Artificial intelligence, vehicle telematics, autonomous vehicles, and the sharing economy—what do they all have in common? Each of these topics, and many more, are having a major impact on the automotive industry.
Automobiles are changing at a rapid pace—in fact, they are outpacing the regulatory environment and will continue to challenge manufacturers, dealers, finance lenders, motor vehicle service contract providers, insurers, regulators, and consumers.
How Is Each Technology Impacting the Automobile?
It's important to first establish a basic understanding of how each technology is impacting the automobile.
This is basically a computer acting like a human; a computer making subjective decisions based on objective circumstances—much like how a human would function. Merriam-Webster's online dictionary defines artificial intelligence (AI) simply as "the capability of a machine to imitate intelligent human behavior."
For an automobile, it is one of the technologies that is allowing driverless vehicles to operate. Without human control, the technology can move a passenger from one point to another and do so under dynamic circumstances, including but not limited to the following.
Accurate navigation (leveraging GPS technology)
Responsiveness to environmental factors (e.g., rain, snow, or ice)
Avoidance of human hazards (e.g., pedestrian or errant ball bouncing into the street)
These are technology that records an automobile's performance, human behaviors, and, possibly, environmental conditions. The vehicle either records or transmits them for analysis. See "Benefits of Telematics to Motor Vehicle Service Contracts" on IRMI.com to learn more about the impact vehicle telematics is having on the automotive and motor vehicle service contract industry.
This leverage of AI allows an automobile to operate without human oversight or intervention. As of the publication of this article, there are driverless/autonomous vehicles on the road, and several industry titans are aggressively pursuing new/enhanced technology (e.g., Google, Apple, and Tesla).
The Sharing Economy
This is not a technology but rather a social behavior that is being supported and realized through technology. The proliferation of Web-based applications and the cloud environment enable individuals to share items, including automobiles, with relative ease. Ridesharing (e.g., Uber and Lyft) is a great example that has disrupted automobile ownership and the taxicab industry. In addition, car sharing (e.g., Zipcar) allows someone to rent an automobile for a period of time, usually done so through an application on a smartphone or via a kiosk—without human engagement. Interestingly, for car sharing, there's usually a commercial owner (owning a fleet of vehicles) that rents to consumers, primarily in large metropolitan areas.
This Is Really Exciting, So What's the Big Deal?
Yes, these technologies, and many more that haven't been discussed or discovered yet, are revolutionizing the automobile and how consumers commute. The upside to these technologies are obvious, and new benefits continue to emerge. Although the benefits are paramount, there are several implications in the insurance and motor vehicle service contract industry that must be addressed.
What's the Impact on Auto Insurance?
Interestingly, the personal automobile insurance space will experience drastic changes as these technologies continue to emerge. By way of example, consider this quote:
Human error plays a role in 94% of all traffic accidents, according to the National Highway Traffic Safety Administration, which is why auto makers and regulators believe self-driving vehicles have the potential to be so transformative.
Personal auto insurance is primarily priced based on the propensity of human error—the progeny of negligent driving. Negligence can manifest in many forms, and the following are a few examples.
Distracted driving (e.g., checking your cell phone, breaking up a fight between children in the rear seat, changing the radio station, eating, or observing scenery outside the vehicle)
Operational error (hitting the gas pedal when the brake pedal should have been depressed)
Improper maintenance (failing to replace broken wiper blade or headlight and inclement weather conditions emerge) leading to human error
In driverless vehicles, negligence becomes insignificant or obsolete. This change will disrupt personal automobile insurance pricing, coverage, and adjudication.
If Negligent Driving Evaporates, What Type of Coverage Is Needed?
Although comprehensive coverage and other personal liability exposures will remain, the opportunity for more product/mechanical breakdowns will emerge. More technology means there's more opportunity for items within the automobile to break. The navigation or satellite locating system, for example, could wear out or break down, wires and cables may need replacement, technology may become incompatible or obsolete, product recalls could emerge, and luxury features could break (the humans being transported will unquestionably have more luxurious features installed in automobiles to occupy their time while in transport).
Some of these coverages are currently contemplated in standard motor vehicle service contracts, such as navigation system breakdowns, but many are not, such as product recalls. Regardless, there will be further opportunity to refine and enhance service contract coverage to accommodate these emerging exposures. This will likely provide a jolt of innovation to the industry, which has remained largely the same, by way of product coverage, for decades.
Importantly, mechanical and technology breakdowns are oftentimes not covered under personal automobile insurance policies.
How Will the Motor Vehicle Service Contract Industry Respond?
Lots of details need to emerge to fully contemplate how service contracts will be impacted. In light of these unknowns, consider the following.
The motor vehicle service contract industry has current products that would cover these types of breakdowns—but pricing will be affected. The more stuff that is prone to break down means there's more coverage exposure, which may translate into price increases.
Product innovation will occur in the motor vehicle service contract industry in an effort to respond to consumer, manufacturer, and dealer/retailer demands to provide new coverage in the marketplace. For example, will technologic advancement or extinction become a potential coverage? This contemplates new technology that would need to replace older/aging technology to keep an automobile in good working order. Assuming the legal and regulatory challenges can be accommodated, would the service contract industry provide coverage for this?
Personal auto insurers will look to expand into this line of business to accommodate shrinking premium collections for personal automobile insurance. Many large personal lines insurers have a division focused on motor vehicle service contracts, but competition may grow to compete for different/new market share.
Fleet ownership may revolutionize the industry. In a sharing economy, individuals may look to share automobiles using ridesharing or car sharing. For the latter, there's usually a commercial owner of a fleet of vehicles who retains the responsibility to keep automobiles in good working order and bears the financial cost of mechanical failure or breakdown. Commercial service contracts—assuming they are permitted in the applicable state and all legal technicalities can be accommodated—may become more relevant and could impact relationships within the motor vehicle service contract industry.
Are There any Legal Issues That Will Emerge?
Yes! Many federal and state laws do not contemplate new technologies, and, oftentimes, legislation/regulation progresses at a much slower pace than technology. This will pose problems, and the legal community will provide value to the industry in navigating these issues. For example, with new technologies, what type of privacy considerations will emerge? Consider the following questions.
What data/information can be collected?
How can the data be used?
Does consent need to be given before information can be collected and/or used?
Who owns the data: the transmitter, the receiver, or both?
Does data need to be encrypted when in transit?
How will data be stored, such as in the cloud?
Can the data be used to adjudicate claims?
Will human adjudication lessen, suggesting automobile data might be able to identify product breakdowns?
Can the data be sold and monetized?
In addition, how will state and federal regulators interact? There are several federal laws that govern aspects of the manufacturing and distribution of the automotive industry. For example, the Federal Trade Commission is the primary federal regulator for automobile dealers. Will state laws try to capture more regulation over dealers? Also, state laws may not contemplate certain losses until legislative fixes can be passed, which can take several years. What type of uncertainty and enforcement will burden the industry?
Technology is exciting, inherently innovative, and rapid. The next 5–10 years will transform the automobile and disrupt human commuting behavior. The motor service vehicle contract industry is uniquely positioned to take advantage of these advancements, but it must anticipate market needs, shifting regulations, and emerging ownership structures. Attorneys, compliance professionals, salespersons, dealers, manufacturers, underwriters, and actuaries, among many other disciplines, will play an integral role in supporting the industry through these technology challenges.
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