Expert Commentary

The Future of Personal Lines Insurance

Our world is rapidly transforming due to the astonishing exponential growth in technology. This growth has myriad applications to the future of personal lines insurance. It is the driving and inexorable force behind the growth in smart or intelligent homes and autonomous or semiautonomous cars. While this lightning-fast technology is racing ahead, the legal and insurance issues are struggling to keep up.


Personal Lines Insurance
February 2017

This article examines these smart home technologies, beginning with an overview of the Internet of Things (IoT). Included within this concept will be topics such as upcoming loss-control devices in the home, additional homeowners coverages we might see in the future, the pitfalls of smart homes, and overall housing risk management and insurance implications.

The article will then pivot to smart auto technologies (i.e., semiautonomous and autonomous vehicles), looking at the approaches that various organizations and countries are taking in this revolutionary advancement, an overview of the different stages or generations of these vehicles, and a look at the societal, personnel, risk management, and insurance implications we will see down the road.

Smart Home Technologies

A smart home is one that is "equipped with lighting, heating, and electronic devices that can be controlled remotely by smart phone or computer."1 An individual could thus contact his smart home on a cold and wintry day via his smart phone before leaving work to verify that his home's indoor temperature is 72 degrees, the curtains are closed, the dinner is piping hot upon his return, and a healthy gas fire is roaring.

A smart home is inextricably linked to the IoT. This term deals with the concept of "basically connecting any device with an on and off switch to the Internet (and/or to each other)."2 Each object would have its own IP address and embedded computer chips. These chips will be ubiquitous in the home and perhaps as cheap as a sheet of paper (1 cent each) in the coming years.

Cisco projects that there will be over 50 billion connected devices in the world by the year 2020, which is about 6.6 connected devices per person (world population projected to be 7.6 billion that year).3 So, connected items will abound in the home of the future.

Home owners will need to properly anticipate and evaluate the profound implications from the IoT in the future. One key trend will likely be a reduction in loss frequency for homeowners policies. If houses are full of sensors and online devices, the communication between the house and the home owner will multiply. And this communication will reap huge dividends in the form of effective loss-control devices in homes, as illustrated below.

LOSS-CONTROL DEVICES IN FUTURE HOMES
Device Description
Water Leak Protection Water sensors that can detect water leaks in the home and immediately contact the owner and any predesignated plumber; these devices will be able to also shut off the main water supply.
Theft Protection Biometrics (e.g., fingerprints) and sophisticated motion sensors can immediately stymie or detect a would-be burglar.4
Fire Protection State-of-the-art smoke and fire detectors automatically alert the owner via smart phone that something is amiss at home.5
Ground Sensors A community exposed to mudslides may have ground sensors embedded in the surrounding landscape, providing smart phone alerts to individual community members.6
Nanotech Roofing Materials Carbon nanotube composite materials (still in early development) are over a hundred times stronger than steel and much lighter than traditional roofing materials; they could be nearly impervious to hail.7
Fortified Homes Utilizing superior and advanced engineering, building materials, and standards, future homes will be extremely resistant to hail, high winds, and hurricanes.8

Another expected trend will be the growing prominence of various tech gadgets, such as domestic robots (dobots) and 3D printing. In addition, more energy efficient homes (think solar panels that interact with a smart grid) will be more prevalent in the next 20 years.

Note, however, that the decrease in loss frequency will be partially offset by an increase in loss severity (particularly in the early years of this transformation) due to the high cost of smart features in the home.

As a result of these trends, homeowners insurers will need to offer a host of new coverages, including the following.

  • Cyber-coverage for automated homes with more extensive loss of use coverage
  • Products liability insurance for 3D printing operations gone awry
  • Specialty inland marine endorsements for dobots
  • Various smart home and green home upgrade endorsements

In addition, homeowners insurers of the future, with this type of high-tech monitoring, will be able to constantly observe their risks with ubiquitous sensors rather than the traditional one-time initial inspection.

Yet these fully Web-connected homes are not without their pitfalls. The law of unintended consequences is alive and well when it comes to technology advancements. With this complex technology comes the risk of hacking, bugs, and incompatibility problems. There are fire dangers associated with state-of-the-art solar panels. Yet many experts believe the pros (e.g., reduced claim frequency) of this exciting and dynamic technology will outweigh the cons.

Smart Auto Technologies

Semiautonomous autos and autonomous autos are now on the scene, although many of the features are in the embryonic stage. Many countries are working on this technology, including the following.

  • China
  • Germany
  • Greece
  • Japan
  • Netherlands
  • Singapore
  • Switzerland
  • United Kingdom
  • United States9

So, what are driverless cars, and what is the difference between an autonomous car and a semiautonomous car? The best way to explain the technology and to differentiate the two is by reviewing the National Highway Traffic Safety Administration autonomous vehicle classification system. 10

  • Level 0: The driver completely controls the vehicle at all times.
  • Level 1: Individual vehicle controls are automated, such as electronic stability control.
  • Level 2: At least two controls can be automated in unison, such as adaptive cruise control in combination with lane keeping.
  • Level 3: The driver can fully cede control of all safety-critical functions in certain conditions (bright, sunny day). The car senses when conditions require the driver to retake control (e.g., powerful thunderstorm or large canopy of trees) and provides a short transition time for the driver to do so.
  • Level 4: The vehicle performs all safety-critical functions for the entire trip, with the driver not expected to control the vehicle at any time. There is no option for human driving; thus, this level could include unoccupied cars.

The incremental approach (e.g., evolving from level 0 to level 2 to level 3) is favored by traditional auto manufacturers, such as Ford, whereas the "ground up to fully autonomous" approach (going directly from level 0 to level 4) is favored by Google.11

The early research indicates that semiautonomous cars are significantly safer than standard autos and that autonomous cars are safer than semiautonomous cars since the autonomous components eliminate driver errors, the cause of over 95 percent of automobile accidents. A variety of auto manufacturers and high-tech companies believe that fully autonomous cars will be available anywhere from 2018 to 2025.

What are the possible implications for society and for personal lines auto insurers in the next 5 to 20 years? The Eno Center for Transportation reports that if 90 percent of the cars in the United States were autonomous, over 4.2 million accidents could be avoided. This scenario could possibly save nearly 22,000 lives per year in the United States alone.12 Barclays PLC predicts that driverless cars could reduce vehicle ownership by 40 percent by the year 2025.13 ABI Research projects that 400 million people in the world will rely on robotic car sharing by 2030.14

With these possible societal changes and safety improvement projects, how will the legal, insurance, and liability issues evolve? Currently, Google and Volvo are assuming the liability for accidents caused by their autonomous cars.15 But, if the accident was caused by a faulty software algorithm (written by one of the auto manufacturers contractors), a multitude of lawsuits could easily ensue.

The implications for personal auto insurers arising from these trends is hazy. They do suggest, however, a dramatic decrease in auto insurance premiums and losses in the next 10 to 20 years. The auto insurance underwriter (likely to be an expert system powered by artificial intelligence and machine learning) will focus on insuring the software and hardware of the automobile, rather than the driver. Indeed, in the year 2030 for example, there may be an extra premium if you want your teenage son or daughter to drive your Porsche, as opposed to letting the autonomous features operate the vehicle. And advances in technology will likely reduce the need for underwriters and claims personnel as well, putting further pressure on lower premiums.

Conclusion

The smart homes and the autonomous automobiles on the horizon promise transformative upheavals to the future of personal lines insurance in the area of loss frequency, loss severity, property monitoring, reduced auto ownership, increased car sharing, reduced premium, and human resources/technology shifts. Can personal lines insurers keep up with the unstoppable and inexorable technology curve? How personal lines insurers ultimately deal with these inevitable forces will be fascinating to behold. And it reminds us of Albert Einstein's captivating quote regarding the future: "I never think of the future—it comes soon enough."


1 Oxford Dictionary Online, s.v. "smart home," accessed January 27, 2017, https://en.oxforddictionaries.com/definition/smart_home.

2 Jacob Morgan, "A Simple Explanation of 'The Internet of Things,'" Forbes, May 13, 2014.

3 Dave Evans, The Internet of Things: How the Next Evolution of the Internet Is Changing Everything, Cisco Internet Business Solutions Group, April 2011.

4 Stephen Mayhew, "Incorporating Biometrics into Your Home Security System," Biometric Update, May 14, 2012.

5 Product page for Nest Protect, Nest, 2017, https://nest.com/smoke-co-alarm/meet-nest-protect/.

6 Janna Anderson and Lee Raine, "The Future of Smart Systems," Pew Research Center, June 29, 2012.

7 "Carbon Nanotubes Twice as Strong as Once Thought," American Chemical Society, September 15, 2010.

8 Product page for FORTIFIED Home program, Insurance Institute for Business and Home Safety, 2017, https://disastersafety.org/fortified/fortified-home/.

9 Charlie Kingdollar, Emerging Issues, General Reinsurance Corp., November 2015.

10 "U.S. Department of Transportation Releases Policy on Automated Vehicle Development," US Department of Transportation, May 30, 2013.

11 Kingdollar.

12 Daniel Fagnant and Kara M. Kockelman, Preparing a Nation for Autonomous Vehicles, Eno Center for Transportation, October 2013.

13 Keith Naughton, "Driverless Cars May Cut U.S. Auto Sales 40%, Barclays Says," Bloomberg Technology, May 19, 2015.

14 "New Car Sharing Economy Disrupts Automotive Industry: ABI Research Predicts 400 Million People To Rely on Robotic Car Sharing by 2030," ABI Research, March 14, 2016.

15 "Who Is Responsible for a Driverless Car Accident?," BBC News, October 8, 2015. 


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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