As talk of driverless cars turns into reality, many commentators are predicting the demise of the traditional motor insurance market and with it a core source of revenue for the insurance sector - the combined motor market currently represents over 25% of total UK insurance market revenue, though profitability concerns continue [1]. Estimates vary but talk of a 30-60% reduction in market revenues is common over the next 20-30 years and is not beyond the realm of possibility.

However, with the introduction of driverless taxis and, in this case, buses, there is every indication that the private motor insurance market will feel the impact of driverless vehicles more greatly than commercial motor.

Redistributing Revenue

Firstly, with changes in societal attitudes, there is a growing generation where life really is for rent. Common items of expenditure such as music are no longer being bought at shops but rented online. For those growing up in this on-demand world, why would they consider it a good idea to buy a car with all the maintenance, tax and insurance baggage when, in the future, they could order one at their own convenience – only paying for transportation when they need it. Indeed, it is estimated in extreme scenarios that private car ownership could reduce by 43% as autonomous vehicles become more prevalent [2].

This anticipated change in attitude will concentrate the ownership of driverless vehicles in the hands of those firms who are able to provide an on-demand ‘Uber-esque’ service to prospective customers and who can absorb the higher initial cost of acquisition of driverless vehicles. This will redistribute future insurance revenues to the commercial motor line of business.

For those continuing to privately own vehicles it is likely that the majority will seek to maximise the use of their asset when it sits idle (which is 95% of the time [2]) by renting it to others in the Sharing Economy. This type of rental agreement requires aspects of commercial coverage, further redistributing revenue to the commercial motor account.

Secondly, according to the UN, the proportion of the world’s population living in urban areas is expected to increase from 54% to 66% by 2050 [3]. This increasing urbanisation will further reduce the private ownership of vehicles as their inhabitants make greater use of public transport. In London, for example, 43% of households do not have access to a car [4]. This reliance on public transport will only increase the use of vehicles such as driverless buses, again redistributing income to the commercial motor insurance market.

In the long-term, the societal changes noted above will have a structural impact on the traditional market, redistributing motor insurance revenue from private to commercial accounts. However, the overall impact of driverless cars on the insurance market will depend on a multitude of other factors including decisions on the establishment of legal liability and technological advancements.

References:

[1] Grant Thornton Analysis of PRA Returns (2016)

[2] Business Insider UK (2016)

[3] UN (2014)

[4] TFL (2016)