The Evolution of Automobile Insurance by Catherine Kargas

Transcription

1 The Evolution of Automobile Insurance by Catherine Kargas Reinsurance 1% Direct 32% Source: Canadian Underwriter, 2012 Brokerage 66% Automobile insurance represents approximately half of Canadian P&C insurance net premiums written (NPW). Two-thirds of the more than $19 billion of automobile insurance NPW flow through the broker channel. This large piece of the P&C insurance pie is highly likely to change in the coming decade due to numerous customer trends and technologies. These changes will most probably have a sizeable impact on the total auto insurance premiums in Canada. Upcoming technologies are expected to impact mobility as well as vehicle ownership. This will in turn have a significant impact on the insurance industry and brokerages. In this article, I examine the trends that are occurring with respect to automobile ownership and use as well as the factors that are contributing to these trends and finally. In addition, I briefly discuss driverless/autonomous technology and its potential impacts on Canada s P&C insurance industry. Customer Trends Obtaining a driver s licence was once equated with adulthood and freedom of movement a coming of age. For many baby boomers, their car was/is an extension of their personal identity. But times have changed and millenials 1 generally do not have the same love affair with the car. 1 Population born between 1980 and 2000 (approximately).

2 A recent Economist article discussed how a growing number of academics cite the possibility that both car ownership and vehiclekilometres driven may be reaching saturation in developed countries - a notion known as peak car. 2 While the recession did have an impact, the downward trend in average km driven started before the crisis. Consider the following facts: Cities across NA are rethinking their condo to parking space ratios. The City of Vancouver, for example, has relaxed its requirement that developers build at least one parking space for every unit in their buildings. The metropolitan region is now considering a staff report recommending that all 24-member municipalities reduce parking requirements, noting that between 18 and 35% of apartment parking spaces in Metro Vancouver sit empty, day-in, day-out. 3 In the Western world, younger people are getting their driving licences later than they used to. The percentage of US 16-year olds with a driver s license dropped from 46% in 1983 to 31% in Over the same period: the percentage of year olds with licenses declined from 92% to 82%. 4 According to Oxford University s Gordon Stokes, the later people pass their test, the less far they drive even once they can. 5 This clearly indicates a shift in the perception of younger generations towards the driving experience from a ticket to freedom to a mere convenience. Overall miles driven in the US decreased by 6% between 2001 and 2009, despite the fact that the US population increased. Among people aged 35 or under, miles driven decreased by 23%. 6 Canadian transit ridership has been increasing at a significantly faster rate than the country s population. Transit ridership increased by 17% between 2006 and The Canadian population, over the same five-year period increased by only 8% 8. The percentage of Canadians holding a driver s license has declined in age groups 16 to 54 years (2009 compared to 1999). 9 2 The Future of Driving : Seeing the back of the car. The Economist, September 22, Car use declining in North America, Michael McCullough, Canadian Business, April 7, US Department of Transportation, University of Michigan s Transportation Research Institute 5 The Future of Driving: Seeing the back of the car. The Economist, September 22, Frontier Group 7 CUTA statistics 8 Statistics Canada 9 University of Michigan Transportation Research Institute (UMTRI)

3 Approximately 100,000 Canadians belong to co-operative car-sharing networks like Modo and Autoshare. There are many more when considering the number of users of Zipcar and car2go % of millenials are making efforts to drive less, partly due to environmental concerns and partly due high car ownership costs 11. Households in urban areas are 2.5 times more likely not to own a vehicle than those in rural areas, and younger people those at the forefront of the trend away from driving tend to prefer living in cities. 12 Numerous factors are contributing to these trends. Some of these are (not in order of importance): High cost of automobile ownership (fuel, registration, insurance [particularly for younger people living in urban areas], maintenance, depreciation) Traffic resulting in ever increasing commute times (the automobile is not necessarily the fastest way to get from point A to point B) Aging population (seniors who don t work, drive less or are no longer physically capable of driving) Cost of parking, particularly in urban centres Urbanization o Millenials have shown a preference for living in urban settings, within walking distance from shopping and other necessities. And it s not just millenials. 10 Car use declining in North America, Michael McCullough, Canadian Business, April 7, Zipcar study, For today s youth, cars no longer represent freedom, McLean s, June 5, 2012

4 In an attempt to avoid long commutes and traffic frustrations, Canadians are returning to the cities. o In the Western world, car ownership and use has been stable or increasing in rural areas but declining in urban areas. In 2010, 77% of OECD populations were urbanized. This percentage is expected to rise to 86% in o In the US, the share of metropolitan residents without a car has grown since the mid-1990s. 13 o 62% of 18 to 29 year olds stated they would prefer living in a smart growth community (mix of homes, restaurants, libraries, public transportation) instead of contributing to urban sprawl. 14 o Despite being the second largest country in the world with a relatively small population, Canada has one of the most geographically concentrated populations in the world. In fact, our country s ten largest cities are home to 54% of the Canadian population 15. Increased health concerns (resulting in more biking, walking) Increased awareness of the impact of the automobile on the environment Telecommuting o In the US, approximately 30 million people work from home, at least occasionally. 16 o Similar trends are seen north of the border with an increasing number of Canadians opting to avoid the commute and working from home at least once per week. Home entertainment o North American cinema attendance has been declining for years. In 2011, attendance hit a 16-year low. 17 Instead of driving to the movie theatre, Canadians have increasingly opted to make use of their home entertainment systems and their TV/movie on demand subscriptions. Increasing availability of mobility options (more below) Social networking and increasing use of the Internet and intelligent devices (more below). Mobility options A growing number of younger people in Canada are delaying or not obtaining a driver s licence. In a context of growing urbanization, they are opting for alternatives. Urbanites have several options for mobility, including Walking Transit (in all its forms) Bike paths and Bixi programs available in several Canadian cities Car sharing, including Zipcar, available in several Canadian cities, including Toronto and Calgary Car rental 13 The Future of Driving : Seeing the back of the car. The Economist, September 22, National Association of Realtors, Source : CIBC, Urbanization and Canadian REITs, April 3, Off the Road: 8 Reasons Why We re Driving Less, Brad Tuttle, Business and Money, April 13, The end of movie theatres? Jamie Portman, October 12, 2012

5 Internet, Social networking Getting together with one s peers used to involve physical movement. Today, teenagers and 20-somethings have basically traded in a 2.5 ton vehicle consuming large volumes of fossil fuels for a device that fits into the palm of their hand as a means of maintaining social connectivity. 18 In fact, these intelligent devices are incompatible with driving. Posting on Facebook and tweeting on the iphone is much safer for and more compatible with a passenger lifestyle. In a study undertaken in 2011, 68% of millenials said they sometimes use social media to connect with friends and family instead of going to physically see them. 19 A University of Michigan survey of 15 countries found that in areas where a lot of young people use the Internet, fewer than normal have driving licences. A global survey of teen attitudes by TNS, a consultancy, found that young people increasingly view cars as appliances not aspirations, and say that social media give them the access to their world that would once have been associated with cars. 20 While the automobile may have been a status symbol or an extension of one s self for the boomers and generation Xers, for millenials, the automobile is sometimes described as a burden. The cell phone has become the new status symbol. Autonomous driving technology Autonomous driving technology is the convergence of Socio-demographic factors (aging population where an increasing number of Canadians will need to be driven ) Consumer behaviours and preferences, particularly present among millenials Technological advancement (radars, LIDAR systems, GPSs, sensors, computer vision and imagery have advanced to the point where autonomous technology is now real). Although many people first consider that it s mostly science fiction when presented with this topic, they quickly change their minds when presented with the hard facts: these technologies have been creeping up on us for years. Consider the following: Many of you are already driving vehicles that are equipped with several semiautonomous features, including cruise control, lane-keeping assist, anti-lock brakes, parking assist, pedestrian recognition. The 2014 Mercedes-Benz S-Class will be equipped with 360 o vision allowing the vehicle to build 3D images of its environment plus internal sensors to monitor the driver. Autonomous vehicles are approved in three US states: California, Nevada and Florida. An additional twelve US states are considering legislation. Automobile manufacturers around the world are working to develop this technology. Google s driverless vehicles have registered over 500,000 km on urban, highway and other settings in California and Nevada psst without an accident! 18 Car use declining in North America, Michael McCullough, Canadian Business, April 7, Zipcar study, The Future of Driving: Seeing the back of the car. The Economist, September 22, 2012

6 Renault-Nissan CEO, Carlos Ghosn, predicts that fully autonomous vehicles will be in showrooms in And by the way, he s not alone in that prediction. Some, including Google s Sergei Brin, are predicting availability as soon as three to five years from now. Pros The benefits of this technology are enormous. An estimated 93% of collisions are related to human error. Every year, these collisions result in more than 2200 Canadian lives lost (number 1 killer of young Canadians) as well as more than 170,000 Canadians injured. Imagine being able to eliminate or significantly reduce the number of collisions. Imagine the lives that can be saved. Imagine the injuries avoided. There are also environmental benefits. An estimated 23% of fuel used by vehicles in urban areas is consumed sitting in traffic or looking for a parking spot. This technology would essentially eliminate this thanks to fluidity in circulation (in part due to vehicle to vehicle and vehicle to infrastructure communication) and knowledge of where to park. Obviously, this would result in lower GHG emissions. On a personal level, autonomous / driverless technology results in an improved quality of life by using the time in the vehicle more productively and eliminating driving frustrations. Cons As with most things in life, this technology has its downside. Numerous industries will be impacted by the introduction and penetration of autonomous vehicles. Here s one obvious example: If cars drive themselves, why would we need driver licenses? That would result in the elimination of driving schools, driving instructors as well as the government bodies that are responsible for issuing the licenses and speeding tickets. Imagine To start to understand the changes that this technology represents, I invite you to read the following scenarios. Imagine the consequences on your personal lives, on Canadian society, on your own business as well as on your clients businesses.

7 The impacts on the P&C insurance industry are numerous. Shared vehicles In a context where most automobiles are idle approximately 90% of the time and automobile ownership is rather expensive, particularly for younger Canadians in urban areas, it is easy to understand how the future of mobility is expected to be a shared one. A model of shared usage to replace individual automobile ownership makes sense given that users can have access to a vehicle that meets their immediate needs at every trip. At the same time, this model is expected to be financially less burdening on the individual user. This will result in a fewer number of vehicles on Canadian roads and a completely different insurance purchasing model. Insuring the vehicle As the individual s role moves from passenger to driver, insurance is no longer required for the individual. This represents tremendous changes for underwriting.

8 Collision elimination An estimated 93% of collisions are related to human error. Given that driverless vehicles are programmed not to exceed the speed limit or break any laws, given that these vehicles don t apply makeup or drink alcohol, given that these vehicles react to changes in their environment significantly faster than humans, means that collisions can be practically eliminated. Also, in case of a collision, given all the systems on board, complete information is available to determine responsibility. Imagine the impact on legal and claims departments. Imagine being able to eliminate the fraud that is plaguing the insurance industry in Ontario. Imagine the impact on repair garages and auto body shops. Imagine the reduction in premiums. In Ontario, for example, approximately ¾ of auto insurance premiums relate to personal injury. Assessing the impact In the United States, there are discussions of this technology resulting in a reduction of 80% of auto-related insurance premiums. What can we expect to occur in Canada? Will the change in ownership model also result in new players in the insurance industry? Will the vehicle manufacturers/integrators also become the insurers of these vehicles? If not, will they want to partner with carriers as the latter have a better understanding of the different provincial regulatory environments? What role will brokerages play in the future? How should carriers and brokerages prepare for the driverless road ahead? MARCON, in collaboration with key players in the legal, technology, environmental and academic sectors. is studying the driverless revolution, the likely introduction timelines and penetration rates of the Canadian market as well as the impact of these vehicles on a number of Canadian industries, including insurance. This study will be key to understanding not only the impact on automobile insurance but also other industries that may or may not survive this revolution. These industries represent commercial lines accounts for the insurance industry. For more information about this study, please communicate with Catherine Kargas at or at x260. Catherine Kargas, an accredited business strategist, is Vice President at MARCON, a managementconsulting firm serving the financial services, energy and transportation industries. Catherine has 25 years of consulting experience. In the area of insurance, she has worked with P&C, life and group insurance providers. Catherine is the Vice Chair of Electric Mobility Canada. She s an Insurance- Canada.ca collaborator and contributor to the Insurance 2023 project.