Since late 2010, we have seen an uptick in loss frequency in auto insurance lines in the U.S. as the economy strengthened and more drivers began to hit the road, often with a
smartphone in one or both hands. The proliferation of smartphones has contributed to, if not
largely driven, the increase in loss frequency in both personal and commercial lines.
More sophisticated and expensive components of modern-day vehicles, as well as the imputed liability of distracted drivers,
have driven loss severity higher. Rate increases going back to 2014 and continuing through 2017 are, in many cases, now
offsetting these adverse trends and driving welcome margin improvement. Barring a sharp reversal in loss cost inflation, we
expect to see further rate strengthening and insurers' underlying auto margins improve in 2017-18 (excluding the impact of
heavy catastrophe losses in 3Q 2017) as this strengthening continues to earn into revenues.
While rates are now reflecting higher loss frequency and severity, we may be at or near the peak of that trend. Autonomous
and semi-autonomous vehicle technology promises, not without controversy, to reduce losses by eventually removing much
of the error-prone human element from the road.
In the short term, distracted driving and improvements in U.S. economic fundamentals have resulted in
greater accident rates, causing auto insurance losses to spike. In addition, prior-year loss reserve development trends indicate potential reserve deficiencies in auto liability segments. Rate increases are now
offsetting these trends and the margins of top-tier carriers should improve through 2017 and beyond—all else
Over the longer term, the promise of safer driving conditions has garnered the support of regulators, resulting
in considerable progress in the pace of auto disruption. As semi-autonomous capabilities and safety features
advance, many observers expect completely autonomous vehicles to be the norm by 2050. The adoption of
autonomous vehicles, connected devices and the threat of insurer substitution by OEMs (original equipment
manufacturers), alongside growing preferences toward the ‘sharing economy’, are the long-term drivers of auto insurance market transformation.
The auto insurance business is now alive and well, but there are moments in history when technologies have moved the
world in completely new directions. The invention and proliferation of the wheel was one of those moments, and the
distribution of semi-autonomous and autonomous vehicle technology is potentially another. The insurance industry has a
unique opportunity to embrace—and steer—the development of wheel technology toward more healthy outcomes for
policyholders, stakeholders, and wider society.
Opportunities—and risks—abound in auto-related product and cyber liability insurance products, among other developing
areas of coverage, but technological and analytical advances will require auto insurers to re-imagine customer experience,
redefine traditional underwriting practices, and rethink market strategy to remain viable.
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