exchange for their data relating to healthy behavior, customers receive financial incentives such as discounts on their monthly healthcare premiums. Here, the insurer’s role isn’t simply to provide health insurance but also to help customers lead healthier lives. What does it mean for society when the focus is on monitoring patients to keep them healthy rather than on treating them when they’re ill?

And in the auto insurance sector, the connected car is bringing disruption and opportunity. Many insurers already use car telematics to personalize risk assessment and pricing, or even to offer usage-based products. Some are using it to offer a range of services like roadside assistance and traffic alerts, vehicle security, driver coaching and so on.

Looking a little further into the future, driverless cars have the potential to turn the auto insurance industry on its head. Again, leading insurers are starting to forge new partnerships and build ecosystems that will allow them to remain relevant in a world where personal auto ownership will be rarer and where the nature of the risks they manage will be vastly different.

BMW and Allianz have agreed to offer usage- based insurance underwritten by Allianz for the car manufacturer’s i3 and i8 electric vehicles in the UK. And State Farm, the U.S.’s largest personal lines auto insurer, is collaborating with Ford on autonomous driving research. Together, the companies are assessing whether driver-assist technologies can lower the rate of rear collisions.

And in many segments of the market, the need for traditional insurance coverage is slowly evaporating. In auto insurance, for example, the imminent arrival of autonomous vehicles together with a trend away from owning cars might shrink the size of the addressable market. Similarly, a combination of hardier, high-yield crop varieties and big data for more accurate forecasting of crop yields is starting to erode the market for crop insurance. Insurers must think about new business models and revenue streams to compensate for those that slow down to a trickle or even disappear in the years to come.

Tomorrow’s digital insurance leaders

As the earlier examples illustrate, forward- thinking insurers see great potential to make a difference—and to make a profit—by operating within ecosystems, not just as individual corporate entities. Working in concert with players from other industries, leading insurers are considering how to tackle significant challenges that societies, organizations and people will face in the future. Whether under their own brands or as partners for other companies, they will play a role in transforming centuries-old modes of transportation; raising the quality of healthcare by tackling it holistically, across many industries from hospitals to insurance and robotics; and much more besides.

Insurers have an opportunity to embed themselves in tomorrow’s customer-centric digital ecosystems, become the regulators of the disruptive technologies of the future and help to enable progress. This is an opportunity they should not squander.

Read the full report at Accenture

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