Insurance Industry Braces for Driverless Cars
In December, on-demand insurance company Trōv unveiled a partnership with self-driving technology company Waymo to offer “insurance billed by second, day, mile, event” for ride-sharing coverage in self-driving vehicles. Trōv founder and CEO Scott Walchek called the partnership “the convergence of the future of transportation with the future of insurance.”
That future is making some insurance companies nervous, as automakers and other companies set ambitious goals to offer fully autonomous private cars and taxis within just a few years. Experts say insurance companies need to prepare for this shift or potentially lose millions or billions in revenue as those self-driving vehicles drastically reduce crashes and premiums.
KPMG warned in a 2015 report of a “select set of winners and a broader swath of potential losers” as the industry transforms, and said a survey showed that 32 percent of insurance industry insiders conceded doing nothing to prepare.
“We’re all sort of trying to predict the future,” said Jim Whittle, assistant general counsel at the American Insurance Association. He said one focus of the association is maintaining auto safety, and that in the move toward self-driving cars there is no “cutting corners.”
The insurance industry is already using artificial intelligence. Customers who allow companies to monitor their driving with AI equipment installed in the car or via an app get a discount. Insurance companies also use AI to analyze huge volumes of data, cut overhead and streamline claims, detect fraud, and replace or assist insurance agents or customer service representatives with virtual assistants.
But those benefits are only “Act 1,” in the words of Daniel Schreiber, co-founder and CEO of Lemonade, a company that sells “insurance powered by bots and data-driven algorithms” to serve those who have become accustomed to doing everything on their smartphones. The benefits accrue to any company in any industry that embraces AI.
Although driven by data, the insurance industry has been dubbed one of the “most outmoded” by a Lemonade board member. The industry’s “Act 2,” according to Schreiber, will be its transformation via AI.
Forecasts of an Industry Disrupted
Analysts fear AI’s biggest impact on the personal auto insurance industry sector will occur as car makers and tech firms use AI to eliminate the need for drivers, and ride-sharing firms strive to use autonomous cars to eliminate the need for personal car ownership.
Waymo says 94 percent of crashes are due to human error. Even as Uber paused its autonomous driving program in Arizona after one of its self-driving cars fatally struck a woman in Tempe, experts expect such accidents to drop precipitously as AI takes over. The KPMG report predicted 80 percent fewer accidents by 2040, potentially shrinking personal auto loss costs from $125 billion to $50 billion — a 60 percent drop. And premiums will follow costs, they say.
Researchers at Virginia Tech found lower crash rates for autonomous vehicles across the board, even for low-level crashes that were unlikely to be reported if a human driver was behind the wheel. And that data includes crashes by autonomous vehicles still in the testing phase.
As insurance payouts drop, customers and perhaps regulators will expect their premiums to follow. With companies working to replace personally owned cars with shared vehicles, premiums could drop even more.
Lisa Quinn Knych, professor of law and public policy practice at Syracuse University’s Whitman School of Management, said autonomous vehicle owners will still have to be insured, but the other parties that require insurance may shift and expand.
She said fewer drivers could potentially mean less revenue for insurance companies, “but I think companies can plan for that ... and adjust with the new technology as it happens.”
Some of that premium income could be replaced by insuring the vehicle manufacturers, or the company responsible for the AI.
“If a human being is involved and the human being is at fault or negligent in some way, that human being is going to want insurance,” Knych said. “But I also think that there may be increased opportunities for companies to insure for product liability.”
She also noted that technological developments, such as seat belts and air bags, increased safety, and yet insurance companies didn't stop making a profit. But, she said, “I think this is a bigger change, so the industry has to be more focused on how the business model will shift.”
Defining the Driver
For most car trips today, the car’s driver carries insurance that also covers the vehicle, passengers and contents of the car. But if a car is truly autonomous, then who is the “driver,” and who should pay for the insurance? The car owner? How does an insurance company know whether self-driving mode in a Tesla is turned on, so the company can bill appropriately?
Two Swiss Re experts suggest a split model, with product liability and driver liability changing depending on who is driving and for how long. Knych said insurance companies may even have two sources of auto premiums. Even if she has a driverless car, she said, “I just don’t foresee not wanting to drive sometimes. Because I enjoy driving.”
Nearly 82 million cars are expected to be sold in 2018, according to Statista. By comparison, the consulting firm HIS Automotive expects sales of 600,000 autonomous vehicles worldwide in 2025, rising to 21 million in 2035, with China leading the way.
The autonomous car industry, however, has many hurdles to navigate before it gets there — other than who pays in a crash. The technology has to prove itself safe, or it won't be embraced by consumers. It also has to be reliable and secure from hackers. Some state and local officials have balked at permitting autonomous vehicle testing let alone widespread introduction, perhaps sensing the fear of some drivers, passengers or pedestrians.
Asked for its position on insuring self-driving cars, the New York State Department of Insurance pointed to the announcement in May 2017 that it was accepting applications for testing self-driving cars, provided companies comply with federal safety standards and state inspection standards. The legislation permitting the testing expires in a year.
The American Insurance Association has been looking at proposed laws and regulations. Whittle said the legislative focus so far has been on permitting testing, not the future of auto liability. Similarly, the National Highway Traffic Safety Administration doesn’t expect fully automated driving until 2025 and then only on the highway.
After years of polling data that suggested fear of self-driving vehicles, AAA said early this year the number of drivers who said they are afraid to be in one dropped from 78 percent to 63 percent. Whittle said maintaining safety of self-driving cars is important for their acceptance because any failure of a driver assistant system becomes a “huge news item.”
However the partnership between self-driving tech companies and the insurance industry develops, leaders in both camps will have to keep their eyes on the road.
“I think it’s going to be complicated, but not necessarily negative for the insurance industry,” Knych said.
Citation for this content: MBA@Syracuse, Syracuse University’s online MBA program