What is the future of car insurance?

The composition of the vehicle parc, a legal term for all automotive vehicles in use at any given moment, is changing more drastically than ever before.

Roads around the globe are now populated by a mix of traditional combustion engine vehicles, electric vehicles (EVs), and models with varying levels of connected capabilities such as Advanced Driver Assistance Systems (ADAS). Automakers are increasingly implementing ACES strategies (autonomous driving, connected cars, electrification and shared mobility).

The rise of Chinese manufacturers and the increasing dominance of heavier vehicles such as MPVs and SUVs are pushing the industry towards a new future.

Why then, despite these rapid advancements, have vehicle insurance pricing models remained largely unchanged for decades?

Understandably, policy pricing has long been based on human driving habits. But with the vehicle parc evolving more rapidly than our driving habits, it's clear that auto insurers must shift their approach to reflect how cars are changing – not just those who drive them.

Changing risk landscape
The growing popularity of larger, more powerful, and increasingly autonomous vehicles is already making an impact on road safety and car insurance.

For instance, occupants of SUV's are less likely to be seriously or fatally injured in a collision, while those in a car they collide with are more likely to suffer serious or fatal injuries. In a collision between an SUV and a lighter car, the risk of fatal injury decreases by 50% for the occupants of the heavier car, but increases by almost 80% for the occupants of the lighter car. Similarly, the occupants of a car with 50kW more power than another vehicle are 65% less likely to suffer fatal injuries than the occupants of that other vehicle.

Repair costs are also escalating as cars become more complex, and insurers increasingly opt for total loss settlements. In other words, instead of navigating lengthy repairs for technologically complex vehicles, insurers are more frequently choosing to declare them total losses, removing them from their books faster. This trend is particularly evident in electric vehicles, where the lack of an established market for generic replacement parts further complicates repairs. Additionally, cybersecurity vulnerabilities, software updates, and other safety considerations specifically related to connected vehicles add new layers of complexity. 

Self-driving or autonomous vehicles (AVs) are further upending traditional liability frameworks as questions around fault and regulation in AV-related accidents complicate claims processes. As autonomous vehicle technology advances, liability will shift from a personal to a product-based model. For instance, when safety features designed to prevent accidents fail, responsibility may transition from the driver to the manufacturer.

These are just a few of the changes happening in the modern automotive landscape – and insurers must adapt accordingly.

Modern vehicles and dynamic insurance
As vehicles become more intelligent, both generating and reacting to vast amounts of data, the insurance model must evolve in turn.

Today, pricing is roughly 80% based on the driver and 20% on the vehicle. But as vehicle attributes play a larger role in the act of driving itself, this dynamic is expected to flip, with 80% of pricing set to be driven by the vehicle and its technological capabilities. However, in order to accurately assess the attributes of any given vehicle, insurers must prioritize granular data on vehicle construction and features, and the real-world impact of those features on road safety.

Here, digital twins — digital representations of a physical vehicle that can be simulated without damaging or losing money on actual physical vehicles — are becoming increasingly useful. A digital twin enables insurers to assess any given vehicle based on the attributes they display in real-time, in-motion, offering a far more robust and accurate assessment of vehicle health than a static assessment of a vehicle's specs as it sits on in a lot or a factory.

Leveraging AI for data processing and risk assessment 
Vehicles with AV technology generate vast amounts of data from driving behaviour to and vehicle performance.

This data, which includes information on features like ADAS, performance variability across manufacturers, and vehicle usage, allows insurers to strategically transition from driver-based to product-based risk assessment. The adoption of telematics, AI, IoT, and other innovative technologies that can help monitor vehicle performance internally is gaining momentum in the industry for that very purpose, among others.

By utilizing AI to parse and analyze the vast amounts of data created by modern vehicles, insurers can leverage detailed, real-time insights to make more informed decisions about product liability, offering dynamic pricing models that reflect the true risk presented not only by a driver, but by the vehicle they drive.

Smarter cars need smarter insurance
The transition from driver liability to product liability is one of the biggest shifts the auto insurance industry has ever seen, catalyzed by the increasing availability of granular vehicular data.

By embracing data-centric approaches, insurers can offer more tailored, fair, and competitive insurance solutions that align with the evolving role of vehicles in society. It's a unique opportunity for insurers to lead the market by adopting more innovative, AI-powered models that respond to the realities of autonomous and electric vehicles and actually reflect the reality of today's driving.