Risks may differ but don’t go away for driverless insurance

By reputation the insurance industry is often seen as a slow-moving beast but research suggests that their pace is changing. It seems that insurers are keenly embracing new technologies, such as advanced driver assistance systems (ADAS), and they are taking steps to prepare themselves for an autonomous vehicle future. Nevertheless, there is still the feeling that the rapid advances in autonomous vehicle technologies have taken some industries by surprise, including insurers, because there will be a need to create some radically different parameters from the very well established insurance model.

Legislators around the world are having to address the changes the rapid advances in autonomous vehicle technologies are creating. This includes finding a legislative way to answer the liability question of who’s responsible when an accident occurs when the traditional human driver is no longer in control of the car. With respect to semi-autonomous vehicles, there is also a need to determine when the driver is liable and when the car is liable. This has led to a number of vehicle manufacturers accepting default liability for accidents that are caused by their vehicles. As new legislation is passed and as autonomous technologies are becoming more sophisticated, there arises a need to cast off the traditional ways of assessing risk because they are going to become obsolete. It’s time to think anew.

Market growth

In the meantime Zion Market Research has published a report on the latest developments and trends within the ADAS market. The report, Advanced Driver Assistance Systems (ADAS) Market: Global Industry Analysis, Size, Share, Growth, Trends and Forecasts 2016-2024, finds that North America has so far dominated the ADAS market to date. The research company finds that the growth outlook seems positive: “There are many reasons for the growth of the ADAS market globally some being the strict laws by the government regarding safety, the consumer preferences for new technologies and good safety features.”

The organisation adds that, while market growth is positive, further expansion is being held back: “Factors that are hampering the market growth include: most of the applications of the ADAS are still in the stage of development and the applications that are developed are available only in premium cars. Another factor that hampers the market growth is the lack of consumer awareness regarding ADAS and its benefits.”

Shifting gears

These factors will have an impact on how insurers respond to ADAS and autonomous vehicle technology. John Matley and Bill Mullaney of Deloitte Consulting illustrate this point in their Insurance Business Magazine article, Insurers And The Future Of Mobility: Learning To Shift Gears: “As computers start to replace human drivers, the need for personal auto insurance will shrink dramatically. By 2040, personal auto insurance industry in the US, currently said to be worth $205Bn (£165Bn), is projected to drop to $140Bn.”

“Of the forecast $140Bn in 2040 premiums, approximately $100Bn will be commercial lines products protecting against product liability and commercial auto accidents. The sooner insurance companies adapt, the more likely they are to survive,” they add. These figures show why at least some insurers are reacting with more rapidity than they’re used to doing. It’s not so much about the technology. The key driver is about ensuring that they have a sustainable business model to permit their businesses to thrive and not just survive well into the autonomous vehicle future.

So, it’s today that insurers need to step back to think about how ADAS and autonomous vehicle technologies are going to impact on insurance premiums. Will they increase or reduce in price? After all, in the event of a crash, there is a lot of expensive gear to consider – such as sensors. The components within each vehicle as a result of a crash or systems failure may even need to be replaced or re-calibrated. This is costly.

However, because ADAS systems are designed to reduce accidents with safety in mind, it’s argued that fewer accidents will take place. In some commentators’ minds, this leaves the question about whether this will push insurers for a compromise between price and performance whenever they determine the risks and liabilities associated with a particular customer. From this issue emerges some differences of opinion in terms of the cost impact on insurance premiums.

Luke Harris, director of Claims at Metromile comments: “In the near term, these advanced systems will contribute to increased insurance premiums as the parts and labour associated with repairing/replacing and recalibrating damaged ADAS and autonomous vehicle components can be very costly. Although these systems are helping make vehicles and drivers safer, the vast majority of vehicles on the road today predate the advent of current ADAS technologies. ADAS and autonomous systems equipped vehicles will continue to be involved in accidents and sustain other insurance claim producing damages.”

“With all of this said, the long-term effects of ADAS and autonomous systems equipped vehicles will, ultimately, help lower insurance premiums by reducing both the frequency and severity of vehicle collisions. As these technologies become more affordable and equipped vehicles gain greater market saturation, the savings for insurers and consumers will start to earn in. At Metromile we predict the savings to eventually be upwards of $1,000 annually for the average driver.”

In contrast Mariel Devesa, head of innovation at Farmers Insurance says: “It depends. In the long-term it will likely lower premiums because more people will be using the technology and there will be a higher rate of adoption. This will eventually lower risk but, in the near term, you will have cars that cost more to repair or replace because of the additional technology.”

Safety standards

In terms of how ADAS and new safety standards will affect safety, Roosevelt Mosley, principal and consulting actuary at Pinnacle Actuarial Resources thinks that ADAS will reduce crashes caused by human error: “One of the major studies that is used in estimating the impact of autonomous vehicles is a National Highway Traffic Safety Administration (NHTSA) study on causes of motor vehicle crashes shows that 93% of crashes were caused by human error and this number is often referred to as the number of crashes that would be eliminated by autonomous vehicles.”

Harris responds by adding: “In the insurance Utopia of the future, auto insurance will still be required (although it will look different) but all vehicles on the roadways will be equipped with advanced safety features and will communicate with other vehicles and their surroundings to virtually eliminate the risk of damage or injury from an automobile crash. Although this isn’t something we’ll fully realise in the next decade, technological advancements in the automotive industry are helping to move us in this direction.

“The evidence exists in semi-autonomous and fully-autonomous case studies being conducted and produced by technology industry leaders like Google, Tesla, and Uber,” he says before commenting on whether this will change the traditional insurance rules: “As accidents become less frequent and less severe (both by measure of force and cost), the basic rules of insurance will prevail. Profitable, forward-thinking insurers will lower rates to gain market share and consumers will benefit from the lower premiums.”

Car ownership

Fewer accidents should as Harris indicates lead to lower insurance premiums. Then again, everything is relative and the growth of autonomous vehicles won’t necessarily reduce vehicle ownership. Therefore, it is in the insurers’ interest to ensure that all new vehicles are fitted with ADAS as standard and there is perhaps a need to encourage an aftermarket to allow more traditional cars to be fitted with these kinds of systems – if that’s at all possible.

Devesa’s view on car ownership is that “some people will always prefer to drive, while others will prefer to never drive again”. She is most interested in the impact that autonomous functionality will have on car-sharing and ride-sharing, arguing that the material cost of a using such a service could be less than owning a car. In her view this could affect vehicle ownership levels in the long-term, and subsequently on how insurance is marketed.

Mosely says that there are a number of people who think or hope that car ownership will reduce. However, he cites an Autoweek article that suggests this isn’t going to necessarily be the case. In her article, Turns out millennials sure are buying a lot of cars, Diana T. Kurylko finds that: “The fastest-growing segment of vehicle buyers happens to be the one that supposedly doesn’t care about cars.”

She elaborates: “Millennials make up the fastest growing segment among vehicle buyers and likely will represent about 40% of the US new-vehicle market by 2020. Last year, Millennials, also known as Generation Y, purchased 4.1M vehicles in the United States, accounting for 29% of the market, according to data from J.D. Power and Associates’ Power Information Network.”

Mosely points out that many people are doing these things later in life, saying: “Vehicle ownership is being delayed with today’s college graduates but that is more a function of them delaying major milestones in their lives (getting married, buying houses, having children, etc.).” This means that the need to own a car is “as pressing as earlier generations that did many of things not long after graduating college”. Therefore, it could just be wishful thinking by certain interested parties that vehicle ownership will wither away. Owning car is very convenient. To encourage the uptake of other forms of transport requires a good alternative transportation infrastructure. This often doesn’t exist and just because there is an alternative means of getting about, people still want choice.

Driver vigilance

Zapora Johnson, vertical market manager for telematics at LexisNexis Risk Solutions also points out that ADAS is not a panacea. The recent Tesla crashes show that drivers shouldn’t rely 100% on the autonomous technologies. “ADAS features are marketed as more of a way to assist drivers in safety and not to be completely relied upon, so drivers must still be vigilant as we do not have the infrastructure or ecosystem in place to support full autonomous driving, or certain ADAS features,” says Johnson.

“The challenge with new technology is that early adopters will push the limits of the existing capabilities,” says Devesa before adding: “Consumers should understand what the actual capabilities are and stay within the guidelines that are provided for the respective technology.” The technology will nevertheless change perspectives in that there will eventually be a shift from personal insurance coverage based on factors involving human error to commercial coverage that will be defined by technical failure. “In the near term, there are many areas that need clarity during the partial autonomous stages”, he explains. In essence though, it’s mobility that insurers are most focused upon.

Over the air risk

David Lukens, global product director for telematics at LexisNexis, also believes that it’s a challenge for insurers to assess risk on features that are capable of being updated over the air, thus changing the functionality of a system overnight: “That’s a challenge, especially if the vehicles take over the driving functionalities. The insurers need to be informed of the changes. Today, drivers do all sorts of things that insurers don’t know about though and insurers are often unaware of these changes.” So, there will in his view need to be some policy changes to cover the updating of systems over the air and he’s right to suggest that there will also need to be a mechanism to tell insurers what has changed and when it changed. In the same way, insurers need to know when a car is controlling itself or when a human driver is in control of the vehicle – particularly at the point of an accident.

Cyber-security

Because autonomous technologies will, to a certain extent, rely on some kind of mobile or wireless connectivity, insurers are having to consider the impact that cyber-security breaches will have on ADAS and autonomous systems. The worst danger could be created by a hacker taking over the control of a vehicle with the intent to either steal it or to cause harm to its ‘passengers’ or people outside of the vehicle.

Despite this potential threat, Lukens doesn’t feel that it’s for insures to spend their time assessing the cyber-security risk associated with the connectivity of each vehicle. “I am not sure that this is insurers’ responsibility unless they are insuring manufacturers for some kind of breach liability,” he comments. In his view the liability should lie with the vehicle manufacturers because they will have built the connectivity systems. “I think the OEMs are primarily responsible for this liability and so the auto manufacturers are always going to be central – and even if these systems are provided by Tier 1 suppliers to the OEMs, the OEMs are ultimately accountable for what they put into their cars,” he adds.

Harris responds by saying that cyber-security is certainly a hot topic with the increase in connectivity from carmakers and third party providers. “Insurers looking at their own risks, and so new cyber-insurance products and services are gaining popularity in the US.” He also supports the view that it’s important for insurers to be able to access the data of vehicles that are equipped with ADAS features: “Although there are many factors that affect the risk profile of an individual or household, knowing which vehicles are equipped with ADAS features and understanding how these features impact frequency, severity, and loss ratio helps insurers reward policyholders by offering lower rates for driving safer vehicles and demonstrating low risk driving habits.”

Ongoing conversations

Devesa concludes: “We are constantly having conversations about autonomous vehicles and looking at the data to better position ourselves to meet the needs of the changing marketplace.” Both Farmers Insurance and Metromile see the sharing of data as a way to adhere to their own core corporate values that put their customers in the driving seat. Customer loyalty is a must-have for them as insurers.

However, while it may be possible to use telematics data to be fairer to low mileage drivers with the usage-based insurance, sharing data still poses a challenge. It raises customers’ suspicions about how it’s really going to be used. Insurers and their partners therefore need to show their customers how they as consumers will benefit from data sharing. Furthermore, without access to the data from ADAS and autonomous vehicles, insurers will not be able to accurately assess risk. So, this is as important an unending conversation to have as the ongoing dialogue about changing liabilities and risk models.

[Ins.Jarvis.2017.02.16]

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