Personal auto insurance could become obsolete in 20 years: Morningstar

Self-driving cars could make personal auto insurance largely obsolete within 20 years, according to a worst-case scenario modeled by Morningstar. A more likely, more moderate scenario predicts that the line could remain necessary for several more decades, until 2060.

The company’s new report, “Insuring Autonomy: Analyzing the Implications of Self-Driving Cars for the Auto Insurance Industry,” finds that by 2044, in the most aggressive adoption scenario, most cars on the road could be automated to some degree where liability shifts. from driver to manufacturer. Morningstar believes that widespread adoption of autonomous vehicles likely means that auto insurance would be replaced by product liability insurance, which would ultimately be borne by automakers when level 4 or 5 autonomy is reached.

That transition could be the end of the line for insurers that rely too heavily on personal auto premiums, Morningstar warned, singling out Progressive as potentially at risk.

The timeline

Morningstar said the most important factors that will affect AV penetration rates are the timeline of technology development, the pace of adoption of AV technology and the scrapping rate of the existing car fleet. The firm then developed three scenarios for each of these factors: very aggressive (the worst case scenario for personal auto insurers), aggressive and moderate (the most likely scenario).

Morningstar noted that most vehicles on the market today are at Level 2-3 automation, with driver assistance or navigation on autonomous pilot (NOA) systems such as Tesla’s FSD Supervised or XPeng’s XNGP. These systems can brake, accelerate, stop, swerve, overtake and change lanes autonomously in a complex urban or highway environment, but still require continuous intervention from a human driver. There are a few Level 4 solutions from companies like Waymo, Cruise, Apollo and Pony.ai that offer robotaxis capable of driving without a human behind the wheel, but the rides are currently limited to specific geographic locations where the software is heavily trained on location – specific parameters.

The study defines the technology development timeline as the point at which 0.25 percent of vehicles sold have Level 4 or greater autonomous capability. Morningstar calculated that in a very aggressive scenario for technology development, an adoption rate of 0.25 percent could be reached by early 2026. That break-even point would push back to mid-2027 for the aggressive scenario and 2029 in the moderate scenario.

Using previous technologies as a guide, Morningstar calculates that Tier 4 or 5 AV technology could reach an 80% adoption rate in just seven years (14 years with an aggressive scenario and 18 years with a moderate scenario).

For scrapping rates, the firm took historical data as a benchmark, with very aggressive and aggressive scenarios assuming that the rate at which old cars are replaced will increase significantly over time.

Using these calculations, Morningstar projects that in its very aggressive, aggressive, and moderate scenarios, 60 percent of cars on the road will be Level 4 or higher autonomous by 2044, 2053, and 2060, respectively.

Impact on insurance

Morningstar assumes that the personal car line will not be significantly affected until level 4 or higher autonomy is reached on the scale, when liability can be shifted from the driver to the automaker or company that provided the vehicle with autonomous capability. This is because even in Level 3 autonomy, humans will need to take control in many conditions and may be held liable in the event of an accident.

Explicit method vs. based on formula
Morningstar used two methods to quantify the impact of AV adoption on insurance coverage under the very aggressive scenario.
In the first (explicit) method, a 10-year Stage 1 period assumes no significant impact from autonomous cars – AVs remain in the Tier 3 range for most of this period, and a delay in regulatory response means that car insurance is still required. Then, Stage 2, another 10-year period, assumes that the adoption of autonomous technology leads to premium declines at the same rate as the adoption of AVs.
This method assumes that underwriting results weaken due to cost cutting, pushing returns towards the cost of equity. At the end of Stage 2 (the point where the percentage of cars on the road that are Level 4 or higher approaches 60 percent), Morningstar assumes insurers are abandoning the personal auto line due to volume and diminishing returns.
The second method (based on formulas) also projects an explicit stage 1 of 10 years. But Morningstar said it then uses the default decline in total premiums from the first method and enters that as the net income growth rate for Stage 2.

AV is expected to start having a material impact on auto insurance once a 10% penetration rate is reached (2035 in the very aggressive scenario). The business will decline at an ever-increasing rate as the penetration rate increases from 10 percent to 60 percent (in 2043), at which point it ceases to create value and the capital on insurance balance sheets will begins to be returned to shareholders.

Morningstar examined the outlook for Travelers, Allstate and Progressive if the personal auto line becomes obsolete.

Travelers expect to see only a small impact from the loss of their personal car – a 4% decrease using the explicit method and a 6% decrease using the formula approach. About 60 percent of Travelers’ premiums come from commercial insurance, and personal lines operations are split about equally between auto and owners, with personal auto accounting for only about 20 percent of total premiums. Additionally, while Morningstar believes Travelers has a narrow moat stemming from its commercial operations, its auto business does not appear to have one. With yields on this side limited and premiums relatively low as part of the overall mix, potential attrition on the personal auto line doesn’t appear to be a major issue for travelers.

For Allstate, while auto makes up the bulk of its premiums, it’s also a big player among homeowners. Morningstar thinks it’s reasonable to believe that Allstate would continue to operate even if it were to exit the personal car business. Although Allstate derives most of its premiums from auto insurance, Morningstar estimates a relatively modest decline in value using its explicit (15 percent) and formula-based (13 percent) approaches because Allstate is not believed to have a moat. In Stage 2 projections, ROE is around 10 percent and the company exits the personal vehicle before any major value destruction. (See Morningstar’s definition of economic moat below.)

Morningstar said the outlook is much bleaker for Progressive, which focuses largely on personal vehicles. Its owners line was purchased in 2015 and is only 4% of total premiums, so this line will likely be lost if the insurer exits auto insurance as well. While Progressive has a commercial auto business that accounts for 17 percent of premiums and is very profitable, Morningstar’s worst-case scenario calls for that line to become obsolete as well. Progressive is expected to see a much larger valuation impact, with a 26% decline in value using the explicit method and a 21% decline using the formula approach. Because Progressive produces very strong profits for personal vehicles, its narrow moat is a negative because much more value is lost through attrition. By the end of Stage 2, in a worst-case scenario, Morningstar expects the insurer to completely shut down operations.

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Economic moat

The Morningstar Moat Economic Rating is a structural characteristic that Morningstar believes positions a firm to achieve sustainable excess returns over a long period of time, with excess returns defined as returns on invested capital above our estimate of a firm’s cost of capital. The economic moat rating is not an indicator of the investment performance of the investment highlighted in this report.

Narrow companies are those that Morningstar believes are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide-moat companies are those that Morningstar believes will earn excess returns for 10 years, with excess returns likely to remain for at least 20 years. Firms without a moat, including those that pose a substantial threat of environmental, social and governance value destruction risks; industry disruption; financial health; or other idiosyncratic issues, are more susceptible to competition.

Morningstar identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale.

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