 It's been more than four decades since TV audiences were first introduced to Knight Rider, its leather-clad star David Hasselhoff, and his sidekick: a haughty, self-driving Pontiac called KITT.This means 40-odd years in which autonomous vehicles' (AVs) potential has loomed large in our imaginations. Clearly, the future is yet to arrive. But unlike nuclear fusion, cryonics, and teleportation, the technology has now existed for two decades and could soon be rolled out.Domestically, British Knight Rider fans may finally get a taste of the automated thing from 2026, when the government expects the first AVs on UK roads. The Automated Vehicles Act, which last year passed into law, is intended to aid the technology's deployment, reduce collisions caused by human error, and jump-start an industry "estimated to be worth up to £42bn by 2035". Cue warm words from self-driving start-ups Oxa and Wayve, and the Society of Motor Manufacturers and Traders.The same announcement carried no comment from the UK's leading motor insurers (2024 market value £22bn), though they will be watching closely. If driving is on the cusp of rapid growth and disruption, as AV proponents suggest, then the concept of driver liability could soon be overturned.Right now, however, the UK's motor claims sector is facing a more imminent shake-up. Assuming a recently defanged CMA doesn't derail things, Aviva (AV.) will soon buy Direct Line (DLG), doubling its market exposure to become the industry's biggest player.Both parties have reasons for cheer. By selling at a big premium and hitching itself to a bigger wagon, Direct Line shareholders are no longer all-in on an iffy turnaround strategy. For Aviva, the prize is a more balanced insurance book, and lower relative group-level capital strain, all for a fair price. Then there are the cookie-cutter M&A benefits: savings, synergies, market share, and EPS accretion.How about that supposedly seismic change in the foundations of motor insurance and risk? Does that factor into projections? After all, the economic value of the intangible assets Aviva is paying up for Direct Line's brand, patents and customer lists relies on long-term profit forecasts. Within a decade, if AV adoption has exploded, the risks of impairment to both the Direct Line business and Aviva's existing motor lines could spike. Should shareholders worry about the £3.7bn deal?It would seem not, based on an hour-long presentation to investors and analysts after the tie-up was recommended. At least, that's the implication. The impact of self-driving cars simply received no mention. When asked about the deal in the context of AV disruption, Aviva declined to comment.Aviva & Direct Line: A new dividend machine?Drive onTo understand why Aviva is prepared to calmly look past the self-driving threat and double down on motor insurance, we need first to consider what those heady AV projections will require.As of January 2025, there are no self-driving vehicles cleared for UK roads. As with electric vehicles, widespread AV adoption will rely on the existing fleet's replacement, rather than its upgrade given the latter isn't possible with current technology. That makes this a gradual shift, at an uncertain rate.This doesn't mean some analysts haven't factored the rise of AVs into their earnings and valuation models. In 2017, Deutsche Bank released a report warning that self-driving cars could lead to an 80 per cent drop in personal motor insurance by 2050. Though it suggested a "meaningful" impact would not be felt for more than a decade, the analyst team estimated the market would start to shrink by 3 per cent a year, on a like-for-like basis, from 2028.Eight years (and several stuttering attempts in the US and China to roll out AVs) later, Deutsche's timeline has been pushed back. Its estimates for the rate of contraction have also thinned. As far as structural declines go, it's all quite vague. But AVs are still in the model. Direct Line's top line, for example, is assumed to climb 2.5 per cent a year until 2034 and fall 2 per cent a year thereafter.The level of adoption is a significant variable. A 2023 report by McKinsey suggested advanced driver-assistance systems and fully autonomous cars "could create $300bn-400bn" in global revenues by 2035. However, this estimate isn't the quantum leap it first looks like. This year, the report assumes the market will hit between $70bn and $100bn, based on current sales of what its authors refer to as level one (driver assistance) and level two (partial driving automation) systems.But it is the so-called level three (conditional driving automation) and four (high driving automation) systems where McKinsey expects all the growth to occur. That's despite a cloudy demand picture: while most drivers say they would pay a significant premium for fully autonomous features, only around a quarter report to being ready to make the switch.For its part, Aviva argues the road to full automation will be long, giving it years to adapt. Is this watch-and-wait stance sensible? Henry Heathfield, an insurance analyst at Morningstar, thinks that while "the big picture headline of [AVs] is concerning...the reality is quite different"."Even if auto manufacturers have the capacity to roll out fully autonomous self-driving cars, how many people will actually have the money to buy these?" he asks, pointing to the manufacturing and affordability challenges created by the rise of electric vehicles.Heathfield also flags the unresolved question of social acceptance, and the preparedness of consumers, fellow road users and car manufacturers to move away from the status quo. Though he expects active driving and assistance features to proliferate, improving safety and fuel efficiency, he believes it is "only in a fully autonomous world...where we lose private insurance".But might insurance take a knock somewhere earlier on that journey? Tom Bateman, an insurance equities analyst at Mediobanca, says that investors are already asking about the sector's long-term viability, not least because driving safety has been steadily improving for several years.If such modest uptake of the technology is already having an impact, this begs the question: might higher-level automation lead to a snowball effect on road safety and adoption, even if released at limited scale? While we're straying into hypotheticals, could huge breakthroughs elsewhere in the world force policymakers' hands in the UK? What if China floods the market with cheap, AV-ready products? Would civil society put up with the personal and economic cost of the 30,000 killed and serious injured each year if (and it's a big if) there was a market fix?For Heathfield, obstacles include inertia, the speed of regulatory change, and the costs of widespread implementation. "It probably took around 25 years for seat belts to become mandatory," he notes. "And although largely absent until the 1980s, airbags still aren't mandatory." How much road?Motor insurers are confident their model will dominate for decades to come.There is plenty of logic to this view. Until we get full AV adoption, the concept of driver liability will endure. Even if adoption proves rapid, cars will still need insuring against theft, non-driving related damage, no-fault claims, and maintenance. The sector also has plenty of lobbying power to shape favourable legislation and regulation.Indeed, the role of regulation helps to explain why Aviva is keen to grow its market share. Tougher oversight of ancillary products has squeezed smaller players, boosting the position of larger incumbents. In turn, greater scale means more efficient and effective pricing.This informational asymmetry, whereby a seller has a far better grasp of a product's value than its buyer, is a big reason why personal line insurance is profitable. But in a future in which the main counterparties are car manufacturers or fleet owners, it's much harder to see the appeal to underwriters. Product liability insurance is notoriously challenging work.The rise of AVs is a trend whose effects are impossible to call. Clearly, its development has long been over-hyped, evoking the American scientist Roy Amara's observation that "we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run".But there is very little consensus, even on a five-year view, as to when the technology will start to make itself felt. On balance, this probably means this particular investment risk facing Aviva already a well-diversified business can be reduced to a rounding error, for now at least. |
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