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Self-driving cars have been stuck in the slow lane for years. But if the incoming Trump administration rolls back regulation, they will shift up a gear. Motor insurers should buckle up. Depending on how rapidly the technology is adopted, it could boost their fortunes or run them off the road.
The most pessimistic predictions for auto insurers assume widespread adoption of highly autonomous cars. If drivers are no longer responsible for accidents, liability would shift to manufacturers, limiting the role of conventional insurance to theft and non-driving-related damage.
In 20 years’ time, lucrative auto insurance franchises might have disappeared altogether, according to data group Morningstar. That is based on its most aggressive scenario in which 60 per cent of cars are fully autonomous by 2044.
With the market cut by more than half, publicly traded insurers would find it difficult to earn an acceptable return. They would probably exit, leaving the market to mutual insurers. This worst-case scenario, Morningstar estimates, could knock as much as 26 per cent off the fair-value estimate of Ohio-based Progressive, potentially the most affected US company.
There is little sign that investors are concerned. Progressive’s forward price/earnings ratio of 20 is over a tenth more than its 10-year average. That reflects the distant nature of the threat. Even on Morningstar’s most pessimistic projections, Progressive would be still generating a strong return on equity of 19 per cent in 10 years’ time, modestly less than its historical average.
Moreover, insurers will not readily abandon the market. Even if highly autonomous cars do arrive, they have a chance of retaining a role, albeit in partnership with carmakers. Insurers argue that relying on the product liability regime as an alternative to insurance will not work since it is too slow and complicated to compensate crash victims.
Incumbents might even gain from self-driving cars, if the latter stop short of full automation. That would improve safety, without chipping away at the relevance of insurers. Even though repairs of automated vehicles are costly, past experience suggests that falling accident rates boost insurers’ returns until pricing adjusts.
Even so, car insurers should be braced for disruption. They face competition from carmakers such as Tesla that can capture data from the vehicles. Conventional personal car insurance premiums will drop 6 per cent to $248bn by 2030, predicts consultants McKinsey. By then, it expects more than a quarter of the personal auto insurance premium pool will be affected by changes to distribution, products, pricing and claims handling.
Personal car insurers will swerve extinction on all but the most aggressive forecasts of autonomous vehicles’ progress. Nonetheless, it will be a bumpy ride.
