The logistics industry is on the cusp of a revolution. Sensors are increasingly tracking cargo while convoys of driverless trucks and flying drones are in the pipeline. This transformation, however, will not happen overnight. Logistics firms will increasingly need innovative insurance and risk management solutions as they face both emerging risks and evolving traditional exposures in the years ahead.
Like most other industries, technology will be a significant disruptor for logistics firms. It is changing the way in which people shop, how and where companies manufacture goods and how those goods are transported and distributed. Technology will also play an important role in response to growing environmental and public health concerns around vehicle emissions; according to a survey from the Freight Transport Association (FTA) some 70% of logistics firms say cutting emissions is a priority.
Technology will directly impact the US$4.8 trillion global logistics industry. From smart warehouses to driverless vehicles, digitisation and automation will help cut costs and drive customer service. There is already a burgeoning sector for logistics technology start-ups. Alphabet recently invested US$185 million in Convoy, a technology-enabled trucking network, while Uber offers an app that matches carriers with shippers.
Perhaps the biggest change on the horizon will be the increasing automation of warehouses and vehicles. A combination of cloud platforms, robotics, IoT and machine learning are expected to give rise to new and more efficient business models. Driverless goods vehicles, for example, could reduce haulage costs by 30%, according to a 2017 report from the OECD.
However, the transition to autonomous driving will not be straight-forward. For example, the technology behind autonomous cars is still unproven. Tesla cars have experienced a fatal crash in autopilot mode, while Apple’s self-driving car was recently involved in its first accident. Earlier this year an autonomous Uber car killed a pedestrian in Arizona.
It could be at least another 25 years before fully autonomous cars are seen as the ‘norm’, according to vehicle safety organisation Thatcham. Even then, some people may choose to drive manual vehicles or buy autonomous cars with manual options.
It could be a decade or longer before fully autonomous vehicles are common on the roads, and autonomous trucking could take even longer, given the need for rigorous testing. We should, therefore, expect a considerable period of time in which manual, semi-autonomous and eventually fully-autonomous vehicles are sharing our roads, which will have important implications for risk,
Once the issues are dealt with, autonomous driving is expected to dramatically increase road safety, given that around 90% of road accidents involve some form of driver error, according to the Association of British Insurers. In fact, insurers are already beginning to see signs that motor claims frequency is slowing with modern safety features, such as auto-emergency braking (AEB) - the technology has been shown to reduce personal injury claims by 45%.
Claims frequency should reduce significantly with autonomous vehicles, but the human element will remain for some time, and we have yet to see how autonomous vehicles will react to the ‘irrational’ actions of pedestrians, cyclists and manually operated vehicles. This is a concern for underwriters. Driverless cars are inevitable, but how good the technology will be, how long it will take to be fully compliant and when it will be fully operational, is still an unknown.
More sophisticated technology also means higher repair costs. Insurers are already seeing repair costs climb with Advanced Driver Assistance Systems (ADAS) and the use of more sophisticated materials - Thatcham says car repair bills have increased by 32% over the last three years. The cameras, sensors and lasers that power ADAS systems are often located in windscreens, headlights and bumpers, meaning a chipped windscreen or simple rear-end shunt can be expensive to repair (replacing an ADAS windscreen can cost as much as 123% more for certain models).
The current liability and insurance system was not designed with ADAS systems and autonomous vehicles in mind, however, the insurance industry has been helping the government devise a future liability framework for autonomous vehicles. Crucially, the recently passed Automated and Electric Vehicles Bill will enable motor insurers to recover costs from vehicle manufacturers when technology failure causes an accident.
The motor insurance policy will continue to be responsible for indemnity in a road traffic accident and will step in and fund the costs if technology is found to be the cause of an accident. However, while the Bill is a huge step forward, questions remain about how insurers will be given access to crucial post-crash data required to establish the cause of the accident.
Establishing cause and liability for an accident involving an autonomous vehicle may not be as straight-forward as it first seems. For example, data might not be accessible due to a malfunction or if hardware is destroyed in an accident. A missed software update, the use of a manual override or a cyber-attack could also be contributing factors to an accident.
“Autonomous vehicles will see a more complex position in respect of determining liability for road incidents. The vehicle insurer may seek subrogation rights in the event of the crash resulting from a failure in the technology of the vehicle. This may have implications for products liability exposures for vehicle manufacturers and the adequacy of limits applicable under insurance policies, not least on account of the unlimited liability limits attaching to Road Traffic Act requirements. In addition, truly autonomously operated vehicles will have no driver, resulting in a transferral of exposure from an employer’s liability policy to a motor policy, as all persons in the vehicle may be deemed to be passengers.” says Matt Lacy, Director of Casualty.
Increased reliance on technology, in the form of driverless vehicles but also with IoT and supply chain digitisation, will almost certainly create new risks, most notably the costs of dealing with cyber incidents and resulting business interruption.
The logistics sector is currently experimenting with low cost sensors, Blockchain and machine learning to digitise and automate logistics processes. However, reliance on both data and complex integrated platforms creates significant dependency risks. When the NotPetya malware struck in 2017, a number of logistics systems were crippled - it cost FedEx and Maersk US$300 million apiece.
“Cyber risk for logistics comes down to business interruption and integrity of the digital assets,” explains Erica Constance, Cyber Underwriter at QBE. “If a logistics platform goes down, or even worse, if a database is deleted or wiped, companies will not be able to operate. Smart warehouses are also a potential source of business interruption, if a rogue employee or malware causes malicious harm to the network,” she says.
Motor vehicles are also vulnerable to cyber-attacks, and increased automation is only likely to increase this risk. Connected vehicles might be open to cyber-attacks, malware introduced through updates or maintenance, as well as cyber extortion, terrorism, theft or outages. At present, motor insurance would cover bodily injury caused by a cyber event, including a malicious cyber incident, although motor policies may need to adapt as cyber risk evolves.
Cyber is a rapidly evolving risk for business and logistics. It is a difficult risk to assess and quantify, but customers increasingly require support and protection with specialist insurance. This is an area where we have been developing our capabilities and considering the implications for traditional insurance.
The logistics industry is already rich in data, while automation, cloud platforms and IoT will only generate more and more data that can be used to manage risk. Telematics and cameras have already had a big impact in the fleet motor market, while wearable devices are starting to be used to monitor employee movements.
Insurers are partnering with technology and insurtech firms to develop new risk mitigation services. QBE, for example, works with Vision Unique Equipment (VUE), which uses CCTV and telematics to analyse accidents and to inform risk management for fleet operators. QBE has also been looking at the use of technology to monitor driver fatigue, while IoT belts can monitor manual handling and working conditions.
“GPS and sensors will enable tracking of temperature, humidity and vibration – all tracked real time, on the cloud, AI monitored and with auto alerts. This will mean lots of data for insurers to analyse and feedback to customers,” says Victor Hu, Head of Data Science at QBE Insurance.
“This should mean better risk management, reduced incidents and the control of premiums. With better data, premiums will increasingly more accurately reflect the risk of individual customers, while insurance will become more tailored – usage based insurance and real time insurance will also be more available,” he says.
Logistics companies face a number of big challenges, not least Brexit, which will potentially impact the cost of fuel and spare parts, the supply of labour and ‘just-in-time’ supply chains. Concerns for emissions, growing competition and the disruptive influence of technology will all help shape risk for the logistics sector in the coming years.
Logistics businesses will need to walk the tight rope of managing traditional risks, while at the same time keep in mind that new and additional risks are just around the corner. As an insurer, we listen to our policyholders and intermediaries and work with them to face the challenges they face in helping to address the risks of tomorrow.
Automation and digitalisation will drive risk in the future, but we must not get fixated on new technology. The fundamentals of risk control and assessment remain critical. If you lose sight of the fundamentals it can easily push a business over the edge.