Self-Driving Cars and Insurance

Self-Driving Cars and Insurance

SEPTEMBER 2014

THE TOPIC

Each new generation of cars is equipped with more automated features and crash avoidance technology. Indeed, many of today’s high-end cars and some mid-priced ones already have options, such as blind-spot monitoring, forward-collision warnings and lane-departure warnings. These will be the components of tomorrow’s fully automated vehicles. At least one car manufacturer has promised to have fully automated cars available by the end of the decade.

Except that the number of crashes will be greatly reduced, the insurance aspects of this gradual transformation are at present unclear. However, as crash avoidance technology gradually becomes standard equipment, insurers will be able to better determine the extent to which these various components reduce the frequency and cost of accidents. They will also be able to determine whether the accidents that do occur lead to a higher percentage of product liability claims, as claimants blame the manufacturer or suppliers for what went wrong rather than their own behavior. Liability laws might evolve to ensure autonomous vehicle technology advances are not brought to a halt.

RECENT DEVELOPMENTS

  • General Motors will offer a super cruise system with hands-free automated driving on freeways that have proper lane markings by 2016. However, drivers will have to be ready to take over control of the vehicle and cars will be fitted with a device designed to alert the driver to pay attention even during highway driving. Toyota said it plans to offer crash-avoidance technology in Toyota and Lexus models by 2017. Daimler is now offering a system on certain models that allows a car to brake, accelerate and remain in its lane without human intervention at speeds of under 16 miles an hour.
  • Google, the company that has been the public face of self-driving cars in the United States for the past few years, announced in May 2014 that it is building a fleet of vehicles without a steering wheel or role for a driver because its technology has not been able to successfully switch control back and forth from automated driving to the driver in an emergency and does not expect to be able to accomplish that soon. The prototype will have a top speed of 25 mph and will be summoned by a smartphone, in effect serving as an automated taxi service. Other companies building autonomous cars said that they will continue to work on vehicles that will be able to safely make that switch. Volvo says that it expects to have its cars tested on city streets by ordinary drivers by 2017. However, experts say the size and the cost of the sensors powered by lasers used to steer the driverless cars must be reduced before such cars can be put into mass production.
  • A survey by IEEE, a technical professional organization dedicated to advancing technology for humanity, of more than 200 experts in the field of autonomous vehicles found that of six possible roadblocks to the mass adoption of driverless, these three were ranked as the biggest obstacles: legal liability, policymakers and consumer acceptance. Cost, infrastructure and technology were seen as less of a problem. When respondents were asked to specify the year in which some of today’s commonplace equipment will be removed from mass-produced cars, the majority said that rear view mirrors, horns and emergency brakes will be removed by 2030, and steering wheels and gas/brake pedals will follow by 2035.
  • In February 2014 federal agencies approved vehicle-to-vehicle (V2V) communications systems that will allow cars to “talk” to each other so that they know where other vehicles are and can compensate for a driver’s inability to make the right crash avoidance decisions because of blind spots or fast moving vehicles. V2V communication uses a very short range radio network that, in effect, provides a 360-degree view of other vehicles in close proximity. The Department of Transportation estimates that safety systems using V2V communications will be able to prevent 76 percent of crashes on the roadway.
  • At the end of 2013 Michigan joined California, Florida, Nevada and the District of Columbia as jurisdictions that allow the testing of autonomous vehicles on public roads. Under the Michigan law, drivers of such vehicles must remain in the driver’s seat at all times while the vehicle is on the road so that they can take over in the event the technology fails or there is an emergency. In California, the Association of California Insurance Companies is advocating “for changes clarifying that the autonomous vehicle’s manufacturer retain all liability for damage, losses or injuries caused by the operation of these vehicles as required by the enabling law (SB 1298),” according to Property Casualty Insurer’s Association of America. Other states have considered such proposals. The U.S. Department of Transportation lets states allow limited testing of autonomous vehicles but not sales.
  • A study of the benefits self-driving vehicles by the RAND Corporation, released in early 2014, includes discussion of liability insurance options. It suggests that the concept behind no-fault auto insurance laws might become an attractive alternative to tort-based laws as the use of automated vehicles becomes more widespread. The study, “Autonomous Vehicle Technology: A Guide for Policymakers,” also discusses the possibility that product liability cases against manufacturers may inhibit the development of such technology, in which case, the study suggests, laws that incorporate some level of cost-benefit analysis may be adopted, based on the notion that the technology is more likely to reduce human error than to cause it.
  • Preliminary results from a study by Ron Actuarial Intelligence conducted for Israel’s ministry of finance found that collision avoidance systems in private cars resulted in a 45 percent reduction in bodily injury insurance claims. Using data from auto insurance policies issued between 2009 and 2012, the analysis separated out the influence of forward-collision warnings and lane-departure warnings from the impact of all other factors related to bodily injury claims frequency. The report says that the effect of such crash-avoidance systems on the seriousness or severity of claims is not yet clear.

BACKGROUND

Self-driving cars are definitely on the way, but it may be some time before we are all being conveyed by fully automated vehicles.

Most accidents are caused by human error so if this factor can be minimized by taking control of the moving vehicle away from the driver, the accident rate should tumble. Data from the Institute for Highway Safety (IIHS) and Highway Loss Data Institute (HLDI) already show a reduction in property damage liability and collision claims for cars equipped with forward-collision warning systems, especially those with automatic braking. The exact percentage varied depending on the car manufacturer.

Among the major automakers testing self-driving cars are Audi, Ford, Mercedes, Nissan, Toyota and Volvo. The cars have some ability to travel without the driver intervening but only in certain situations, such as low speed stop-and-go highway traffic. Slow speeds give the car’s computers more time to process information and react.

Experts vary as to when the changeover to self-driving cars will occur. A transport scholar at the University of Minnesota believes that by 2030 every car on the road will be driverless. Driverless shuttles are already being tested on some university campuses in Europe.

An automotive study by IHS, a global information company, titled “Emerging Technologies: Autonomous Cars—Not If But When” forecasts that self-driving cars that include driver control will be on highways around the globe before 2025 and self-driving “only” cars by 2030. Nearly all of the vehicles in use are likely to be self-driving cars or self-driving commercial vehicles sometime after 2050, it says. The study notes two major technology risks, software reliability and cyber-security.

We do not yet know how the driving public will react to the vehicles that come on the market. For most drivers there will be a steady progression from a minimally or semi-automated car to the next level. A Status Report from HLDI suggests that it could take as long as three decades for 95 percent of all registered cars to be equipped with crash avoidance systems. Forward-collision warning systems have been available since 2000, HLDI says, and if they follow their current trajectory, they will not be available in most cars until 2049.

In addition, some people who enjoy driving and do not want control to be taken from them may resist the move to complete automation. Already there are some who say they refrain from using the cruise control feature because they prefer to maintain control themselves.

The risk of an accident is unlikely to be completely removed since events are not totally predictable and automated systems can fail. In addition, the transition from hands-off driving to hands-on promises to be tricky.

The need for drivers to control the car in an emergency is fraught with questions, not just those involved in the automotive technology. What kind of training will people need to safely handle these semi-autonomous vehicles? How well prepared will drivers be to handle emergencies when the technology returns control to the driver? How will beginning drivers gain the necessary experience and how will experienced drivers stay sharp enough when they are only infrequently called upon to react?

Autonomous cars have been compared to airplanes on auto-pilot. But while a pilot and a driver both need to be able to make split-second decisions, there are likely to be fewer times when this skill is called upon in a plane than in a car and, in addition, the pilot is highly trained in how to interact with the automated system.

The Impact on Insurance

Some aspects of insurance will be impacted as autonomous cars become the norm. There will still be a need for liability coverage, but over time the coverage could change, as suggested by the 2014 RAND study on autonomous vehicles, as manufacturers and suppliers and possibly even municipalities are called upon to take responsibility for what went wrong. RAND says that product liability might incorporate the concept of cost benefit analysis to mitigate the cost to manufacturers of claims. Coverage for physical damage due to a crash and for losses not caused by crashes but by wind, floods and other natural elements and by theft (comprehensive coverage) is less likely to change but may become cheaper if the potentially higher costs to repair or replace damaged vehicles is more than offset by the lower accident frequency rate. The number of vehicle-related workers compensation claims, now responsible for a large but decreasing portion of claim costs according to the National Council on Compensation Insurance, should continue to drop as will the share of healthcare and disability insurance costs related to auto accidents.

Regulation: Insurance is state-regulated. Each jurisdiction has its own set of rules and regulations for auto insurance (and so far for self-driving cars). Basically, there are two kinds of liability systems. In some states liability is based on the no-fault concept, where insurers pay the injured party regardless of fault, and in others it is based on the tort system. But there are many important differences among the states in the regulations that now exist within each category, see report on No-Fault Auto Insurance. Will the auto insurance system change to be more uniform with the arrival of self-driving vehicles and will the federal government play a larger role? If car manufacturers are required to accept more responsibility for damage and injuries, they might push for a greater role for the federal government to eliminate some of the cost of complying with the rules of 51 jurisdictions.    

Underwriting: Initially, many of the traditional underwriting criteria, such as the number and kind of accidents an applicant has had, the miles he or she expects to drive and where the car is garaged, will still apply, but the make, model and style of car may assume a greater importance. The implications of where a car is garaged and driven might be different if there are areas set aside, such as dedicated lanes, for automated driving.

During the transition to wholly autonomous driving, insurers may try to rely more on telematics devices, known as “black boxes,” that monitor driver activity. Some drivers may object to them based on concerns about privacy. Usage-based insurance policies, which depend on data about the driver’s behavior submitted by an electronic device in the driver’s car, have attracted a smaller than expected percentage of the driving population, possibly because people do not want to be monitored. According to the National Association of Insurance Commissioners, use of telematics is forecast to grow to up to 20 percent within the next five years.  

Liability: As cars are become increasingly automated the onus might be on the manufacturer to prove it was not responsible for what happened in the event of a crash. The liability issue may evolve so that lawsuit concerns do not drive manufacturers and their suppliers out of business

RAND has suggested some kind of no-fault auto insurance system. Others foresee something akin to the National Childhood Vaccine Injury Act, a no-fault compensation program for vaccine recipients who suffer a serious adverse reaction when vaccinated. The legislation was passed in 1986 in response to the threat that life-saving vaccines might become scarce or even unavailable if manufacturers, overwhelmed by claims of injury, scaled back or terminated production.

Repair Costs: While the number of accidents is expected to drop significantly as more crash avoidance features are incorporated into vehicles, the cost of replacing damaged parts is likely to increase because of the complexity of the components. It is not yet clear whether the reduction in the frequency of crashes will lead to a reduction in the cost of crashes overall.   
 
Automobile ownership appears to be on the decline, and more people in urban areas are opting for public transportation and shared rides. Some people wonder whether when all vehicles are self-driving anyone will actually own a car. Cars may belong to a company, municipality or other group and may be parked away from the center of the community in a location from which they can be summoned by phone.

A study by the University of Texas at Austin of how the advent of autonomous cars may change vehicle ownership found that each shared autonomous vehicle (SAV) replaced about 11 conventional vehicles. The study assumed that only 5 percent of trips would be made by SAVs.

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