John O'Roarke, managingdirector of Liverpool VictoriaFriendly Society Ltd.'s general insurance division, told S&PGlobal Market Intelligence why he thinks the U.K. motor insurance industry couldshrink to a third of its current size, where liability will lie in the age ofself-driving cars and what this could mean for traditional motor insurers.
The following is an editedtranscript of the conversation
S&P Global Market Intelligence:How will new self-driving-car technology — from lane-departure preventionthrough to complete automation — affect the motor insurance industry? Will carsbecome so safe that the industry loses its current relevance?
John O'Roarke: I think that if we were tobelieve everything that we read in the press or consultancy papers, we'd bepanicking and saying that the future of car insurance is quite bleak. But itseems probable to me that for the next five years or so, there will be verylittle impact. We'll be seeing cars becoming very gradually safer through newtechnologies, but to make the leap from autonomous braking and lane control tofull automation seems to me to be a massive step. I would say that based onwhat I've read, that's probably not likely to happen within the next 15 years.You're probably looking at 2030 before full autonomy actually starts to takeplace on the roads and makes an impact on the insurance industry.
Lookingjust at the U.K., there's another factor at play here that will also reduce thefrequency of claims: Regulation. The government is considering banning anycompensation whatsoever for whiplash. Given these factors, it is conceivablethat in 20 years' time, the market could be a half or a third of the size it istoday because there will simply be far fewer claims made.
How will self-drivingtechnology change the nature of insurance contracts?
Manufacturerswill be taking on a greater and greater share of the liability. You can imaginean event today where the lane-changing functionality within a car becomesfaulty or is hacked and the car causes an accident. Manufacturers will need toinsure against that liability. There will be growth in that sector. It will bea complex landscape because people will also be driving old-technology cars onthe same roads at the same time. Human error will still be an issue. I thinkthere will be a personal-lines insurance product for the foreseeable future —for the next 30 years or so — but the size of that market has to diminish.
What impact will this have onthe industry?
Isuspect that the outcome will be what traditional economics would suggest.Today in the U.K., we might have only 20 to 25 motor insurers of anysignificance. Imagine the market falls by a half or a third — I don't thinkthere will be that many insurers around. There will be consolidation, and I thinkyou'll end up with five or six insurers. You could imagine similar thingshappening everywhere in developed economies.
What types of insurers willinsure the new risks involved? Will a traditional motor insurer start insuringproduct liability, for example?
Ithink it's a completely different risk to underwrite. It would seem that themainstream, vanilla personal-lines motor insurers such as ,esure Group Plc,Admiral Group Plcwould not be as well-positioned to write those risks as experts in privateliability such as AmericanInternational Group Inc., Chubb Ltd. [and] Zurich Insurance Group Ltd. The big commercial insurersare probably better placed, I would have thought, to write those kinds of risks.
Will the rising cost of repairs— because of all the new technology in cars — be a significant factor?
Idon't think so. I think it's fair to say that the average cost of repairs willincrease because the technological cost of the vehicles will increase, but Ithink that will be a relatively small factor compared to the shrinkage infrequency. I certainly wouldn't see one canceling out the other. The thing tobear in mind when considering that is that the cost of an average claim from amotor insurer is massively skewed by the personal-injury element. The car bodyrepair is actually a fairly small component.
In the second half of 2015,you reported rising claims costs but also higher premiums. What trends do youexpect from the first half of 2016?
Ourexpectation is that prices will continue to increase for the first half of thisyear and then plateau. I think that will be the end of the hardening phase ofthe market, as the claims inflation that we've seen would then have beencompensated by price rises. It could be that premiums start to fall inanticipation [of government legislation against whiplash injury claims] asearly as the beginning of 2017.