The Cars of The Future Are Arriving. How Can Auto Insurance Adapt? It’s Complicated.

When cars began to hit American roads in great numbers a little more than a century ago, they did more than create a sense of freedom (and, eventually, traffic jams). They created new markets in a wide range of industries, including insurance.

Now the auto industry could be at a new kind of inflection point. The convergence of technology, regulatory support, and global efforts to mitigate climate change are creating momentum for electric vehicles (EVs), autonomous vehicles (AVs), and new kinds of shared services.

Yes, there are barriers to widescale EV adoption, and fully autonomous driving has not proceeded as fast as originally thought (or hoped). But EV sales in the United States are growing fast—52% in 2023—and new models are being launched at a dizzying pace. The National Renewable Energy Laboratory projected last year that there will be 30 million to 42 million EVs on US roads by 2030, compared to about 3 million now.

In addition, drawing on our own unpublished research and interviews with 20 industry leaders, we believe that almost all new vehicles will be connected by 2030 and that micro- and shared-mobility solutions, such as e-bikes, ride-hailing services, and even robo-taxis, could account for a third of personal miles traveled by that time. In short, mobility as we have long known it is on the edge of transformation.

That means the US auto insurance industry probably is, too. McKinsey estimates that by 2030, premiums for traditional personal auto coverage (about $260 billion now) will peak, and then begin to decline. Over the same period, though, new insurance models are expected to emerge, using sophisticated pricing telematics to offer coverage for new kinds of AVs and EVs. This market could more than make up for the losses in conventional premiums: McKinsey puts its potential at $100 billion a year by 2030.

A Future Defined by Questions

Figuring out how to price insurance for near- or fully autonomous vehicles is a complicated work in progress. AVs are expected to be much safer. Distracted driving is a leading cause of accidents, and computers don’t text while driving.

The integration of artificial intelligence and machine learning into vehicles could improve safety, too. But that raises questions about how to calculate and allocate liability and risk. For example, if a lane-departure warning is wrong, or late, or ignored, who is responsible for the ensuing accident? For EVs, too, cybersecurity and software issues loom larger than in conventional cars.

And while EVs and AVs will likely have fewer accidents, the average claim could be more expensive. Replacing a conventional windshield costs a few hundred dollars; it’s many times more for one infused with sensors. That has implications for carrier operations, and even their solvency.

At a minimum, then, to develop innovative insurance products fit for the future, carriers will need to understand emerging safety features to price risk more precisely. They will also need to build expertise related to software reliability and cybersecurity.

In broad terms, liability could shift away from drivers and toward carmakers and technology providers. But this, too, is complex; it won’t be easy to negotiate the terms of engagement with regulators (federal, state, local) and consumer and industry groups. If such a shift does take place, that would likely increase demand for commercial auto premiums; providing capacity to this new market could prove a profitable avenue for reinsurers.

And finally, one more complication: disruption could open the door to new entrants, including insurtech startups. Incumbents have considerable assets, such as strong brands and customer relationships. But carmakers themselves could enter the game; if they own the data imbedded in the vehicle—a valuable underwriting asset—they could offer insurance at the point of sale. A couple are already doing this, though the more likely path is to develop partnerships with existing carriers. That could be a promising path for revenue and profit growth.

It’s an uncertain road ahead, with a quarter of the personal auto insurance premium pool facing shifts in distribution, products, and pricing. To give just one example, technology is already changing every touchpoint in the claims journey.

But uncertainty, even disruption, can be positive. The simple fact is that different kinds of mobility will require different kinds of insurance. Carriers who develop the best sense of direction, and the skills to adapt to change, will put themselves into position to drive into the future with confidence.

Catlin is a senior partner in McKinsey & Company’s Boston office. McElhaney is a partner in Washington, DC.