At a recent news conference, U.S. federal transportation officials described Talking Cars and their ability to avoid deadly crashes by seeing it coming before you do. The U.S. government will likely require automakers to equip new vehicles with technology that lets cars warn each other if trouble lies ahead. A radio signal would continually transmit a vehicle’s position, heading, speed, and other information. Your vehicle would receive the same information back from other cars, and the on board computer would alert its driver to an impending collision. Alerts would come in varying forms: a flashing message, an audible warning, or a driver’s seat that rumbles. Some systems might even automatically brake to avoid an accident if that option is included. Examples of what the technology enables:
- Alert you when another vehicle equipped with the same technology is about to run a red light
- Alert you when a car several vehicles ahead in a line of traffic has made a sudden stop
- Avoid traffic congestion or road hazards
The National Highway Traffic Safety Administration has been working with automakers on the technology for the past decade and estimates vehicle-to-vehicle communications could prevent up to 80 percent of accidents that don’t involve alcohol or mechanical failure. In a recent book titled: The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups, the authors (Chunka Mui and Paul Carroll) dig deeper into this topic. About 5.5 million U.S car accidents occurred in 2009 involving 9.5 million vehicles; the accidents killed 33,808 people and injured 2.2 million others. The total accident related costs in the U.S. are estimated to be roughly $450 billion. This chart from the Eno Center for Transportation provides a deeper view into accident related statistics. A closer look into the driverless car phenomenon can be found in their recent report titled Preparing a Nation for Autonomous Vehicles.
Based on their current research, annual U.S economic benefits could be in the range of $25 billion annually with only 10 percent market penetration, and roughly $450 billion at high penetration rates.
Incremental driver-assist technology is a precursor to autonomous cars. The basis for future self-driving cars can be seen in some high-end vehicles through, parking assist systems, lane departure warnings, adaptive cruise control, collision avoidance, and other features that use sensors and radar. The technology represents the start of a new era in automotive safety in which the focus is “to prevent crashes in the first place,” as compared with previous efforts to ensure accidents are survivable, said David Friedman, the head of the agency. “It will change driving as we know it over time,” said Scott Belcher, president and CEO of the Intelligent Transportation Society of America. “Automobile makers will rethink how they design and construct cars because they will no longer be constructing cars to survive a crash, but building them to avoid a crash.”
A critical mass of vehicles using the technology is required before the safety benefits can be realized, and replacing the nation’s vehicle fleet will take time. But according to Paul Feenstra, a spokesman for the transportation society, the technology could deliver safety benefits with as few as 7 to 10 percent of vehicles in a given area similarly equipped. For those that continue to view this as science fiction that is a distant possibility, there may be a way to speed things up. Qualcomm indicates that a growing share (currently 45 percent) of Americans use Smartphones that already have GPS, and can combine with radio chips to enable communication between vehicles by retrofitting the ones already on the road. That would help make it possible based on Qualcomm estimates to achieve a 50 percent market penetration in less than five years. This approach also enables the extension of safety benefits to pedestrians, bicyclists and motorcyclists. Given that in 2012, vehicles killed more than 4,700 pedestrians and injured 76,000, alerting a driver to a possible collision with a pedestrian carrying an information emitting Smartphone is a very good thing. However, using Smartphones to support connected-car technology is challenged by battery life, a need for antennas, questions about radio frequencies and concern that GPS functions might not be as precise as those in a vehicle manufactured with special technology.
The authors of the previously referenced report from the Eno Center for Transportation predict mass market adoption of autonomous vehicles between 2022 and 2025. Given that Nissan and Volvo both have announced their intentions to have commercially viable autonomous-driving capabilities by 2020, the authors combine this with an assumption that it will take an additional five years for prices to drop to allow for some degree of mass-market penetration. Numerous other manufacturers have begun testing driverless systems including: Audi, BMW, Cadillac, Ford, GM, Mercedes-Benz, Toyota, and Volkswagen.
If you think through this innovation, disruption lies ahead for several Industries: Insurance, Healthcare, and Auto to name a few. The driverless car is a great case study for every industry facing disruption. It puts approximately $2 Trillion in the United States in play: the summation of revenues for carmakers, dealers, rental car companies, body shops, healthcare providers, and more. If we expand the discussion from driver-assist technology to driverless cars, we can begin to see why. In The New Killer Apps book – the authors help this disruptive force take shape. They describe a potential future enabled by what Google claims they can accomplish:
- Reduce traffic accidents by 90%
- Reduce wasted commute time by 90%
- Reduce the number of cars by 90%
To put the possible impact into perspective, the claims made by Google would save 30,000 lives and reduce accident-related expenses by at least $400 billion per year. This creates a disruptive effect of hundreds of millions of dollars for hospitals, car repair businesses, Insurance companies, car dealers, lawyers, and many others. Some examples of the ripple effect created by this one scenario:
- 90% of insurance premiums could disappear
- Car sales could be reduced, impacting a $600 billion annual U.S business
- Spending on highway construction could be reduced
- Gasoline sales could be reduced due to less cars and greater efficiency (e.g., drafting)
- Hospital and health insurer revenue are effected as car related injuries plummet
- Governments could lose fines because traffic laws are obeyed
- Police could need fewer officers on the road
- Prisons could need less capacity
- Utilities could lose revenue as traffic lights become unnecessary and street lighting needs diminish
- Reduced number of parking lots would free land and reduce property values
In the previously mentioned book, the scenario defined by the authors brings the re-imagination envisioned by some venture capitalists into focus. This re-imagination puts more than $36 trillion of stock market value up for grabs across ten industries most affected by current technological innovation. That $36 trillion is the total market valuation of public companies across these ten industries. But disruption is not limited to these ten, and therefore any re-imagination is bigger.
The driverless car scenario adds up to $2 trillion ($450 billion in crashes, $600 billion in car sales, $200 billion in auto-insurance premiums, hundreds of billions in health insurance, etc.) in revenue associated with cars in the United States that could be taken away from the incumbents. Let’s put a lens on one impacted industry: Insurance. Here again, the authors articulate the possible impacts. These driverless car innovations mean lower claim volume and an impact to the $200 billion in personal and commercial auto insurance premiums written each year in the U.S. Insurance premiums are a direct function of the frequency and severity of accidents, and both frequency and severity are impacted by this innovative technology. Examples:
- Sensors keep drowsy or drunk drivers in their lanes
- Cameras embedded in cars could alert police to drunk or overly aggressive behavior
- Sensors built into cars should also reduce theft
In a world of driverless cars, where accidents are curtailed, most of those premiums go away. Volvo for instance predicts it can eliminate crashes altogether for anyone driving its cars by 2020. The market could be reduced by 75% or more. In the short term there may be no impact as fewer accidents would mean fewer claims, and therefore greater profits. Until enough actuarial data proves that driverless cars delivered the savings and premiums go down. To expand on their scenario analysis, the authors look at doomsday scenarios where someone could emerge to sell insurance to the automaker that is bundled with cars in a world where the manufacturer, not the driver is responsible for insurance. What if manufacturers leveraged their own warranty operations to sell insurance themselves?
Now back to the earlier points. Let’s assume that the full potential of driverless cars takes years to realize. Even a 20% adoption rate of incremental driver-assist technology might result in significant enough reductions in accidents to trigger material reductions in premiums – driving a material impact on premiums long before fully autonomous vehicles become ubiquitous.
Lastly, the authors explore possible new models that Insurers may pursue:
- Selling a single policy that covers all risks to a person’s life and property based on age, assets, and all the personal behaviors that can be monitored easily via sensors and Smartphones
- Enabling people to point to a destination on their smartphone map and buy just the insurance to get there, based on a number of factors
- Changing underwriting models using emergent knowledge drawn from external sources, financial transactions, and online databases
- Building agencies of the future. Taking over all the processing work from the agencies and reducing cost through client self-service
- Combine agency data with corporate sources and emergent knowledge to identify potential clients, sell new services to existing clients, and better understand what a client wants – better than the agency can themselves
I’ll explore other disruption scenarios in the next several posts. A look into a possible future allows us to identify these scenarios, and The New Killer Apps authors provide us with a great starting point.
Note: After completing this Blog Post, Paul Godsmark commented on it, pointing me to a Morgan Stanley report that points to a much bigger savings of $5.6 Trillion. Thanks Paul! An article describing these savings can be found Here.