Will driverless cars mean the end of auto insurance?

Self-driving cars, such as the fleet Google has been operating for several years, are still mostly a curiosity. But it seems inevitable that they will become a significant part of the nation’s transportation infrastructure in the near future.

And that could mean a huge downsizing of the auto insurance industry, as the frequency of accidents declines and liability shifts from the driver to the vehicle’s software or automaker. It could also greatly reduce what we pay for car insurance.

Among auto insurers, State Farm is taking the lead in realigning its services with this new landscape.

Consider:

• General Motors recently announced that it has partnered with ride-sharing company Lyft in a $500 million plan to create an “on-demand” network of self-driving cars. Uber has also been outspoken in its plan to rely increasingly on autonomous cars.
• Ford has announced plans to triple its research fleet of self-driving Fusion Hybrid cars (from 10 to 30), boosting speculation that it plans its own autonomous car.
• Google says its fleet of self-driving cars has logged more than 1 million miles since 2009 with only 12 minor accidents — none of them the fault of the vehicles.

Self-driving cars are not yet commercially available, but autonomous-car technology, such as crash-avoidance systems, is making its way into models from many automakers including Mercedes-Benz, Volvo and Tesla. Research and consulting firm Celent, in a recent report on “the end of auto insurance,” projects that within 20 to 30 years, more than 50% of cars on the road will be autonomous.

[Compare car insurance quotes with NerdWallet’s Car Insurance Comparison Tool.]

KPMG, an advisory and research firm, predicts that these trends mean that within 25 years the personal auto insurance industry could shrink to less than 40% of its current size. If cars are self-driving, perhaps owners will only need to buy car insurance policies that cover car theft and non-crash damage such as hail and floods.

State Farm considers a new role

State Farm, the largest auto insurance company in the country, appears to be making plans to survive in this new world. One possibility could be for the insurance giant to reinvent itself as a “life management company,” as the company put it in a patent application recently published by the U.S. Patent Office.

State Farm’s patent application, “Aggregation and Correlation of Data for Life Management Purposes,” describes how the company could analyze data about a customer’s vehicles, home and personal health, find patterns and offer “personalized recommendations, insurance discounts, and other added values or services that the individual can use to better manage and improve his or her life.”

To that end, State Farm would collect data about:

• Your home, including security systems, environmental conditions, energy use and home automation.
• Your vehicle, including use of the vehicle and your physical and mental state while driving. (NerdWallet previously has reported on State Farm’s patent-pending plan to get inside your head while you’re driving.)
• Your health, including weight, blood pressure, sleeping patterns and fitness activities as reported by “wearable, implantable, ingestible, or hand-held personal health sensors.”

State Farm could use the data to send you advice, alerts, coupons or discounts on insurance or other goods and services, according to the patent application.

In one example given in the application, State Farm’s system might determine you are not sleeping well and correlate that with information that shows your home gets cold at night. The system would suggest that you raise the temperature to sleep more soundly.

Or your personal health metrics might show a high level of stress. The State Farm system might be aware of a recent break-in affecting your home or vehicle and recommend extra security measures to give you more peace of mind.

In response to an inquiry from NerdWallet about the patent application, a State Farm spokesperson said the insurer “takes the privacy of our customers seriously. We do not sell customer information, and we do not allow those who are doing business on our behalf to use our customer information for their own marketing purposes.”

The spokesperson declined to comment specifically on the patent, beyond saying the company is “actively innovating in a number of areas.”

Transforming into a life-management advisor could play to State Farm’s strengths:

• State Farm has a vast customer base. At the end of 2014 it had 82 million customer accounts, including auto, home, health and life insurance policies and banking accounts.
• The company also is adept at analyzing huge amounts of data about people, cars, homes, health, pets, weather and much more. It processes about 35,000 claims a day.
• State Farm has a lot of money. The mutual company had a net worth of $80 billion at the end of 2014, a year in which its subsidiaries generated $4.2 billion in net income on $71.2 billion in revenue. (2015 figures are not yet available.) The company can afford to test new ideas and technologies.

State Farm isn’t the only insurance company eyeing a future in which its expertise in risk assessment is harnessed to provide recommendations and advice to consumers. Travelers, for example, recently applied to patent a device that offers specific suggestions for managing errands and other travel. Customers would be able to see a map of “risk zone” data for places they want to go, such as stores, restaurants and roads. They could then plan the day “with an eye toward how ‘risky’ such endeavors may be,” according to the patent application.

Products and systems described in patent applications may never make it to the consumer.  But State Farm’s “life management” patent application fits a pattern for the company. Applications published over the past several years show that State Farm sees a promising future in consumer-data analysis that could allow it to calculate scores for customer behavior, change customers’ daily habits through advice, recommend products and target advertisements based on where you drive.

Auto insurers must adjust to disruption

Donald Light, Celent’s director of North America property/casualty insurance, predicts that as self-driving cars gain momentum, auto insurers will go out of business if they can’t reduce their cost structures — the massive buildings, the armies of agents, the computer systems.

He said auto insurers will have to ask themselves, “Am I OK with being a smaller company? Have I adjusted my cost structure so I survive being smaller?”

Light says it’s unlikely companies that depend on auto insurance premiums will be able to make up the difference by shifting to selling other types of insurance. “There aren’t other kinds of insurance lying in the street waiting to be written,” he says.

Few auto insurance companies have taken serious action to prepare for the gutting of their business, according to a June 2015 KPMG survey. Most senior insurance executives believe that any change will happen far in the future, or not at all, according to the survey. Almost one-third (32%) say the companies they work for have “done nothing” to prepare for the advent of driverless cars. In addition, 23% say they have little or no understanding of driverless cars and only 6% say they have an operational plan to deal with “the end of auto insurance.”

Shifting into new business lines is a possible tactic, says Light, “but I doubt it solves the cost-structure problem,” he says.

For example, say you currently pay $800 a year for car insurance.

“What’s it worth to me to have a personal life manager? It’s not worth $800 a year to me. Maybe it’s worth $100 a year to me. Revenue goes down in a material way,” he says. “Companies need to accept this reality earlier rather than later.”

Amy Danise is an editor at NerdWallet, a personal finance website. Email:adanise@nerdwallet.com. Twitter: @AmyDanise.

This article was written by NerdWallet and was originally published by Forbes.