Autonomous Vehicles and the Disruption of the Car Insurance Industry
4 transformations that will change the industry as we know it
In 1897 Gilbert J. Loomis, a U.S. citizen, held the distinction of being the first person to purchase an automotive insurance policy. This protected Loomis if his car damaged property, or injured or killed an individual. Importantly, the earliest car insurance models determined that it is up to the drivers to protect themselves against any liability that could arise from incidents involving their vehicle. Something that hasn’t changed much even today. Buying insurance online, smarter analytics and pay-as-you-drive models, have changed the industry, but it is still fundamentally the same. Autonomous vehicles (AVs) are set to change this, big time.
Autonomous vehicles (AVs) offer many things. The convenience of being picked up wherever you are, not having to park when you arrive at your destination and being able to answer important emails on the go, are all good reasons for people to switch from conventional to automated vehicles. This convenience factor is important, however, arguably there is another factor that will play just as large of a role — insurance. Insurance is a numbers game. Insurers aren’t worried about horror stories of AVs failing to stop at pedestrian crossings but simply the likelihood of an accident. This will make driving AVs cheaper in the long run. Here we outline the four major disruptions to the car insurance industry.
1. Less claims — human fallibility
We humans are fallible and prone to making mistakes. Be it in our relationships, at work or even when carrying out the simplest of tasks. Human error when driving a motor vehicle is particularly costly, sometimes fatal. In fact, humans are by far the most dangerous thing on the road. In the UK for example, of the nearly 1,700 fatalities and 180,000 other injuries resulting from motor accidents each year, a staggering 90 percent of these come from human error.
Because of this human fallibility it comes as no surprise that many hail AVs as somewhat of a saviour when it comes to reducing road accidents. With HD maps, cameras and advanced sensors, AVs should be able to better assess their surroundings than humans. Also an AV is less likely to be tired, drunk or distracted by a message on its phone. Google’s redesigned Prius, for instance, has driven more than 700,000 autonomous miles without a single accident. As the safety of an AV will be assessed far more vigorously than a human driver, it will also be easier to ensure the quality of the road users. For this reason the number of claims will decline, representing a major challenge to the insurance industry. It is estimated that by 2035, the rollout of AVs will see auto insurance premiums drop by up to $25 billion in the U.S., 12.5 percent of the total market. Research from KPMG forecasts that by 2050, automation could reduce the car insurance industry by as much as 71 percent.
Source: Accenture, 2017The drop in the number of claims is very much dependent on how quickly the move to full automation comes about. In a world of complete automation, the drop would be stark. Premiums for conventionally driven vehicles would be relatively more expensive than for AVs and could price-out many from driving the vehicles themselves.
2. Will costs come down? Short term opportunities for insurers, long term decrease in premiums
Paradoxically, more automation will be both a boon and a burden for insurance companies. In the short term, payouts are likely to increase. Although it is difficult to make predictions on the unit costs of AV equipment; expensive cameras and sensors will almost certainly make AVs more expensive for a while. This means higher payouts too. In addition, insurers will also benefit from a reduction in fraudulent claims. As the whole of a journey will be monitored through telematics tracking, fobbing off the insurance company with a fake claim will become harder than ever.
On the flipside, this boon will only last so long. There are three main reasons for this. First, unit costs will inevitably decrease, reducing the value of parts being covered. Second, with greater autonomy there will be less accidents, leading to a drop in premiums. This will become increasingly apparent as the proportion of vehicles on the road, in advanced stages of automation, increases. The final reason concerns ownership, or lack thereof. As AV adoption is likely to take the form of mobility as a service (MaaS) in the form of “robotaxis”, the number of actors that require insurance will decrease. Whereas, insurance companies have historically provided cover for individual drivers, they will now be working directly with the OEMs and software licensing companies.
3. Liability shifts from driver to vehicle. Who is responsible?
As we reach the later stages of automation and human driving is eliminated completely, the burden of liability will shift from the individual to the vehicle itself. Today insurance is determined by a rough assessment of an individual’s ability to drive, with metrics such as: age, sex and driving history taken into account. Although imperfect, these metrics have helped insurers to provide appropriate premiums based on the risk factors involved. When it comes to judging the reliability of an AV, new prediction models will need to be developed.
Firstly varying degrees of automation and how they interact with other road users, need to be taken into account. As AVs with higher degrees of automation are less likely to be involved in road accidents, insurers will need to write policies with the degree of automation and the quality of its components in mind. It is not, however, as simple as making an objective assessment of a vehicles reliability. There are tricky questions to be answered surrounding responsibility. If specific parts fail or there is a software failure, who is to blame?
The 2018 Automated and Electric Vehicles Act states that if an automated vehicle causes an accident, the insurer is liable for damages. The insurer is then able to seek recompensation from other at-fault parties. This may include the OEM itself or the provider of the automated driving system (the software). Under this same act, the owner of the vehicle is made responsible for keeping the vehicle software up to date and well maintained. Failure to do so may relieve the insurer from covering the liability. New opportunities will arise in providing insurance in other areas. Cybersecurity, product liability insurance for sensors and algorithms, and insurance against infrastructure problems, offer new avenues for revenue generation. To make the most of this, insurers will need to establish agreements not only with the OEMs, but with the Tier 1 and Tier 2 suppliers.
4. New actors, new partnerships
To adapt to these fundamental changes in the way liability is covered, new partnerships will be required. This may lead to OEMs seeking to develop closer ties with insurers and possibly to bring insurance in-house. This would give the manufacturers greater control over their liability risk, as well as make it easier for them to sell their vehicles. This is because insurance prices are currently high for AVs, meaning it is in the interest of the OEMs to bring these costs down. Dan Peate, an American venture capitalist, was made painfully aware of this when he tried to insure his Tesla Model X a few years ago. He was quoted a whopping $10,000 a year. Insurance is, nonetheless, not a simple task, requiring advanced analysis and prediction models. Therefore, we may well see a large number of mergers and acquisitions between OEMs and insurance companies.
The Gilbert J. Loomis of the future won’t have a pulse
The core business of today’s car insurance industry is going to change dramatically, and the car insurance of the future won’t resemble anything like it does now. Individuals will benefit from less accidents and lower premiums, as well as reduced costs in terms of the abdication of their ownership commitments. As the driver will no longer be responsible for controlling the vehicle, the liability will move from the driver to the vehicle itself. This will mean new insurance models for OEMs, and Tier 1 and Tier 2 suppliers. With new insurance models come new opportunities for innovative players to get themselves in on the act. Over the past years, although the ways of measuring risk have become more effective, the fundamental aspects of insurance have hardly changed. With liability moving to the vehicle itself, the next Mr Loomis of the autonomous age is likely to be made out of software, not flesh and blood.
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