Before the end of the current decade, the personal auto industry is likely to see a peak—and then a subsequent lasting decline—in premiums for conventional auto coverage, consultants from McKinsey & Company predict in a new report.

According to the report, “Navigating unknowns: Auto insurance questions in a new mobility era,” even though past timelines for the adoption of autonomous driving have proven to be overly ambitious, a transformation in the mobility landscape will occur within five to 10 years. The transformation will not only involve the emergence of more autonomous vehicles and electric vehicles (AVs and EVs). It will also move personal miles traveled to micro- and shared mobility solutions (biked and ride-hailing services),

Translating the impact of the transformation into premium dollars collected by insurers offering “conventional auto personal lines coverage,” the McKinsey analysis puts the current level of “conventional” premiums at roughly $260 billon, projecting that this figure will drop to $248 billion by 2030. At the same time, $15-$30 billon of premiums written for “disrupted personal lines coverage” today will jump to $100 billion by the beginning of the next decade.

“This $100 billion market is characterized by distinct distribution, product, pricing, and claims handling—systematically using, for example, sophisticated telematics for pricing, distribution embedded at the point of vehicle sales, and coverages for as-yet-unseen generations of AVs and EVs,” write the authors, Tanguy Catlin, a senior partner, Ani Kelkar and Doug McElhaney, partners, and Dimitris Paterakis, a consultant.

A chart in the report also reveals that $5 billion in premiums is expected to shift from the personal to commercial lines market and some $36 billion of the personal lines pool of premiums will evaporate.

Underlying the premium predictions is a mobility landscape scenario of “widespread, baseline adoption of advanced driver assistance systems (ADAS) features and expected consumer shifts toward greater acceptance of (and reliance on) semi-autonomous driving capabilities,” the report says, noting that even more disruption to the insurance industry could occur under different assumptions.

The report begins with a discussion of the various answers to the question, “Is the emerging mobility paradigm real or a mirage?” and ends with some advice for insurers and OEMs to consider. Along the way, the report authors also pose and address the question, “Are OEMs set to disrupt insurer incumbents?”

While not directly answering “yes” to this last question, the report predicts that “insurance distribution is poised for fundamental changes” and that traditional incumbent carrier strengths—brand awareness and strong acquisition relationships—”may prove to be insufficient in this new environment.”

“OEMs might emerge as formidable competitors for insurers,” with data playing a central role in risk selection, claims management and distribution. Insurers “may need to consider the implications of OEMs potentially treating vehicle data as a competitive asset, affecting data sharing and utilization—and opening up new opportunities for collaboration with traditional insurers.”

After describing three insurance models that OEMs are exploring—creating full-stack insurers, forming alliances with carriers and monetizing insurance leads—the authors ultimately recommend that carriers consider proactively developing insurance products “specifically designed for EVs, AVs, and connected vehicles in collaboration with OEMs to access critical vehicle data and expertise.” The report references the fact that only two leading U.S.-based auto OEMs are pursuing the full-stack model today, suggesting that the other two models are most likely in the short term. (Editor’s Note: Although the report does not specifically name the OEMs pursuing the full-stack carrier model, they are known to be Tesla and General Motors.)

The report goes on to suggest that opportunities to partner with OEMs are particularly relevant today because personal auto insurers are struggling to achieve underwriting profits. “At a time when high marketing and commission costs prevent many carriers from maintaining a combined ratio of less than 100 percent and when premiums for conventional auto covers are declining, OEM platforms could provide a lifeline for profitability,” the report states, noting that the platforms can improve profits by allowing insurers to integrate vehicle data into policy design and underwriting. They can also help carriers to boost growth rates since platforms can provide a way for carriers “to access clients “at the source.”

Other questions discussed in the report are:

• How true is the promise of driver and vehicle safety technology?
• Will carriers insure cars or software?
• What role do regulators play in auto insurance innovation?

Answering the second question, the report described the need for insurers to adapt to a mobility landscape in which vehicle software plays a critical role in safety and functionality. In particular, insurers will have to respond with innovative products for the unique risks and liability models associated with “software-defined vehicles.” As an example, the authors suggest that insurers will need to make “dynamic risk assessments” to consider automated driving features and “over-the-air” software updates “that fundamentally alter the risk profile of the vehicle” in addition to individual driver attributes they consider now (age or driving record, for example).

The report is based on insights drawn from proprietary McKinsey research, data from the McKinsey Center for Future Mobility and information gathered at the ITC Vegas 2023 meeting last year from interviews with a group of 20 leaders from the auto insurance, automotive and mobility sectors.