October 27, 2023
Last September, we published an overview of how the evolution of mobility is likely to affect automotive insurance over the next decade.1 Since then, several key developments have shown that the broader mobility ecosystem, including autonomous vehicles (AVs) and electric vehicles (EVs), continues to evolve:
- In August, the California Public Utilities Commission authorized General Motors–backed Cruise and Alphabet-owned Waymo to operate paid robo-taxis in San Francisco at all hours of the day, removing previous restrictions.2 Still, opposition remains. San Francisco authorities have asked the commission to reconsider the move, saying robo-taxis pose safety risks and interfere with first responders.
- In July, automakers BMW, GM, Honda, Hyundai, Kia, Mercedes-Benz, and Stellantis announced they would collectively spend around $1 billion to add about 30,000 EV charging stations in the United States over several years, with the first ones available as early as summer 2024.3
Overall, these moves show signs of growing support among regulators for AV and EV technology, as well as collaboration among automakers to address one of their most critical challenges—a dearth of charging infrastructure to support the volume of EVs expected to be on the roads over the next few years.
Other developments also show a somewhat accelerating change of pace in mobility:
- About half of US states now allow autonomous trucks to operate within their borders, and large retailers are using these vehicles in their logistics fleets.
- Automakers are increasingly shifting production to EVs from traditional internal-combustion-engine vehicles as consumer demand for these vehicles grows, aided by government incentives such as tax credits. According to a McKinsey survey, the percentage of auto buyers considering a battery electric vehicle or plug-in hybrid increased by nine percentage points (from 33 percent to 42 percent) between December 2021 and December 2022.4 EVs accounted for 10.0 percent of global vehicle sales in 2022, propelled by growth in China and Europe, while US sales of EVs, at 5.8 percent, were below the global average.5
That said, little has changed on other fronts:
- It is still uncommon for consumers to purchase embedded auto insurance from the automaker when buying a car. While some automakers have added insurance to their mobile apps, this feature typically refers customers to insurance providers rather than offering a seamless, “all in one” experience that would allow manufacturers to capture recurring insurance revenue.
- No clarity has emerged about how insurance liability is likely to shift as more vehicles come to market with increasingly sophisticated advanced driver assistance systems (level 2) and conditional-automation technologies (level 3), where drivers are permitted to take their eyes off the road when certain conditions are met. Some automakers have made these types of technologies standard equipment, while others have made them optional.
In line with our September 2022 overview of the mobility landscape, the auto insurance industry remains ripe for a fundamental overhaul given advances in autonomous-mobility technologies and the continuing US shift to “over the air” software updates that, in some cases, automatically install themselves in owners’ vehicles. These changes will likely create a need for new types of insurance products and the potential for disruption.
Several participants in this changing market—including first-mover entrants, “insurtech” companies, emerging carriers, managing general agents, and automakers looking to innovate—will likely have more opportunities to develop innovative products, establish partnerships, and improve competition with top-tier auto insurance carriers.
Auto insurance, now focused primarily on individual driver risk, will eventually need to pivot to account for technology risks associated with fleets of autonomous vehicles and potentially privately owned AVs. That means insurance coverage will likely need to shift from drivers to the automakers and software companies responsible for the development and maintenance of various autonomous-driving technologies.
Assuming the challenge of insufficient charging infrastructure is overcome and EV adoption continues apace, insurance premiums have the potential to increase, due to the high cost of manufacturing the intricate components and technology that are used in EVs and connected vehicles and that require specialized repairs. The claims and repair processes will likely also evolve as vehicle repair increasingly involves a combination of physical repair, software updates, and technical-equipment calibration.
As these trends unfold over the next few years, auto insurers may need to reconsider how they do business. The current model—which involves providing fairly static personal and commercial auto products, maintaining strong relationships with independent agents, and offering a user-friendly platform for claims—might no longer be enough. Their new turf will likely involve establishing relationships with several software-as-a-service (SaaS) companies that lead the driverless-car revolution—similar to the way Android software powers big mobile phone producers. In this new world, auto insurers may work with leading mobility businesses to codevelop new insurance products that cover new types of risk—including the operation of fleets of driverless cars that may come with a combination of ownership models and may occasionally be driven by humans.
The questions we posed last September about the mobility ecosystem’s evolution remain, for the most part, unanswered. That said, we offer this updated set of questions to take recent changes into account:
- Timing. What is the tipping point for market disruption across the mobility and insurance landscapes, and what is the timeline for reaching this tipping point? To what extent will drivers embrace embedded insurance and AV technologies?
- Market size. What is the size of the disrupted personal-mobility-insurance market, and how will the increasing acceptance of EVs and AVs shape this market?
- Adaptation. As the conventional auto insurance market shrinks, how should insurers adapt, and what is the cost of doing nothing given that the pace of change overall has been slow but could well speed up?
- Value chain. What stages of the insurance value chain are at risk right now, what stages will be affected over the next year or two, and in what stages are insurance carriers well positioned to compete?
- Regulations. Given recent regulatory decisions, how will the changing regulatory environment, automakers’ strategies, and customer sentiment affect insurers’ position in the new mobility market?
Tanguy Catlin is a senior partner in McKinsey's Boston office, where Xueqi Chang is a consultant; Doug McElhaney is a partner in the Washington, DC, office; and Dimitris Paterakis is a consultant in the New York office.
September 15, 2022
Most consumers are used to buying a car and insurance separately—and the latter can be a laborious process. Consider a hypothetical US consumer of the future, Jane, who acquires her first semiautonomous car, attracted by its connected technology and advanced-safety capabilities. Crucially, it comes with insurance that calculates her premium payments by automatically assessing her driving in real time through the wireless connectivity feature incorporated into such vehicles.
As she drives her new car, the vehicle’s system senses risks both when she is driving manually and when she is in autonomous mode. Jane receives helpful feedback on how to drive efficiently to conserve energy and to manage insurance costs, and she has access to a wealth of real-time information, including current per-mile insurance costs and energy usage rates.
During one particular drive, Jane receives an important call and switches on the autonomous-driving option so she can focus on her conversation. After the call, she switches back to manual driving—and both her car and her insurance adjust in real time. While she’s driving the car, insurance liability lies with her. But while the autonomous mode is engaged, liability shifts seamlessly to the manufacturer.
As Jane continues on her journey, software engineers monitor the driving effectiveness of her vehicle and vehicles like hers. Based on performance data they receive, engineers release software updates to improve the performance of Jane’s vehicle. Essentially, her vehicle adapts and improves continuously, improving safety performance over time and reducing overall insurance costs.
Suddenly, she is rear-ended by another vehicle. Onboard sensors, cameras, and telematics capture the collision and convey these data in real time to the insurer’s claims system, which is built on artificial intelligence (AI). The system determines that although the accident was minor, the car cannot be used safely. AI immediately begins determining the best way to handle claims and researching nearby robo-taxi, towing, and vehicle-repair companies.
Shortly afterward, Jane receives a call from an insurance associate who checks on her and lets her know that a robo-taxi will be there within minutes. She can leave her car, and roadside assistance will take it from there. When Jane arrives home, she checks the status of her vehicle and any repairs through a mobile app—which also gives her the status of her claim.
While not all of the technology illustrated in Jane’s journey is currently in every car, all of it exists today. And as mobility technology and automotive and insurance AI reach critical mass, a new era will be ushered in, promising not only a radically new experience for consumers but also new commercial opportunities for insurance carriers and automotive OEMs. These opportunities are likely to be keenly contested as disruptive technology enters the long-established automotive and insurance ecosystem.
Three technologies that will shape the future of mobility
Three technologies will shape the future of mobility and global auto insurance: autonomous driving, connectivity and embedded telematics, and vehicle electrification.
But these technologies will also shape an exciting new business dynamic for OEMs and insurance carriers. On the one hand, the introduction of the connected car and embedded telematics means OEMs will have more access to the customer and vehicle data than ever. It also means OEMs will be in an advantageous position to disintermediate insurers. Moreover, the McKinsey Center for Future Mobility expects connected cars to account for 90 percent of new US vehicle sales by 2025.6
On the other hand, insurers may be able to take advantage of the technology and mobility trends described in Jane’s journey to capitalize on insurance that is based on vehicle usage in real time, combined with an automated-claims process—creating opportunities to improve both loss and expense ratios.
Such advanced-mobility technologies are developing quickly and will usher in three phases of the overall evolution of auto insurance (Exhibit 1).
Autonomous driving
Autonomous driving could be the most disruptive influence on the insurance market for a simple reason: it promises to significantly reduce the frequency of accidents, resulting in improved safety and the means to shift auto insurance to a “predict and prevent” product. Significantly, the burden of insurance liability will shift from the human operator to the commercial party associated with the autonomous-vehicle (AV) technology and capabilities (for more on AV liability by type of vehicle, see sidebar, “Six types of AV capability”).
Commercial-trucking applications will be the principal driver of autonomous-vehicle technological development, and industry experts express confidence that autonomous trucking (L4 and above) will be on highways within the next five years. In the meantime, technology for autonomous passenger vehicles is likely to receive a boost from investment in commercial applications. By the middle of this decade, our analysis suggests that sales of new L2 and L3 vehicles will reach 60 percent and 3 percent, respectively. By contrast, capabilities at or above the L4 level are unlikely to materialize significantly in personal vehicles in this decade.
Connectivity and embedded telematics
Connected vehicles use wireless technology to communicate with external entities, sending and receiving data as part of services that are provided to the driver or vehicle’s owner. Unlike today’s mobile apps and aftermarket devices, which require customer engagement and installation to facilitate limited connectivity, the embedded technology in this new era of connected telematics will yield a seamless and passive customer experience, ensuring a high-quality, continuous, bidirectional flow of information.
The quality of data available will also exceed the quality and amount of mileage, GPS, and accelerometer data available today. Added insights may include collision warnings, steering wheel position, seat belt use, tire pressure, and camera captures.
While connectivity is crucial for autonomy, its potential value far exceeds market application. With connectivity, OEMs can envision an array of services, insights, and customer engagement opportunities that extend well beyond today’s limited new-vehicle purchasing experience. As profit margins on new vehicles continue to shrink, the potential for new recurring revenues unlocked by connectivity and “vehicle as a platform” innovations will ensure that this capability gains traction.
Vehicle electrification
While electric vehicles (EVs) will introduce some near-term changes to insurance, including miscellaneous new coverages and consequences for claims handling, we see EVs as an enabling platform for autonomous driving and connectivity, with more potential for disruption coming from its direct-to-consumer sales model. Combined with state and federal policy objectives that encourage adoption—such as direct-sales legislation and rulings, charging-infrastructure subsidies, and the Biden administration’s 2030 target of 50 percent electrification—the push toward EVs will accelerate market change.
Three trends that will disrupt auto insurance
The approximately $260 billion US auto insurance market is on notice. The conventional US insurance market, currently dominated by internal-combustion-engine (ICE) vehicles, will likely stop growing by the middle of this decade. Conventional ICE vehicles will be steadily displaced by EVs.
If current conditions remain, the value of direct written premiums in the market will reach about $390 billion by 2030, compared with $260 billion in 2021 (Exhibit 2). But with connected technology accelerating, the size and composition of the insurance risk pool may change significantly.
By 2030, two-thirds of the auto insurance market will be L0 or L1 vehicles requiring “status quo” insurance products. The rest of the market will be disrupted in three ways:
Loss of market size. The proliferation of safety technology as a result of the greater adoption of connected EVs will reduce accidents, but it will also exert downward pressure on premiums. At the same time, distance traveled is expected to decrease as the availability and cost-effectiveness of shared mobility take a larger share of mileage. Together, these shifts will lead to up to 10 percent ($26 billion) in lost premiums that will completely leave the insurance market.
New personal-lines insurance products will be required. About 25 percent ($100 billion) of overall premiums will still require personal-lines coverage, but they will have substantially different approaches to distribution, product and pricing, and claims. OEMs have the potential to be a major influence in this area because they will have the ability to unlock access to customers and demand an “OEM-certified” repair process as a prerequisite for maintaining product warranties and in relation to where liability would fall in the case of a malfunction.
Some liability will shift to commercial-lines products. About 1 percent ($5 billion) in annual premiums will shift to commercial insurance as conditionally autonomous L3 vehicles penetrate the US fleet of personal passenger vehicles. As the autonomous-driving system takes on more responsibility with an increasing number of L3 vehicles in the fleet, liability will partially shift from human drivers to OEMs and autonomous-vehicle software providers.
The true impact of EVs on the insurance industry
Several key business areas across the insurance ecosystem are likely to be affected.
Distribution. As the number of connected vehicles grows, so too will in-vehicle services and products, including insurance. Insurance carriers are accustomed to selling and distributing bundled products to households indirectly through agencies and brokers, as well as directly through digital and “captive agent” channels, which requires significant investment in marketing and commissions. In fact, the top three property and casualty (P&C) insurance carriers collectively spent more than $5 billion on advertising in 2020.7
OEMs have participated in this largely by acting as a lead-referral partner to a range of insurance providers. But the growth of both connected vehicles and digital direct-to-consumer distribution of EVs holds out the prospect of a new channel through which consumers can directly buy insurance: the OEM. Consumers will be able to buy auto insurance through a simplified or “no quote” purchase process when they buy their vehicle online. Access to customer data and direct-to-consumer vehicle sales will open up the insurance market to OEMs, allowing them to overcome longstanding operational challenges to their ability to capture recurring insurance revenue beyond the point of sale.
Product and pricing. The way auto insurance is underwritten and priced will also undergo a fundamental shift. With increasing connectivity, “pay how you drive” and usage-based insurance (UBI) will emerge as natural complements to EVs. Gone will be mobile apps, aftermarket devices, and the actuarial challenges of surfacing underwriting insights after selection. Instead, we will see insurance shifting with the help of the proliferation of connected data from self-reported, loss-correlated information about things such as marital status, gender, and age to independently observed, loss-causing information such as braking, acceleration, and speed—making the assessment and pricing of risk more accurate and convenient. Entities with access to these data will be the winners.
Moreover, the narrowing divide between personal and commercial auto insurance and the adoption of liability that moves between the human operator and the commercial manufacturer, contingent on usage, at the flip of a switch will spur the rollout of UBI. The market will favor insurance providers that are able to navigate this shifting liability landscape and handle claims seamlessly across commercial- and personal-product exposures.
Claims. Today’s claims journeys are fragmented, complex, and manual. Processing claims requires significant input from customers, insurers, repair-shop networks, and rental providers, and it often relies on incomplete data from involved parties.
In the new future of mobility, insurers will be able to simplify, streamline, and automate the claims journey through connectivity and telematics technology such as cameras and sensors that provide real-time, accurate data. Artificial intelligence (AI) will interpret these data, allowing for seamless claims handling and enabling the insurer to choose how and when to introduce a human touch.
The vehicle repair and rental segments could also undergo their own shift (opening up opportunities for OEMs) because traditional repair shops experience challenges fixing vehicles with highly sophisticated technology. Today, insurers influence vehicle repair and rental, so vehicles are repaired with aftermarket parts while the customer is provided with a rental vehicle from a competitor of an OEM. In the future, because the OEM must accept liability for AV operations and because the connected vehicle will inform the OEM of accidents, the OEM is in a position to strongly influence the parts and rental vehicles the customer receives by making these the terms of continued AV operations.
Three ways the auto insurance market may evolve
Significant changes are ahead in AV and EV technology, and the US auto insurance market will need to adjust to the resulting disruptions. We have identified three potential scenarios that could reshape the market (Exhibit 3).
OEMs enter the market with in-house offerings
Some OEMs will choose to enter the insurance market, attracted by new revenue-generating possibilities as well as the ability to generate vehicle sales by leveraging the reduced cost of ownership proposition that comes with their access to data.
In this scenario, OEMs may choose to outsource certain noncore activities to third-party claims administrators and capital risk to reinsurers but may otherwise insource much of the insurance operation. An OEM may do this if it determines that the customer’s insurance experience is an integral component of a differentiated mobility product and that its access to ongoing customer engagement and driving data presents a proprietary competitive asset.
OEMs and insurance carriers develop partnerships
Any hesitance or inability on the part of OEMs to assume full responsibility for the future of auto insurance will open up opportunities for insurers to maintain their market share through partnerships with OEMs. Such partnerships could benefit insurers because they would gain access to vehicle owners through the OEM, which in turn could leverage the OEM’s relationship with the insurer to provide insurance that is relatively cheaper, lowering the total cost of ownership and driving more vehicle sales.
At the moment, OEMs have significant competing priorities. These include gaining greater customer adoption, adapting their manufacturing lines and supply chains from ICE vehicles to EVs, and resolving emerging dealership channel conflicts as OEMs experiment with direct-to-consumer digital-distribution models. Additionally, some OEMs may be wary of the specialized expertise required to offer insurance and the regulatory environment that comes with it.
As a result, many OEMs will choose to partner with insurers for assistance on insurance offerings, especially in the near term. In this scenario, the OEM acts as an agency and data provider, helping to price and distribute insurance and earning commissions and fees from the insurer. While the OEM will own the distribution journey, the insurer will handle everything else, including underwriting, servicing, and claims. From the customer’s perspective, the OEM is effectively the agent while the insurance carrier is the insurer itself.
OEMs become tech-enabled distribution aggregators and data providers
In what would represent a deeper extension of the affinity partnerships that exist today, OEMs could work with insurance carriers to offer tech-enabled insurance offerings through the car via a connected marketplace. As an aggregator, the OEM would provide data but would otherwise not play a significant role in the insurance customer journey, apart from providing access to the platform for customers and insurers.
This market evolution would favor the rise of independent data aggregators that would consolidate, standardize, and distribute underwriting data for insurance applications. OEMs may take this approach if they perceive the insurance experience to be noncore, adjacent, or incidental to their mobility product or otherwise beyond risk appetite or competency.
Defining the path forward: Key questions for insurers and OEMs
We see potential for one or more OEMs to take the first step beyond the partnerships they have started to capture a significant share of this new, connected automotive market. They have (or can quickly develop or acquire) all the necessary capabilities. But before activating a plan, OEMs have several key questions to consider:
- What is the size of the opportunity?
- Are OEMs well positioned to pursue a greater role in the auto insurance customer journey? What is the value proposition for customers?
- How should OEMs participate in this ecosystem (build, buy, or partner)? How are insurance carriers likely to react?
- What capabilities are needed to enter the auto insurance market? What are the risks, and how can they be mitigated?
The market is also ripe for insurers to explore, but capitalizing on the opportunity will require the right market alignment. An insurance carrier’s ability to identify and implement the appropriate partnership model with OEMs will be key. Insurers should pursue partnerships early and strategically, asserting themselves in a central role in the auto insurance journey. Providing a differentiated customer experience will help insurers avoid disintermediation in the future, when OEMs may become more comfortable assuming an active role in insurance. As they explore the opportunities, insurance carriers have several key questions to consider:
- What is the tipping point for market disruption? Will drivers embrace embedded insurance and AV technologies?
- What is the size of the disrupted personal-mobility insurance market?
- As the conventional market shrinks, how should insurers adapt, and what is the cost of doing nothing?
- What stages of the insurance value chain are at risk? And in what stages of the value chain are insurance carriers well positioned to compete?
- How will the regulatory environment, OEMs’ strategies, and customer sentiment affect insurers’ position in the new market?
While the EV revolution may appear to be at a relatively early stage, one thing is clear: the status quo in the market structure of the US auto insurance sector is set to experience far-reaching disruption. The auto insurance profit pool is about to be realigned as autonomous-vehicle technology redraws the lines that have for decades defined how the opportunity is distributed between OEMs and insurers.
The advantage will accrue to players on both sides of the marketplace that act early enough to carefully assess and then capitalize on what promises to be a radically new landscape for auto insurance.
Download “Connected revolution: The future of US auto insurance,” September 2022 (PDF–0.6MB).
