The idea of self-driving or autonomous cars is an intriguing one. What if you didn’t have to be paying attention to the road? What if you could enjoy the privacy of being the sole passenger in a vehicle, but not actually have to drive it? There are plenty of reasons that self-driving cars are something that interests us and has us looking towards the future.
But the question that arises for insurers is…now what? It’s clear that insurance companies will be hugely affected by the adoption of semi-autonomous or fully autonomous cars. Insurers could see drops in auto insurance premiums in the individual car insurance market, see new opportunities with new lines of business, and new ways of assigning liability when accidents occur. They also have to get ready for the inevitable changes that are going to sweep through the industry.
3 shifts in auto insurance due to self-driving cars.
A drop in car insurance premiums due to self-driving cars?
One of the trends that could eventually occur as more self-driving cars take to the roads is that auto insurance premiums will drop. This is because self-driving cars are ostensibly safer than human-driven ones. (Indeed, data from the NHTSA shows that human drivers are to blame for 94% of crashes.) As the frequency and severity of accidents decreases, so does risk. And as risk decreases, so will auto insurance premiums. It may take time to see this trend, but it could occur.
Another reason that a drop in premiums could occur is simply the fact that people might not be as interested in owning their own vehicles. With people moving to cities and using ride-share services, there’s less need to own a car. And there might just be an overall lack of desire to own a vehicle at all. And of course, that’s less potential premium for insurers to collect – in the individual car insurance market, at least. The prediction is that car ownership will shift from vehicles being owned by individuals to vehicles being parts of fleets that are operated by tech companies, the manufacturers, and even rideshare companies.
With these two factors contributing to the decrease of car insurance rates, the loss of premium for insurers could be significant. In fact, an article in The Harvard Business Review estimates that there could be a $25 billion loss for the insurance companies by 2035.
However, not all hope is lost for insurers. Though the personal auto insurance market could shrink, there will be other opportunities for insurers to recoup the losses with new lines of business.
New lines of business could become viable for insurers.
With the increase in self-driving cars comes an increase in the need for new lines of insurance to protect against the risks that these vehicles create. If insurers are prepared to embrace these new spaces, they can move into the new lines of coverage and offset the losses in premiums that could be seen in the personal car insurance market.
According to an article from Insurance Journal, there are three potential new lines of coverage that present insurers with new opportunities as self-driving cars become more and more of a reality:
Cyber liability. A major concern with autonomous cars is the possibility of hacking and cybercrime. Ransomware and cyber theft are potential losses that need to be covered with insurance.
Products liability. What happens if something goes wrong with the software or hardware that makes the self-driving car go? Liability for manufacturers goes way up when you think about the possibility of problems with the software, failure or issues with the algorithms, or the memory getting overwhelmed. With something as potentially dangerous as driving, it’s crucial that all the components that go into the car’s self-driving technology work properly and smoothly. But if they don’t, that’s where insurance can come into play.
Infrastructure. There is a significant amount of investment in infrastructure that must happen if self-driving cars are to run smoothly and effectively. Cloud servers and signals are an important part of autonomous driving, as are car-to-car and car-to-infrastructure communication. There could be a need to insure the hardware and software that makes this all possible.
The Harvard Business Review article mentioned previously estimates that these lines of coverage could generate $81 billion through 2026, which would more than make up for the estimated losses caused by decreasing auto insurance premiums through 2050.
Who’s liable?
Currently, when there’s an accident one driver or the other is considered “at-fault.” A major issue with self-driving cars is who’s going to be held liable when an accident occurs if no human is actually controlling the car. So, that’s a potential challenge and question for the insurance industry to puzzle over. However, it looks like car manufacturers will have to assume more liability, as they’re the ones responsible for creating the software hardware and technology that allows the car to think for itself.
How quickly will autonomous cars take to the streets?
It’s difficult to know with certainty how quickly autonomous cars will appear on the roads. But it’s likely that this process will happen over time, not quickly or suddenly. The NHTSA presents a list of six “stages” of automation.
Level 0 – The driver is in full control – there is no automation.
Level 1 – Driver assist features may be incorporated in the vehicle, but the driver must remain in full control.
Level 2 – The driver must remain fully alert and in control, but the vehicle can handle some features such as steering and acceleration/braking at certain times.
Level 3 – The driver must be prepared to take control of the vehicle at any time when the car notifies them, but they don’t necessarily have to be constantly monitoring the environment.
Level 4 – The car can essentially drive itself in certain circumstances, and the driver would not have to pay attention in those circumstances. The human driver can take control of the vehicle.
Level 5 – The car drives itself and there is no option for a human driver to take over. The human is simply along for the ride.
According to the NHTSA, autonomous cars will be incorporated on US roads by moving through these stages of automation as the technology advances. So insurers will have time to adapt to the changing world of driving, vehicles, and fleets. However, the prediction cited in The Harvard Business Review article is that by the year 2050, more semi-autonomous and autonomous cars will be on the road than human-driven cars.
Insurers need to be ready for the change.
Clearly the world of auto insurance is changing, and it might feel like the ground is shifting under the insurance companies as technology blazes a trail towards new risks and a new definition of “driving.”
But that doesn’t mean insurers can’t take steps to get ready.
Insurance companies can start digging into the data collected by the software and communication platforms that allow autonomous vehicles to exist. Numbers have always been the insurance company’s best friend, and by being able to process, understand, and apply this data, insurers can give themselves a leg up.
Insurance companies can also develop actuarial means to evaluate this type of risk. They will need to be prepared for the different stages of automation and they will need to have the means in place to be able to underwrite it. Driver assist features can have an effect on the safety rating of vehicles equipped with them, and insurers have to be ready for this at each stage of the progression of automation.
They will also have to consider partnerships with various groups, such as auto manufacturers and software providers. It’s also possible that they will need to consider their entire business model. The ownership of vehicles may shift from the individual to companies that own fleets. For insurers, that means a shift from covering many, many smaller risks to a smaller number of big risks. Insurers have to be prepared for that change.
The world of auto insurance will be significantly changed as cars become progressively more autonomous – and eventually, possibly outnumber human-driven cars. Insurers will have to be ready for the change, and they’ll have to be prepared to embrace new lines of coverage in cyber and products liability as well as have the tools on the actuarial side to adjust with the changes. Personal auto insurance might change, but that doesn’t mean insurers are doomed. It just means they’ll have to be ready to adapt to the times.
Sources:
https://www.insurancejournal.com/magazines/mag-features/2018/12/03/510344.htm
https://hbr.org/2017/12/driverless-cars-will-change-auto-insurance-heres-how-insurers-can-adapt
https://www.nhtsa.gov/technology-innovation/automated-vehicles-safety