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Insure the Car How insurance companies and car manufactures can

reduce costs with new technology in carsreduce costs with new technology in cars

Michael L. Sena

Helsinki19 September 2013

Car manufacturing companies and automobile insurance companies are in different businesses, but they both depend on people buyingcars.

Insure the Car How insurance companies and car manufactures can reduce costs with new technology in cars

cars.

Multiple factors are combining in Europé to threaten both businesses as a result of lowercar sales. The current model of selling and insuring cars is going to be replaced, starting in Europé and then spreading to the US.

Fewer people will own cars and those who domay not drive them all that much or at all.

The Idea

Car companies will have greater incentives to putadvanced systems in their vehicles if insurancecompanies offer greater flexibility in how cars and drivers are insured.

Insure the Car How insurance companies and car manufactures can reduce costs with new technology in cars

drivers are insured.

Insurance companies would do well to workclosely with car manufacturers to encourage the development of technologies that will allow cars to be driven more safely even if there is no driver behind the wheel.

Everyone who wants to drive a car legally needs car insurance and has to pay for it; not everyone can get it or they have to pay more for it—which is why some people drive illegally or don’t drive at all.

� Young drivers - Accident rates are higher for all drivers under age 25, especially young males and single males. Car insurance prices reflect these differences.

� Old drivers - many insurers currently don't cover those aged 81 and above.

� Drivers with poor accident records - Drivers who cause accidents generally must pay higher car insurance premiums than those who are accident-free for several yearsseveral years

� Drivers with physical or mental impairments

� Drivers who live in high risk zones - Generally, due to higher rates of vandalism, theft, and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas.

� Drivers who own expensive cars – Luxury to classic

� Drivers who use their car a lot – High mileage

Michael L. Sena Consulting AB

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Cars have grown steadily in complexity, from horseless wagons to the computer laden machines. Car companies have had to add cost to their cars in order to satisfy safety requirements that are partlythe result of insurance companies’ demands for safer cars.

In 2012 Euro NCAP called on the European Commission to propose the installation of Autonomous Emergency Braking sytems in all cars by 2014. 8000 lives would be saved, claimed Thatcham, the UK’s Motor Insurance Repair Research Centre, which is a member of Euro NCAP. NCAP would start the process by adding AEB to its reward program NCAP would start the process by adding AEB to its reward program forcing car makers to add it in order to get the highest marks for safety.’

Customers have to pay for these safety features, but the carcompanies have not been able to pass on the full costs, resulting in verylow margins for auto makers and very low stock valuations. Parts, services and accessories have become more important sources of profit for the car companies, but even here insurance companies rate cars on their dependability. The two industries have not exactly beenthe best of friends, even though they are totally dependent on eachother. Michael L. Sena Consulting AB

When car companies have looked to the insurance industry for incentives to add safety features to their cars, insurance companies have given them a cool response. In the insurance companies’ responses to the eCall Impact Assessment, for example, there was absolutely no mention of support in the form of reduced premiums for motorists with eCall.


It’s nothing personal, they say. Insurance companies are in the business of securing risk. Each insurance company has a different strategy for how it does this in order to generate the highest levels of returns for its shareholders. Like banks, insurance companies use customers’ funds for investments.Some companies, like Lloyds of London, focus on high risk and high return, while the majority try to minimize their risks by choosing which customers they insure.Claims and risk analysis methods are the principal strategic assets of an insurance company, and the rate setting method is the main tactic a insurance company, and the rate setting method is the main tactic a company can use to both attract and filter customers into high-, average-and low-risk categories.One thing is certain: It is the driver who is the largest cause of accidents. Mental lapses, inattention, misjudgment and unexpected behavior from other drivers and pedestrians. In only 5% of the cases is the vehicle itself responsible for causing an accident.


Car companies and car insurance companies are dependent on each other, for better or worse. Fewer cars sold means fewer insurance policies written. Too much pressure by the insurance companies for added safety features, without some form of payback, chokes off car sales.

Now we have other problems for the industry:

� The chauffered generation are’t buying cars the way their parents and grandparents did. The percentage of new cars sold to 21-34-year-olds hit a high of 38% in 1985. That was down to 27% in 2008.

� In 1994, 87% of 20-24-year-olds had their driver’s license. In 2008, that was � In 1994, 87% of 20-24-year-olds had their driver’s license. In 2008, that was down to 82%. In 1995, percent of total miles driven by 21-30-year-olds totaled 21%. In 2008 the amount was down to 14%.

� Either this generation is much greener than previous ones, or they just can’t afford to purchase, own and operate increasingly expensive cars running on increasingly expensive fuel, or they continue to chauffered by their parents while they live at home after finishing college..

� The average college graduate in the US leaves school $23,000 in debt. No wonder they are not buying and driving cars and are living at home with mom and dad.


“May 2013: European car sales had their worst May in 20 yearsas the region's recession drags on,” said ACEA, the Europeanautomakers' association.

Passenger car demand for May dropped by 5.9% on the samemonth last year in the 27-country European Union to 1.042 millionunits, the lowest level for that month since 1993 when salesdropped below 1 million, according to new figures released bydropped below 1 million, according to new figures released byACEA. For the first five months of the year, sales dropped 6.8%to 5.07 million.

After hitting a 17-year low in 2012 with a little over 12 million newregistrations, European passenger car sales have continued tosag as the European economy struggles to recover from its debtcrisis.

Samantha has just bought her first car.

…but will Simon ever take his driver’s license test?

Geography matters too. In most rich countries car use has been stable or increasing in rural areas, where driving still offers freedom and convenience.

It is in cities, especially their centres, that car ownership and use is declining. And city living is on the rise: the OECD, a rich-country think-tank, expects that by 2050, 86% of the rich world’s population will live in urban areas, up from 77% in 2010.

Sprawl has spread too far. The rewards of rural living have Sprawl has spread too far. The rewards of rural living have now diminished as a result of time of travel, among other factors. People say they are not prepared to travel more than 30 minutes to work, but they are now spending double or three times that amount in many parts of the world

In the US, where over 50% of the population lives in suburbs, more than half the nation’s 51 largest cities are seeing more growth in the core than outside it, according to the Brookings Institution. But the jobs are now mostly in the suburbs and exurbs.

Total miles driven in Sweden down 1.7% in 2012 compared to year

earlier

Governments have added to the problems, and now are sharing inthe pain. On the one hand, they have been responsible formanaging the transport network, focusing on congestion reductionand safety improvements. On the other hand, governments inEurope have relied heavily on tax from fuel; across the EU,transport fuel taxes account for 1.4% of GDP, and the figure is agood bit higher in some countries. But revenues have been fallingfor years, initially because of efficient cars, then because of thesevere recession, and now because governments have decidedthat car drivers are the last source of new tax income.that car drivers are the last source of new tax income.

The not-so-secret secret is that congestion charges aresimply a way for governments to make up the revenue they arelosing to fuel efficiency and public transportation substitution.These revenues will plummet further as car use keeps dropping.

Cities that bank on parking fees, fines and road tolls may have tofind other ways to balance the books.

People Non-movement

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Insurance companies have so far been shielded from most of the negative effects of lower new car sales. They have been trying to attract higher risk drivers, and thereby increase their customer base, by promoting technology-based insurance schemes.

Pay-when and where-you-drive and Pay-how-you-drive rely on installing systems in the vehicle to monitor speed, distance, braking, acceleration and fast turns to provide the insurance company with the measurable means to vary a insurance company with the measurable means to vary a customer’s insurance costs according to how well or badly they follow the agreed guidelines.

There is a limit to how many customers can be offered such schemes since it is the good drivers who are keeping the premiums of the not-so-good at a levels that are affordable for everyone. If everyone’s premiums are lower, the entire business model of automobile insurance collapses.

Insurance premiums in most of the largest markets, notably Germany, Italy, the UK and Spain, have declined in the last 5 years.

The most affected country has been the United Kingdom, probably due to a higher level of competition.

However, we must qualify this. The French market has constantly grown in the last 10 years. Similarly, supposedly highly competitive and mature countries such as Belgium and the Netherlands have experienced total premium increases by respectively 33% and 23% between 2001 and 2010. between 2001 and 2010.

In addition, all new EU countries such as Poland and Romania have experienced rapid growth in the last 10 years. For example, the Romanian market has been multiplied more than 6 times during the period.

Garmin ecoRoutetransmitter

Usage based insurance

High RiskCar Buyer

AftermarketSystemSupplier

Pays for Services

Pays for DataDelivers Data

Kilometers DrivenUrban/RuralTime of Day

Accident Occurrence

InsuranceCompany

Pays for Data

Pays forInsurance

Risk Analysis

Invoices forinsurance based on driving

Delivers Data

High RiskCar Buyer

Car OEMPays for Car


Kilometers DrivenUrban/RuralTime of Day

Accident OccurrenceAcceleration

BrakingG-forces around curves

InsuranceCompany

Pays for Data

Pays forInsurance

Risk Analysis

Invoices forinsurance based on driving

Delivers Data

Gradually, more and more people – especially younger ones – are distinguishing between ownership of a vehicle and the experience of getting from A to B, and they are opting for the experience. One of the options to owning a car is sharing one.

BMW and Daimler are betting on car sharing. DriveNow is a joint venture of BMW and the car rental company Sixt, and Car2Go is a subsidiary of Daimler.

Information technology, more workable procedures, and clearer fine-tuning of pricing are overcoming objections skeptics once had fine-tuning of pricing are overcoming objections skeptics once had to car sharing. Car sharing has been around for decades in Europe and has caught on in the United States with Zipcar, now owned by Avis.

BMW believes that advances in technology might make an easy and satisfying driving experience a better alternative to ownership. This re-evaluation of ownership isn’t just confined to cars, but particularly BMW feels that in the future, brand importance may correlate most of all with playing an effective and pleasant part in a consumer’s experience.

Car sharing still requires that people have drivers’ licenses and drive themselves. But, as I said, people aren’t getting their driver’s license for all these reasons:

� less money because of lack of jobs,

� less interest because of other priorities,

� less need because parents or friends do the driving (the chaufferred generation) or because living in a city means availability of public transport,

� or even because people are making a statement by simply not buying a car

BMW/SixtDriveNow

Zipcar

Car Sharing

Daimler-Benz Car2Go

…maybe it is time to turn the model on its head and let the cars drive the people.

Car companies—and, interestingly, Google—have begun to experiment with this idea. Volvo is among the most active in the area of automating the driving tasks and moving toward full autonomous driving..

Car makers have already introduced many of the basic features that will be the foundation of autonomous driving.

Source: SBD

� The European Union wants to cut down on the current rate of auto fatalities by50 percent, getting them down to 15,000 per year by 2020.

� Since January 2009, ESC has also become an integral component of theEuropean New Car Assessment Program (Euro NCAP). Only vehicles fittedout with ESC can still obtain five stars (the maximum number) in the EuroNCAP tests.

� Starting from 2010, Euro NCAP Advanced rewards began recognizing carmanufacturers who make available new safety technologies whichdemonstrate a scientifically proven safety benefit for consumers and society.

� By rewarding technologies, Euro NCAP provides an incentive to manufacturers� By rewarding technologies, Euro NCAP provides an incentive to manufacturersto accelerate the standard fitment of important safety equipment across theirmodel ranges and helps the car buyer to make the right purchase decision.

� From the 2014 model year, any manufacturer hoping to score five stars on theEuro NCAP safety ratings will need to make sure the vehicle in question isequipped with AEB, or Autonomous Emergency Braking. Among other featuresprovided by systems like Pre-Safe from Mercedes-Benz and CollisionMitigation Braking System from Honda, it warns a driver if their closing speedon the vehicle ahead is outside of a preset safe braking parameter, and if theyneglects to make any inputs, the vehicle will brake for him and prep the safetysystems.

NCAP rewarding

Stay between the solid white lines

and avoid any obstructions

rewarding safety

technologies

Insuring the car instead of the driver

Autonomous Car Owners – These could be companies that have been in the car rental or car sharing business, or taxi companies or even public transport companies. They could be individuals who, like today, purchase their own car. The car owners would have the responsibility of housing, fuelling, maintaining and insuring the cars.

Passengers – These are people who might have been drivers of their own cars or rental cars or members of car sharing programs at one time, or people who would have taken a taxi or bus. They may actually own or people who would have taken a taxi or bus. They may actually own the autonomous car themselves. They pay for the experience of being moved from where they are to where they want to be. In that payment is included all of the costs associated with delivering the service, including insurance.

Car OEM – Car manufacturers could continue to play their former role of simply providing the vehicles, or they could move further up the value chain, as truck companies have already done, and offer cars directly to passengers.

Insurance Company – Makes all of this possible.

Autonomous Car

OwnerCar OEM

Pays for Car


Delivers Data

Passengers

InsuranceCompany

Pays for Data

Pays forInsurance on Car and PassengersRisk

AnalysisInvoices for

insurance based on performance of vehicle

Delivers DataPassengers

Insuring the car instead of the driver

Rather than analyzing the risk of individual drivers, the insurance company assesses the performance of the vehicle on a constant basis.

The vehicle is equipped with hardware that communicates with insurance company servers, and rates are set based on the safety and security record of the vehicle.

This allows for various types of car ownership and car usage. The one variable that today is the largest unknown risk factor, the driver, is removed from the risk equation.removed from the risk equation.

Car OEM

Pays for DataDelivers DataPassengers

InsuranceCompany

Pays for Data

Pays forInsurance on Car and PassengersRisk

Analysis

Delivers DataPassengers

Invoices forinsurance based on

performance of vehicle

Insuring the car instead of the driver will benefit society in many ways, including giving people who cannot drive because of physical disabilities the chance to ‘drive’.

Specially designed steering, acceleration and braking systems have helped people with physical handicaps for many years. Self-driving cars can give the same advantages to visually-impaired individuals and people with lower-than-required hand-eye-brain coordination to successfully managing the self-driving task.

Autonomous cars hold out hope for some men and women who are simply unable to drive themselves. Take, for instance, Steve Mahan, who lost 95 percent of his vision over the course of several years, leaving him clinically blind. Obviously, Mahan isn't able to drive, but Google’s self-driving car can get him to where he wants to go. That’s a Taco Bell taco he’s holding.

Michael L. Sena19 September 2013

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