The “Chaotic Middle”:

Automobile Insurance in the Era of Autonomous VehiclesFederal Advisory Committee on InsuranceUnited States Treasury – Washington, D.C.August 18, 2016
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Introductions - Here with You Today

Jerry Albright

Principal, Actuarial and Insurance Risk 

Autonomous Vehicles and Insurance 

Task Force - Co-Leader

Joe Schneider

Managing Director, Corporate Finance

Autonomous Vehicles and Insurance 

Task Force - Co-Leader

Note: This presentation was not designed and is not intended to advocate for any public policies that might be connected to the topics dis
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Summary

Change is coming, and it is coming fast

Shrinking 

Premium Pie 

and Different 

Coverage Mix

Aligning 

Forces

Reduced Accident 

Frequency

New Entrants 

and the 

‘Chaotic 

Middle’

Consumer 

Impact

Changing Auto Insurance Marketplace

Underlying market forces are already aligning to enable mass changeKPMG estimates an 80 percent reduction in accident frequency by 2040Lower losses lead to lower premium – KPMG predicts industry losses to decrease by roughly $60 billion within 25 years. A shift from personal to commercial and product liability coverages is also anticipated

Fewer traffic fatalitiepremium have the pconsumers, while darisks will need to be 

Given their control ocustomer relationshequipment manufacparticularly well postraditional insurance the next 10-15 year

Planning for 

the Future

Insurers need to unthe auto insurance sstrategy and operat

Source: KPMG LLP actuarial analysis
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Alignment for Mass Change Core elements enabling transform

Timing Four phases leading to a ‘new normal’ 

Implications for Insurers and 

Consumers

Potential impact on insurers’ books of bu

consumer marketplace for insur

The Chaotic Middle Potential new entrants and changes in t

landscape

What Now? Preparing for the future

12345

Presentation Overview
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Integrity of 

Technology

Infrastructure 

Availability

Legal 

Responsibility

Mobility 

Services Autonomous Vehicles

Eight Key Elements for TransformationALIGNMENT FOR MASSCHANGE

 Technologies already exist Convergence and enhancement lead 

next wave  Robust pipeline of new 

capabilities

 Incremental advancem

full-autonomy plays

 Scale of operations dro

 Technology w

infrastructure

 ‘Smart’ infras

complement vcommunicatio

 Leader states setting fi NHTSA key factor in m

technology – position pcomment letters

 Driving risk will follow vehicle operator –

driver to technology

 Hybrid environment of combined vehicle 

decisions will take time to sort

 More you know, the more likely you are 

to adopt

 Flexible value proposition tailored to 

individuals

 Focus on consumer education and 

awareness

 Car-sharing is a standard option for 

urban drivers

 Potential end of two car household

 ‘Black box’ driving data highly valuable Who owns the data – incentives, public 

good, etc...

 Integrity, storage, analytics and security 

critical

A variety of forces will be responsible for the foundational transformation across the driving 
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

 In 2025, a broad-based transformation begins. All new vehicles have autonomous ca

existing vehicles are potentially retrofitted

 Over the next 15 years, integrated driving emerges, a web of information is flowing b

infrastructure tightens. A “new normal” is realized by 2040

 Five years from now, fully autonomous all-speed vehicles become more common V2V capabilities are likely to be embedded in all new vehicles and the increase in sc

costs, making the technology accessible to a larger segment of consumers

 In 2017, partial driver substitution technology is introduced. A broader set of consum

technology, witnessing firsthand its safety and soundness

 This helps shift market perceptions. Potential mandate from NHTSA for V2V commu Introduction to autonomous vehicles as manufacturers roll out some of the underly High-tech companies express interest in fast-tracking production of fully autonomo

No one has a crystal ball to predict the future pace of change. As we synthesized our initial a

envision there to be four potential incremental changes to the transformation over the next 2foundation laid for a “new normal” within a decade

Now - 2017

“Training 

Wheels”

“First Gear”

2017 - 2020

“Acceleration”

2020 - 2025

“Full Speed”

2025 - 2040

Four Phases of TransformationTIMING
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TimingInsurance Industry View on Timeline

Currently, there is significant skepticism among insurance leaders about the potential for auto transform the industry - few insurers have taken action, most likely because many believe happen far into the future, if at all 

Significant impact on business after 2025

Not ready for autonomous vehicles

Little or no understandin

84% No budget allocated for preparation for a

74%

68%

23%

10%

Develop

Insurance Industry View on TimelineTIMINGSource: KPMG LLP’s 2015 Automobile Insurance in the Era of Autonomous Vehicles Survey Results
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Insurer Excess CapitalTIMING

The good news is that personal auto insurers have lots of capital, giving them significant finaThe bad news is that this large capital cushion may also give many a false sense of security 

Capital Position of Top 15 Personal Auto Insurers’ Overall P&C Businesses(1)

Note: (1) 2015 statutory P&C insurance data aggregated for the top 15 writers of private passenger auto direct premium written, based on SNL groups / unaffiliated companies. Required capital was two given an assumed NPW / capital & surplus ratio of 2:1. Excess capital is then calculated by subtracting required capital and surplus from total capital & surplus of the top 15 personal auto insurerFinancial

112.2 111.7 111.2 108.4 111.0 115.1 120.2 125.1 13131.3 144.6 107.9 137.5 172.4 166.9 184.2 223.4 220.92x

0.87x

1.02x

0.88x

0.78x 0.82x 0.79x

0.72x 0.

0.0

50.0

100.0150.0200.0250.0300.0350.0400.0

2006 2007 2008 2009 2010 2011 2012 2013 2

Required Capital and Surplus ($ billions) Excess Capital ($ billions) Total P&C Net Premium Written / Tota
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Autonomous vehicle technology will result in a dramatically safer driver experience, thereby impacting the insurance marketplace by reducing traffic fatalities and other losses

Life and annuities

Mortality tables will be impacted – road traffic 

accidents leading cause of death for ages 15 

to 34

Workers’ 

6% of cla

from a

Auto insurance

Claim frequency will fall, ultimately leading to 

lower premiums

Insurance 

Insurer ImpactIMPLICATIONS FOR INSURERSSource: KPMG LLP actuarial analysis and US Centers for Disease Control and Prevention (2010)
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Working closely with our automotive team and leveraging their extensive research, KPMG’s Adeveloped models to translate the technology and market changes in order to demonstrate ton auto insurer performance

Actuarial Analysis

Severity 

trends

Insurance 

market size

Accident 

frequency

Size of the 

car stock

Autonomous 

vehicle 

technology

Insurance 

product mix

Actuarial AnalysisIMPLICATIONS FOR INSURERS
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Given the new safety technology in autonomous vehicles, the KPMG Actuarial Team predicts reduction in accident frequency by 2040, which is the largest driver of loss reduction

Accident frequency per vehicle by year

 -

 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 0.045

Incidents per vehicle

Average incidents per vehicle

Accident Frequency IMPLICATIONS FOR INSURERSSource: KPMG LLP actuarial analysis
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG Actuarial Team modeled severity broadly in line with inflationary trends. There arof different potential scenarios that could have a significant impact on severity over time

Severity per accident

 10,000 15,000 20,000 25,000 30,000 35,000

Cost per accident ($)

Average severity

$13,600

Loss SeverityIMPLICATIONS FOR INSURERSSource: KPMG LLP actuarial analysis
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Safer vehicles could result in total auto insurance industry losses decreasing by 40% by 204and product liability accounting for a larger portion of the loss pie

Expected loss allocated to personal auto, commercial auto and products liability

 -

 20,000 40,000 60,000 80,000

 100,000 120,000 140,000 160,000

Expected total loss (millions)

Personal auto Commercial auto Products liability

Industry Loss CostsIMPLICATIONS FOR INSURERSSource: KPMG LLP actuarial analysis
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Crash avoidance features which underpin autonomous vehicle safety technology are already safety profile of vehicles...

Vehicles With Front Crash Prevention Technology(1,2) Prop. Damage Liability Claim Freque

Impact on Driving Safety of Vehicles With Crash Prevention Technology vs. Vehicles W

...furthermore, according to recent findings(1), more than 700,000 police-reported rear-end cra

have been avoided if the vehicles involved were equipped with autobrake technology

23%

39%

41%

6%

42%

47%

0%5%

10%15%20%25%30%35%40%45%50%

Warning Only Warning Plus Autobrake City Safety

Percent Decrease

All Rear-end Strikes Rear-end Strikes with Injuries

15%

10%

0%2%4%6%8%

10%12%14%16%

<24 25-64 

Percent Decrease

Age Group

Automated Vehicle Technology is Making Driving Safer...ToIMPLICATIONS FOR INSURERS

Note: (1) Study analyzes police-reported rear-end crashes in 27 states during 2010-2014 involving Acura, Honda, Mercedes-Benz, Subaru and Volvo vehicles with forward collision warning (“warning(“autobrake”) vs. the same models without the optional technology; (2) ‘City Safety’ represents Volvo’s low-speed autobrake system. The test was conducted by comparing two Volvo models with City crash prevention technology; and (3) Study examines Honda’s camera-based and radar-based forward collision and lane departure warning systems for vehicles equipped with these features vs. veh

group. Source: IIHS’s research papers ‘Effectiveness of Forward Collision Warning Systems with and without Autonomous Emergency Braking in Reducing Police-Reported Crash Rates’ and ‘Effecti

Autonomous Emergency Braking System in Reducing Police-Reported Crash Rates’ and IIHS’s ‘Status Report, Vol. 51, No.1, January 2016’
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Personal Auto

58%

While personal and commercial auto insurance represents the whole loss pie in 2013, producinsurance will play a greater role in the future as the vehicles themselves make more driving 

Products Liability

0%

Commercial Auto

13%

Personal Auto

87%

~ $145 billion in losses

2013(1)

2040 – Base Cas

2040 – Potential Altern

~ $85 billion in los~ $85 billion in los

Commercial Auto

20%

Personal Auto

30% 

+

<

Potential Business Mix CompositionIMPLICATIONS FOR INSURERSNote: (1) Based on KPMG LLP actuarial analysis 
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Consumer, the Autonomous Vehicle and InsuranceIMPLICATIONS FORCONSUMERS

From safety to saving money on insurance dollars spent, autonomous vehicles have the poteimpact consumers in a variety of different ways, although associated risks of this new techno

considered

General Insurance Related

 Safer vehicles = less auto re

injuries

 Autonomous mobility-on-de

effective, tailored means of 

 Greater access to mobility fo

disabled, the elderly and othpopulation

 Lower losses lead to lower  The “new” two car family – 

supplemented by mobility-ooverall insurance (and vehi

General Insurance Related

 Cost of vehicle Cyber threats Privacy issues Ownership of data Access to mobility (urban areas most likely to 

benefit)

 Lower premiums most likely to benefit those 

utilizing autonomous vehicles more

 Pricing transparency if included in sticker price Insurance industry disruptions – job impact

Considerations Potential Ben
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG Interna

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The transformation to a future marketplace defined by full autonomy and pervasive mobility be highly disruptive. We anticipate a ‘chaotic middle’ over the next 10-15 years, during which 

models and the competitive landscape are transformed. Future success will require the abiliand adjust to rapid change

Adoption of Autonomy

Time

C h A o T I c M I D d L e

 New technologies and application Decline in accident loss frequency Risk shift Asymmetric info New ownership models New entrants and competitor actions Regulatory requirements and mandates

The ‘Chaotic Middle’ Begins

CHAOTIC MIDDLE
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Ultimately, the original equipment manufacturers (“OEMs”) have the ability to not only contro

the customer relationship, thereby dramatically altering the traditional auto insurance model

Illustrative Process of Buying Automotive Insurance

Today

Customer

OEM 

(Vehicle Manufacturer and 

Insurance Company)

The Future

Customer Digital / Agent

OEM 

(Vehicle Manufacturer)





Driving Data

Driving Data

The OEM Advantage – Data and the Customer Relationship 

CHAOTIC MIDDLE
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The (re)entrance of OEMs into insurance could take a variety of forms

Illustrative Future State Business Models

Potential Business ModelsCHAOTIC MIDDLE

Entity Scenario A Scenario B Scenario C 

 Provide driving and 

vehicle data to insurers

 Become distributor of 

insurance for a selected set of carriers

 Act as an insurance 

company with many functions outsourced

 

Strategic Angle  Telemetry data

 Brand, customer

connectivity

 Product advantage  

Revenue Model  Fees  Commissions

 Underwriting profit and 

investment income (annuity)

 Vehicle and parts sales

  

 License data from

OEMs to underwrite policies

 Form alliances with 

OEMs

 Serve as third-party 

administrators - for example, current insurers could process the claims of the OEMs

  

OEMs Insurer
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1 Acknowledge that the Autonomous Vehicle Transformation is Rea2 Understand Exposure3

Preparing for the Future – Auto Insurance ConsiderationsWHATNOW?

Identify and Monitor Leading Indicators

Prepare Operations

456 Understand Cost Structures7 Align with Other Insurers and Form Partnerships

Evaluate Business Strategy / Consider Diversification Options
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Questions
KPMG Contacts

NameTitleOfficeEmail

Jerry AlbrightPrincipal, Actuarial and Insurance Risk, KPMG Autonomous Vehicles and Insurance Task Force – Co-Leader+ 1 617 777 4623jjalbright@kpmg.com

NameTitleOfficeEmail

Joe SchneiderManaging Director, Corporate Finance, KPMG Autonomous Vehicles and Insurance Task Force – Co-Leader+ 1 312 665 1006jeschneider@kpmg.com
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accurate in the future. No one should act on such information without appropriate professthorough examination of the particular situation.© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm network of independent member firms affiliated with KPMG International CooperativInternational”), a Swiss entity. All rights reserved.