7 Critical Risks Facing the Automotive Industry

Autonomous cars, tariff wars and cyber attacks are just a few of the critical evolving risks facing the automotive industry.

By: Courtney DuChene | August 15, 2019

The once-predictable automotive industry is at an interesting crossroads, facing numerous market-changing risks.

From the push for new technologies, such as self-driving and electric cars, to competition from ride-sharing apps and a decline in foreign-market car sales, it’s no wonder that in June the New York Times declared that “The Car Industry is Under Siege.”

All of these rapid changes mean that automakers will have to step up their game in order to stay ahead of the ever-evolving risks and remain profitable.

Here are seven critical risks the industry is facing right now and for the foreseeable future.

1) Self-Driving Cars

As Tesla promises that over-the-air updates will bring self-driving technology to hundreds of thousands of cars this year, people are right to be concerned about the effects this shift could have on the automotive industry.

Many warn that the push to get self-driving cars on the road as soon as possible could lead to accidents and fatalities, like when a self-driving Uber struck and killed a pedestrian while the back-up driver was watching videos on her phone.

Risk managers and insurance providers should also be wary as self-driving cars are likely to transform our entire transportation system by redesigning public transit, eliminating jobs for truck drivers and reducing the number of car accidents that occur each year.

2) Tariffs

President Donald Trump’s trade war with China has had far-reaching consequences for the automotive industry.

NBC News reports that tariffs on aluminum and steel have already added $240 to the cost of producing a new vehicle. As a result, car prices are beginning to rise and exports are declining.

Despite these already harmful effects, tariffs aren’t going away anytime soon.

Rumor has it, Trump might even add a tariff to imported vehicles and automotive parts, which automakers vocally oppose. Additional tariffs could cost consumers an extra $455 to $6,875 per vehicle, according to a report from The Center for Automotive research. The same report found that these tariffs could drop auto sales by as many as 2 million vehicles.

While the administration decided in May to delay the tariffs for at least six months, tariffs remain a pressing risk for the industry.

3) Ride-sharing and Rental Services

Ride-sharing apps like Uber and Lyft and peer-to-peer car rental companies such as Turo are expected to change the face of car ownership, according to experts at the 2019 Collision Conference in Toronto, Reuters reports.

They cite parking and insurance costs as a major reason why people are turning to car-sharing services instead of purchasing their own cars.

“Your phone will be your car,” Turo CEO Andre Haddad told Reuters. “Many more [people] are realizing they can share their car when they’re not using it or rent it out to recover the big costs of ownership.”

4) Cyber Attacks on Connected Cars

Cars are becoming more technologically connected than ever, with many new models equipped with GPS systems and Bluetooth connectivity.

While those features my make it easier for drivers to stay connected to their phones or get directions on the fly, they also make vehicles more vulnerable to cyber attacks.

In 2015, Fiat Chrysler recalled 1.4 million vehicles after security researchers found a way to disable a car’s brakes and steering wheel through hacking the onboard entertainment system, according to the Washington Post.

The New York Times reported that a security breach that results in a recall could cost automotive companies up to $1.1 billion.

Given that the average car is programmed with more than 150 million lines of computer code, cyber security threats aren’t likely to go away anytime soon.

5) China’s Economic Slowdown

China is the world’s largest auto market by sales, so car makers everywhere should be concerned by the country’s recent economic slowdown, which has led to a decline in auto sales.

According to the Wall Street Journal, June marked the 12th month in a row that auto sales in China declined. Sales are now the lowest they have been in the last three years.

GM reported a 15% drop in sales during the first-half of the year and Ford’s first half sales were down 27% from 2018.

Increasing tension in trade relations between the U.S. and China and new emissions regulations are the likely culprits behind this drop in sales.

6) Automation

It’s no secret that automation is taking over the manufacturing industry.

Automated assembly-lines are largely responsible for the fact that manufacturing jobs, which made up 23% of the economy during the industry’s peak, now only account for about 8% of U.S. jobs. A new study found that “manual workers” were one of the most vulnerable groups in the evolving economy.

Many of these manufacturing jobs were in the automotive industry, so car makers should definitely be concerned about how automation can affect worker layoffs and plant closures.

The lack of manufacturing jobs has been a hot topic politically speaking, with President Trump enacting tariffs and threatening the industry in an effort to bring back American manufacturing jobs.

Even if you ignore potential job losses, automation in the manufacturing industry comes with its own risks. With three million industrial robots expected to be in use in factories around the world by 2020, the automotive industry should be concerned about liability issues if the machines cause product errors.

7) CO2 Emissions Regulations

Given the current administration’s lax attitude towards environmental protections, this category isn’t likely to have a huge effect on the U.S., at least not immediately.

But that doesn’t mean U.S. automakers shouldn’t be concerned about the potential effects of these regulations from abroad could have on their companies. Ford is on track to see up to $6.6 billion in fines for violating European CO2 emissions regulations by 2021 due to car sales in European countries.

The industry has already started to feel the effects of these government regulations. A merger between Fiat Chrysler and the French automaker Renault was thwarted by government demands in France. New emissions rules in China are also a factor in the country’s auto sales decline.

A lack of regulations in the U.S. is equally alarming to automakers. If Trump’s proposed rollbacks on Obama-era regulations go through California and about thirteen other states are likely to sue the federal government in an attempt to enforce their own, strict regulations which could bifurcate the market, according to the New York Times.

As people and governments become more and more concerned about the effects of global climate change, automakers can expect to be more concerned about regulatory risk, which is often tricky, if not impossible, to insure. &

Courtney DuChene is a freelance journalist based in Philadelphia. She can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.