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Self-Driving Vehicle (SDV) will be a game changer for Google.

Auto insurers will be greatly impacted and need to act soon.

SDV will impact many of us in a way technology has in recent years.

Many believe SDV (Self-Driving Technology) will become mainstream only in decades because most believe SDV will become mature only in 10 to 15 years, regulatory licensing and liability issues will take another 5 to 10 years to resolve, customer confidence cannot be achieved for another 5 years. Many of these expectations have slowly been proven obsolete, especially in the recent technological "arms race" between not only the car manufacturers but as well as the technology companies to be the first in this market.

Technology Maturing Sooner than most think

SDV technology will likely become mature sooner than MOST think and some have already been upon us. To name a few, the BMW modified 5 series, Mercedes-Benz S500, Nissan modified Leaf, GM modified Cadillac and of course the Google modified Toyata Prius and Lexus (see also Appendix 1). These vehicles use technologies like video camera, radar sensors, LIDAR (light radar), side laser, ultrasonic sensors, GPS, etc. Not to mention also the latest demonstration of car connecting technology from GM and Acura. Other companies that are also in the race now, including Tesla, Intel, Audi, etc.

Elon Musk (Tesla CEO) says Tesla cars will be partially automated in 3 years and fully automated in 5-6 years from a possible supplier of Mobileye. Mobileye claims its technology is integrated today in vehicles of Volvo, GM, BMW, Ford, Hyundai, Opel, Citroen and Mitsubishi. Google is claiming fully automated by 2017 while Mercedes-Benz trucks will be fully automated by 2025.

Regulatory (Licensing and liability) issues

UK has recently announced its acceptance to allow SDV on public road from January 2015, along with the 3 states in the US. These countries and states are the forefront of this transformational technology and opening up new opportunities for economies and societies. Many expect other countries will follow closely to take part in this experience.

Customer Confidence

There are approximately 1.3 billion disable people (including blinds, immobile, etc.) currently in the world. This is an equivalent of the population of China. SDV will give them back the independence, mobility, not to mention also the dignity that these people have been longing for. In addition, the growing number of senior population in the world will also benefit from this technology. These are the vast number of population who are ready to embrace this technology. The productivity will be unveiled from this population might also serve as catalyst to resolve the regulatory issues above.

As self-driving technology accumulates its actual road experience, errors will be corrected through upgrades to every other car with the same software. This advantage over human drivers will help faster adoption of this technology.


SDV as a Game Changer Event for Google


- Google can (as one of the scenario) partner with one of the car manufacturer as a licensor. Google SDV technology would provide an integrated system ready to market relying on networking and access to map information. Yet car manufacturers SDV technology will likely wind up with more sensors. If Google can license its technology at a low costs (or breakeven level) to car manufacturers with updates available to eventual buyers. This can ensure quick and wide customer adoption, also allow Google to have significant influence over the on-board technology (like Android in Smart Phones).

- Each of these vehicles can also become data collection point for information like real time road conditions, traffics, weather conditions, etc. This could significantly improve Google's ability to provide real-time information. In a longer term, Google can accumulate enough information to provide insight on urban planning, i.e. locations of public facilities, demands by frequencies of visits, etc.


Auto Insurance Industry


- In a world with few expected accidents, most of auto insurance coverage will eventually become unnecessary and increasingly similar to property insurance which covering only the vehicle itself.

- The SDV technology provider(s) will be increasingly responsible for the machine glitches caused damages (to human or other properties). This will eventually become the product warranty. Some believes insurers can partner with these SDV technology provider(s) to replace the lost premiums. However, this is short-lived as every glitch correction will be available to ALL SDVs through periodic upgrades.

- Some believes the $200 billion auto insurance industry in the US could be reduced by 75% as few SDV require insurance.

Business Impacts

- Auto policies will become increasingly standardized and commoditized, largely the same as home insurance.

- Underwriting ability (segmentation) in auto policies will become obsolete in the environment where human errors are significantly prevented.

- Other areas like product distribution, customer relationship, claim processing and expense mgmt will become the key to compete for the remaining market.

- As auto policies will become commoditized, online insurance distributors (i.e. Kinetic, Google, etc.) who have great influence over customers, will become increasingly more powerful and can capture more economic value from insurers.

- In the short-term, there might even be gains in the underwriting profit before the benefit reflecting actuarially in the premium pricing in the above timeline. However, these profits will be short-lived as fewer vehicles will eventually need insurance.

- Insurers will soon face choices of short term underwriting profit before delaying premiums reductions for those vehicles already have these safety features before actuarially shows in data or aggressive on pricing to gain the market shares or be the first to reduce premiums and capture enough market shares to ride out this wave of structural changes.

Financial Impacts:

- Underwriting profits will be significantly reduced for those insurers fail to increase the number of policies written. (Combined ratio might remain constant but profit $ will reduce as a proportion of premiums lost.

- Investment income from "float" (premiums received but not paid as claims) will also be significantly reduced.

- Auto insurance is usually short tail (12 -month average duration). In a scenario that average annual yield is 3% and combined ratio of 95%, every $100 of premiums reduced, underwriting profit and investment profit will be reduced by $5 and $3 before tax, respectively.

- For those insurers carry investments in brokers, there might be risk of investments impairment, as brokers source of revenue might be significantly reduced, especially for those brokers that are not able to replenish the lost commissions from lost premiums.

- Capitalized costs in IT spending that are unamortized will be impaired and written off if future profits are not expected to exceed the remaining unamortized costs.

Interesting Side Effects:

- Workers operate transportation vehicles; taxi; delivery, etc. will soon become obsolete.

- Parking and traffic police can be significantly reduced.

- Hospital demands for vehicle related accidents (medical costs) will be reduced.

- Urban designs will be changed:

n Suburban can be farther from city central,

n Reduced numbers of parking spaces,

n Narrower highway lanes and

n Lower numbers of physical road signage and correspondence maintenance efforts.

- Increase fuel economy (Reduce driving spacing and circulating traffic for parking)

- Reduce traffic congestion; better manage traffic flow, esp. emergency vehicles.


Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.