1 Insurance White Paper Auto-insurance Driving into the sunset? How changes in the automobile industry will affect the future of the auto insurance industry
2 About the Author Bonny Kurian Bonny is the Director for Global Delivery at the Insurance Industry Solutions Unit of Tata Consultancy Services (TCS). Bonny has been with TCS for more than 22 years and has handled several responsibilities in insurance and financial services IT, including application development, project and program management, IT architecture consulting, global delivery management, and more. In his current role, Bonny leads TCS' Global IT and BPO delivery teams for several key accounts. His team manages several transformational projects for TCS' insurance and brokerage customers. He has published multiple papers on insurance and IT, and has been quoted on several occasions in Computerworld, ACM News, and The National Underwriter. He has also coauthored a chapter on the New Era of Customer-Centric P&C Billing in the book titled CRM in Financial Services, by the ICFAI University Press. Bonny holds a bachelor's degree in Applied Electronics Engineering from CET, and a master's degree in Computer Science from the Indian Statistical Institute. He has attended Executive Leadership and Management programs at the Ross School of Business, University of Michigan, at the Singapore Management University and at the Tata Management Training Center.
3 The automobile industry is at the cusp of revolutionary change, as car sharing programs, remote-controlled vehicles and driverless cars threaten to completely alter not just driver behavior but the entire urban landscape as we now know it. Each of these developments has several societal and economic implications. Some of these implications bode well for the future, in the form of solutions to humanity's biggest problems, such as the high human cost of traffic accidents, wasted time in commuting, huge energy deficit and so on. However, these developments will affect every player in the auto ecosystem, some adversely: for example, steelmakers will see a fall in demand for their product, and many supplementary part makers will face reduced demand, as there will be little need for the replacement of airbags or other components. In this paper, we examine the implications of these developments for the auto insurance industry in particular. While some industry analysts have predicted the demise of this industry, we present our alternative view, where the auto insurance industry can utilize the right technology to transform itself by developing innovative new products, alternative distribution approaches, and tapping new customer segments. We believe that companies that can come up with new products that address the requirements arising from these developments are most likely to successfully navigate the path to this exciting future.
4 Contents 1. The future of driving 5 Car sharing programs 5 Semi-autonomous Vehicles 5 Remotely Driven Vehicles 6 Driverless cars 7 2. Implications on society 8 3. Economic implications 8 Fewer accidents 8 Improved productivity 9 Efficient use of assets 9 Ramifications for several industries 9 4. End of the road for the auto insurance industry? 9 5. The TCS view 10 Shaken but not stirred? 10 Back to the drawing board 11 Don t miss the boat Conclusion Acknowledgement 12
5 The future of driving The automotive industry has been at the forefront of innovation ever since it came into being more than a century ago, turning on their heads age-old methods of transportation as well as the concepts of travel, time and distance. Today, other revolutions are looming large within the industry, threatening to dramatically alter not just the way we drive and interact with our vehicles, but also the future design of our roads and cities, thus shaking the foundation of the entire auto ecosystem. We are talking about the advent of car sharing programs, remote-controlled vehicles, and at the very pinnacle of an intelligent transport system, the driverless car. And all this will happen sooner than you might think. Let's take a closer look at some of these new developments. Car sharing programs Car sharing (or short-term auto use) is a service that provides the benefits of car transportation while reducing the negative impacts of private vehicle ownership, such as the cost and responsibility of maintaining one. This service has grown in popularity in recent years, as affluent suburbanites, increasingly frustrated by congested traffic in cities, the steep fees for and the dwindling number of parking spaces, and an increasing commute time, are finding car sharing friendly to both the environment and their wallets. In addition, car sharing is a good option when you need access to a different type of vehicle for different life situations an SUV for a weekend out-of-town trip, a minivan for a family outing or a Jaguar XK to impress! Recent trends show that as of December 2012, there were nearly 1.7 million car-sharing members in 27 countries, not including so-called peer-to-peer services that allow drivers to rent vehicles directly from individual car owners.¹ Semi-autonomous Vehicles These vehicles can handle driving functions without operator input in certain situations. Semi-autonomous systems such as adaptive cruise control, lane departure warning systems, collision detection, and so on, allow cars and trucks to perform up to 90% of the driving duties without human intervention. At the 2013 Consumer Electronics Show (CES), Audi wowed the audience with the unveiling of its self-parking car². Cadillac hit the headlines with the demonstration of its semi-autonomous SRX with Super Cruise, a sophisticated system that uses a camera communicating with the car's GPS to see the road ahead. ³ However, these cars will still require a driver to deal with the most perilous and unpredictable situations, such as other drivers driving rashly. This means that drivers will be free to do many things behind the wheel they cannot do now, but will still assume responsibility for controlling the car. ¹New York Times, Car sharing services grow and expand (Jan 2013), accessed Aug 26, 2013, ²Volkswagen website, Press release: Audi CEO Rupert Stadler: Piloted driving will become reality this decade, (Jan 2013), accessed Aug 26, 2013, ³Autoblog, Watch Cadillac's new semi-autonomous Super Cruise in action, (Apr 2012), accessed Aug 26, 2013, 5
6 Such cars could become a middle ground between purely driverless and manually driven cars, and are poised to gain ground in the medium to long term. Analysts suggest that semi-autonomous vehicles will hit the roads in the next five to ten years. Remotely Driven Vehicles A possible intermediate step between the Semi Autonomous Vehicle and Driverless Vehicle is a Remotely Driven Vehicle. With strategically positioned cameras and sensors and added safety features, it is possible for a remote driver to navigate a car. Today, with this concept gaining traction, Mitsubishi offers a remote controlled test drive of its Outlander SUV. This technology is highly developed and is deployed in several industries for activities like hazardous waste disposal and in certain locomotives as well. Lane-Change Assistance Blind-Spot Detection Side Impact Self-Parking Cross- Traffic Alert Lane-Departure Warning Parking Assistance/ Vision Parking Assistance Brake- Assistance/ Collision Avoidance Adaptive Cruise Control Lane-Change Assistance Blind-Spot Detection Side Impact Self-Parking Lane-Departure Warning Cross- Traffic Alert Radar Application Ultrasonic Safety Sensors on an advanced vehicle 6
7 to to to 2027 Mandatory legislated use Telematics Automated Enforcement Collision Avoidance Preferred: Special Lanes, tax incentives Automated Enforcement Collision Avoidance Robot Cars (Driver less Cars) Voluntary and pilots Telematics Automated Enforcement Collision Avoidance Robot Cars (Driver less Cars) Available Robot Cars (Driver less Cars) Source: Celent Research⁴ Scenarios and Timing for the Adoption of Key Technologies Driverless cars The concept of the driverless car is all the rage today, after Google proudly debuted its prototype and received the first license from the state of Nevada in May On March 28, 2012, Google posted a YouTube video showing a legally blind man being taken on a ride in the company's self-driving Toyota Prius, on a carefully programmed route that took him from his home to a drive-through restaurant, then to the dry cleaning shop, and finally back home. And in January 2013, Audi and Toyota unveiled ground-breaking advances in the fast-approaching world of autonomous automobiles, such as the Audi's ability to park itself inside a multistory garage, and Toyota's Lexus LS test vehicle's advanced safety features such as the Lane-Keep, Assist system (LKA), Blind Spot Monitor (BSM) and the Pre-Collision System. This could well signal that the future of cars might have already arrived. ⁴Celent.com, A Scenario: The End of Auto Insurance by Donald Light, (May 2012), accessed Aug 26, 2013, 7
8 Implications on society The new developments in driver behavior and in the auto industry have several broad implications for society. Car sharing makes the occasional use of a vehicle affordable, even for low-income households, thereby allowing them better job access and consequently, better upward economic mobility. Other benefits⁵ include: Increased consumer choice and financial savings, Reduced per capita annual mileage, resulting in reduced congestion, road and parking facility costs, energy use, crashes, and pollution, and Reduced residential parking requirements and support for higher density residential development. Semi-autonomous features in cars that keep themselves centered in lanes and adjust their speed based on the location of the car ahead, could prove life saving. In addition, autonomous or driverless cars could improve road safety because they are not prone to human errors such as disobeying traffic laws or falling asleep on the wheel. By relieving drivers of the task of driving and navigation, driverless cars will address the needs of the physically challenged, children and the elderly who require additional support to fulfill their mobility needs. Accidents caused by drunk drivers will witness a drop in numbers, as their dexterity and skills will not be required to pilot or maneuver the vehicle, reducing the threat they present to other commuters and pedestrians. Also, since driverless cars will adhere to traffic rules, drunken drivers will be incapable of violating the law. With regard to the environment, experts expect reduced gas consumption and air pollution, due to better traffic flow and the removal of then redundant traffic safety provisions. With fewer or no human drivers on the road, there will be changes to the driving landscape, as there will be fewer street lights, guard rails, extra wide lanes, rumble strips needed. Economic implications It is clear that the growing use of sensor-based safety systems, connected vehicle technology and the driverless car will have far-reaching implications as the technology matures and becomes pervasive. Fewer accidents Driverless car technology can reduce the severity of injuries and property damage associated with vehicle crashes, and save hundreds of billions of dollars of cost each year. Google projects that its car could save almost 30,000 lives each year on U.S. highways (and 1.08 million worldwide), as well as prevent nearly 45 million additional injuries. The company estimates that accident-related expenses can be reduced by at least $400 billion a year in the U.S. alone. ⁵Victoria Transport Policy Institute, Carsharing: Vehicle Rental Services That Substitute for Private Vehicle Ownership (Feb 2012) accessed Aug 26, 2013, 8
9 Improved productivity A recent study⁶ estimated that traffic congestion in the US wasted approximately 5.5 billion hours and about 2.9 billion gallons of fuel a year for urban Americans. By freeing drivers from the driving function, the driverless car can reduce wasted commute time. By relieving congestion and regulating traffic without driver errors and road rage, traffic management will be streamlined. Efficient use of assets Car sharing and the driverless car could reduce the need for cars altogether by enabling efficient sharing of vehicles. Experts feel that a driverless vehicle can theoretically be shared by multiple people, delivering itself when and where it is needed, and parking itself in some place when not in use. Car sharing can usher in an era of pay-bythe-mile options, eliminating the need for investing in an asset (a car) that is unused or underutilized. Ramifications for several industries According to strategy consultant Chunka Mui,⁷ several industries will be affected by the large scale adoption of car sharing and driverless cars. Steelmakers, for example, would see a fall in demand for their product, as cars do not need to be so bulky and sturdy, while electronics suppliers could see increased demand for theirs. Many supplementary part makers will see their business dip significantly, as there will be a reduced demand for replacement airbags and other components. Vehicle repair and body shops could lose business. Emergency rooms in hospitals that cater mainly to accident victims may be downsized due to reduced need. With cars being in constant use, the need for huge parking lots will be eliminated, freeing up land for more beneficial social and economic uses. End of the road for the auto insurance industry? One of the industries that will significantly feel the impact of these new developments is the auto insurance industry. The industry earns an annual income of nearly $200B from personal and commercial auto insurance premiums⁸; this could reduce by 75% or more, according to some industry analysts. Yet another reputed global consulting and research firm states that the auto insurance portion of total P&C premium over the next decade could potentially drop from 39 percent to just 13 percent. While truly driverless cars may be several years away from mass adoption, incremental driverless technology such as smart cruise control and crash avoidance are being increasingly adopted with every passing day. According to experts,⁹ even a 20% adoption rate of incremental driver-assist technologies will result in significant enough reductions in accidents to trigger material reductions in premiums. ⁶Texas A&M Transportation Institute, TTI's 2012 Urban Mobility Report (Dec 2012), accessed Aug 26, 2013, ⁷Driverless Cars: Trillions Are Up For Grabs Chunka Mui and Paul B Carroll, Kindle edition (Mar 2013), accessed Aug 26, 2013 ⁸National Association of Insurance Commissioners, Property and Casualty Insurance Industry 2012 Top 25 Groups and companies by countrywide premium, by line of business, 35- Total All Lines (Apr 2013), accessed Aug 26, 2013, ⁹Driverless Cars: Trillions Are Up For Grabs Chunka Mui and Paul B Carroll, Kindle edition (Mar 2013), accessed Aug 26,
10 The TCS view Shaken but not stirred? While these changes in technology adoption in the automobile industry will have a significant impact on the auto insurance industry, in the midst of these fairly alarmist views, we believe auto insurance will continue to stay relevant. Key to sustaining business will be the auto insurers' ability to stay relevant to the market, and identify and address the new opportunities arising out of this changing auto landscape. Our rationale is as follows: As long as some cars are manually driven, the need for auto insurance will continue. In fact the insurance liability for manually driven cars may go up because a manual driver will find it challenging to drive alongside a group of driverless cars. For example, driverless cars will be capable of traveling in lock step mode or closer together at a faster pace because they can react faster to changes in driving conditions and other contingencies. A manually driven car that relies entirely on the individual's ability to react to changing driving conditions will, in turn, make manual driving a higher risk to be insured. With a reduction in manual driving, often, the primary operators of a car (due to their inexperience) may not be familiar with the risks associated with driving in unfamiliar conditions and may take risky driving decisions like venturing out in hazardous weather conditions such as slick rain- or snow-covered roads. The public infrastructure may also not be primed to set out machine-detectable warnings in such locations. This will lead to avoidable risk exposures and consequently higher damages as well as claims. In the case of car sharing, and risk slicing (due to automotive time sharing), associating drivers to vehicles and their driving time-periods will get more complicated, especially when users want policies that cover them for certain numbers of miles, or for certain periods of time. This will lead to complexities in the areas of pricing, claim adjudication, coverage verification and so on. Simplified auto insurance models will be developed that are appropriate for part ownership or periodic usage (for example, Zipcar ). As driverless cars become popular, more senior citizens, disabled people and even children will start using cars. This will increase the number of car users on the road and will, in turn, increase the number of insurance policies required. With improved safety features, the reduction in auto insurance premiums, if done with the right analytics and actuarial modeling, will be compensated by a reduction in insurance claims, thereby allowing the industry to still maintain profitability. 10
11 Back to the drawing board With the mass adoption of driverless cars no longer remaining a remote possibility, subtle technological and business model changes are beginning to take place. To continue to remain relevant, focused and effective, it is imperative for insurers to create product and technology solutions tailored to this situation. There are several aspects insurers need to consider in this new disruptive technological and business model landscape. With added security features and driverless technology, assigning liability in cases of accidents and damages will prove to be challenging, simply because of questions around who, or what, is in control. For instance, a vehicle problem could occur due to a software glitch within its safety or driverless software, control hardware issue, lack of maintenance or due to the user of the car manually over-riding some of the automated controls. The accident could therefore be the fault of the owner of a shared car (who might have neglected to arrange for preventive maintenance), the driver, the manufacturer or the programmer of the car's software. Experts see liability possibly shifting from the driver and the car owner to the vehicle manufacturer under certain circumstances, but these are yet uncharted legal waters. Don't miss the boat Auto insurance companies should analyze how their business will transform to accommodate these new technologies and car ownership/usage models, so that they are better equipped to compete effectively in the new landscape. New products (for example, selling insurance by the mile instead of 24-hour asset coverage, especially for shared cars) will have to be introduced, and structured and priced differently from today's products. New stakeholders such as manufacturers, car software developers, remote drivers, and others will enter the picture, fundamentally changing the entire value chain, from product definition to pricing, marketing, distribution, underwriting, service, and claims. To deal with these changes, insurance companies must be able to change their systems and processes to develop and to accurately price new products and insurance packages. This will require agility in responding to opportunities introduction of new coverages, insured entities, performance or usage-based insurance products, and the ability to analyze large volumes of dynamic data to perform tiering and creative pricing. In this new scenario, the utilization of software-driven statistical models, and specialized software such as flexible product configurators become very critical. In addition, with the new driver-assist technologies spewing vast amounts of data, companies will need to be able to conduct predictive analytics on this black-box data, as well as on data from external sources like the Google Driverless Car project in order to arrive at the optimal price for their products. In short, insurers will increasingly need to be technologically ready to stay relevant in the new vehicular landscape. Through several interactions, it has been found that a majority of the P&C insurers in North America have not yet completed the necessary technological and systems transformations to support agility around advanced analytics and new product creation. 11
12 Therefore, insurers need to evaluate their readiness to create and service new and relevant insurance products across all channels and proactively transform their New Business and Policy Administration Platforms. Insurers will also want to consider investing in an analytics ecosystem to gather and derive correlations between risk, context, stakeholder(s), claim, potential pricing and so on from internal and external sources such as call center data, blackbox-sensor data, and social media feeds. This analytics ecosystem must be designed to scale up to handle the large volumes of data gathered from or about individual drivers, driving habits, vehicles, and localities. With the new insurance products necessitated by the changes in the auto industry, insurers will have to build their analytical capabilities to support their actuarial and pricing requirements. Conclusion While no one can predict exactly when driverless cars will become a reality on our roads, it is definitely certain that the auto insurance business is going to change. Although some analysts predict that auto insurance might go the way of Kodak, Blockbuster and other now-dying businesses of the past, we feel that the industry will not die but be transformed. Insurers who have the technological wherewithal to be able to develop innovative new products, create alternative distribution approaches, and tap new customer segments will not just survive but even thrive. Companies that can be first off the block to come up with new products for these new markets and new developments are most likely to successfully navigate the path to this exciting future. Acknowledgement The author would like to thank Mr. Vinod Kachroo, Global Head of Industry Solutions, Insurance and Healthcare Business Unit, TCS, for his contribution to this paper. 12
13 About TCS' Insurance Business Unit With over four decades of experience in working with insurers globally, TCS delivers solutions and services to help insurers meet rising customer and agent expectations, address non-traditional competitors, manage low investment yields, and drive growth in emerging global markets. TCS has built an unmatched track record in enabling insurers transform, enhance business agility, improve operational efficiencies and increase customer engagement, while ensuring regulatory compliance. 7of the 10 world's largest insurers and over a hundred insurers globally partner with TCS. Our state-of-the-art innovation labs and global solution centers, and cutting edge solutions and technologies set clients apart from their competitors. We leverage the combined expertise of our industry trained and certified (LOMA, LIMRA, CPCU and so on) consultants to support the entire value chain for Life, Annuities and Pensions, Property and Casualty, Health, Commercial and Reinsurance companies. Contact For more information about TCS Insurance services, visit: Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and TM assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2013 Tata Consultancy Services Limited TCS Design Services I M I 10 I 13