Will the Google car end automobile insurance as we know it?
By: Alexander Pui
Introduction
Google’s autonomous car has been portrayed as the latest techno-marvel that will set the
world’s commuters free from the steering wheel. While the technological sophistication built
into the software that enables the vehicle to essentially clock up to 300,000 kms on ‘auto-pilot’
is impressive, certain quarters may be nervous at the far reaching ramifications of the
autonomous car, with some already attempting to formulate contingency plans. However,
there are others simply unaware of the rapid progress being made in this space, or
demonstrating willful blindness, thus exposing themselves to the risk of losing the first movers
advantage – a risk that could prove fatal as evidenced by the demise of former market
leaders such as Kodak and Borders in recent times.
The advent of the autonomous vehicle will drive economic growth, but also has the potential
to unleash disruptive change1. In particular, one of the most susceptible industries is that of
auto-insurance given that driverless cars are likely to bring down accident rates dramatically.
As insurance premiums are a direct function of the frequency and severity of accidents, in a
reality where accidents are significantly curtailed, premiums will face significant downward
pressure. Since insurers make their profits on the float from their premium income, and
unless they can tap alternative sources of revenue, the markedly lower premiums will
adversely impact the profit margins of many insurers2.
The purpose of this essay is not to make predictions, but to serve as a guide to consider the
reach and scope of impact of autonomous vehicles on the auto-insurance industry. This will
enable business leaders to avoid surprise, and to identify pre-emptive strategies before the
technology begins to exert its disruptive powers. It will first explore how technology for
driverless cars will evolve, in particular the likelihood as to the timing and extent of driverless
car adoption. This is highly relevant, as it will determine how industry disruption will play out
and the time frame for insurers to adapt. It will then move to explore the implications arising
from two scenarios, and the alternatives available to insurers in each case; in the nearer term,
the more probable but lower impact shift to semi-autonomous vehicles where the driver still
retains some control over the machine; and further on the horizon, the less probable but
higher impact shift to a fully-autonomous vehicle.
How (and how soon) will the autonomous vehicle replace cars of today?
1 Disruptive technologies: Advances that will transform life, business, and the global economy, McKinsey Global
Institute, May 2013 2Ehrhart B., Important Trends for Insurers, Think ouside the risk, Precedings of the 2013 Aon Benfield Australia
Limited Conference.
Before addressing how the auto-insurance industry could thrive in an era of autonomous
vehicles, it would be instructive to first assess the potential pathways to a driverless society.
Firstly, high cost is a common obstacle to a commercially viable new product. At present, the
Google car is estimated to cost more than a Ferrari3, which would price the car out of reach
for mass adoption. However, if the high costs associated with driverless technology stem
from software components, it is arguable that these costs will diminish exponentially- akin to
how one gigabyte of memory fell from 300k in 1981 to less than 10 cents today4.
Another hurdle to the adoption of driverless cars may be psychological, i.e. that drivers simply
are unwilling to give up control of their cars as it embodies personal freedom and serves as a
status symbol5. Regardless of how persuasive economic and safety statistics may be,
personal habits do not change easily although people could come to trust the cars should
there be increasing evidence of their effectiveness. In contrast, new drivers who are born into
an IT savvy age may more readily trust automation, and an aging population faces the option
of immobility due to diminished driving reflexes or embracing autonomous cars6.
Crucially, autonomous vehicles will pose a unique set of regulatory and legal challenges. In
particular, the issue of liability will become central to how soon and how widely autonomous
vehicles will reign on our roads7. Citing America’s litigious society as an example, auto
makers have erstwhile refrained from offering products that placed control out of the hands of
the driver, as it would precipitate a shift in liability for accidents to themselves8. With the vast
majority of car accidents currently caused by driver error, manufacturers are only liable for a
small proportion which constitutes the remainder. Paradoxically, although autonomous
vehicles will reduce the total number of accidents via the removal of human error, the risk of
liability for the manufacturers increase as it is shifted from the drivers to them9. This is
evidenced in the airline industry, where pilots are still sat in the cockpits of commercial flights
due to liability reasons although computers are perfectly capable of flying planes.
Based on the discussion above, there exist several persistent obstacles to the broad
implementation of driverless vehicles. These obstacles will likely be overcome suddenly
rather than gradually, via a ‘killer app’ type jolt10
. This is because an opening for a killer app
will form when the exponential improvement in technology is not mirrored in the incremental
3 Will Auto Insurers survive their collison with driverless cars?
(http://www.forbes.com/sites/chunkamui/2013/03/28/will-auto-insurers-survive-their-collision-with-driverless-cars-part-
6/) 4 Ibid
5 Ibid
6 Ibid
7 Fleming James Jr., Accident Liability Reconsidered: The Impact of Liability Insurance, Yale Law School Faculty
Scholarship Series 8 Strategy: Reshaping Auto Insurance, Volume 5, 2013 , PriceWaterhouse Coopers
9 Martelle S., Self-driving cars and the liability issues they raise, May 2012
(http://www.protectconsumerjustice.org/self-driving-cars-and-the-liability-issues-they-raise.html)
10
Ibid 3
change within social, political, legal and business systems. In addition, the norms and market
dynamics in a driverless society will likely to be very different to what they are at present. To
illustrate, developing auto-insurance markets maybe more receptive to the notion of driverless
vehicles. Although the US is the leading global auto market at the moment, China may
emerge as a future pioneer of autonomous vehicles as it is spurred by greater incentives to
adopt driverless cars to reduce its harrowing accident rate and combat serious traffic
congestion and air pollution in its burgeoning cities. Alternatively, the concept of private
vehicle ownership may lose its appeal as automated taxi fleets are formed. If profit margin
issues due to cars sitting idly during off peak hours are overcome, these fleets may even
substitute private car use as the primary mode of transport, shuttling commuters to and from
work. While the time frame and extent of disruption caused by the autonomous vehicle
remains unclear, the auto-insurance industry must be prepared for several possibilities -
ranging from semi to full automation scenarios -to safeguard its continued viability. The
following sections will explore these scenarios addressing complex issues of liability, new
business lines and new ways to rate risk.
Case A: The Semi-Automation Scenario
In the semi-automation scenario, it is assumed that technology has progressed to the point
where the driver still maintains control over car, although there will be say advanced ABS,
collision avoidance technology built in to improve safety to the point that accidents are
drastically reduced. However, since liability has not shifted away from the driver of the
vehicle, the current business model of auto-insurers based on assumption of personal liability
remains valid. To estimate the impact of semi-automation technology on accident rates and
premiums, insurers could extrapolate from previous trends since the inception of air bags,
anti-theft and basic ABS, but what should insurers do if they expect accident rates to be
significantly curtailed?
The strategic choices facing insurers are stark: Should they delay instituting price reductions
and enjoy short-term profitability? Or price aggressively with the aim of stealing the best
customers to gain market share? The latter choice of being aggressive seems rational. As
premium per customer decreases, one way to address this issue is by signing up more
customers to offset the decrease in revenue per customer, assuming that the costs of
repairing a technologically advanced vehicle does not increase significantly. Importantly, to
sign on ‘good’ customers, a more creative underwriting approach is required by leveraging
improved data capture technology, and acknowledging an increasing reliance on machinery
rather than human driving abilities. Instead of using traditional rating factors such as age,
address, engine size or vehicle purpose, insurers could utilize advanced telematics, whereby
data that describes how, when and where a vehicle is actually driven is used to calculate risk
presented by the driver11
. For example, information such as typical routes taken (safe wide
highways with dividers as opposed to narrow winding beach roads) and the number and age
11
Driverless Cars: Boon or Bane for auto insurers? IBM Global Business Services White Paper, 2013
of occupants in the vehicle (i.e. the expected life span and medical costs of a 5 year old
quadriplegic would dwarf that of a grown adult) could be collected by a beacon fitted to each
vehicle that is relayed to the insurer, enabling dynamic road pricing and the ability to offer
different insurance prices to customers. In fact, basic telematics based insurance products is
already being gradually introduced in the UK and the US, with equipped policy holders
reporting reduced claims sizes and frequencies12
.
An advanced telematics approach to risk rating will not come without its own set of
challenges. For instance, insurers will need to first make a bold and expensive investment in
its data collection and management strategies and carefully consider the operational costs of
telematics especially its impact on claims experience, business volumes and business
retention. This may not augur well with the increasingly widespread outsourcing and cost
cutting strategies. In addition, since it will be easy to track a driver’s movements through
record keeping, prospective users may view it as a fundamental violation of privacy – thus
opening a floodgate of related legal issues. As such, new laws will have to be drafted to
regulate the use of telematics and insurers will need to reassure its customers by tightening
information security before it can be introduced on a broader scale.
Case B: The Fully Automated Scenario
Further into the future, there may be another more potent step shift from heavily assisted
driving to ‘full’ automation where the human no longer controls the vehicle. At this juncture,
the actions of drivers will effectively cease to be a predictor of premium rates as control of the
vehicle is completely ceded to machines. Even if accident rates do not vary much between
semi and fully automated scenarios, there will still be a profound impact on the auto-
insurance industry owing to a shift from personal to product liability. As a consequence, the
insurance sector will be compelled to change their current business-operating model as the
need to locate an alternative source of premium arises. This is where the business of insuring
car manufacturers as well as those who build driverless automation software for product or
tort liability assumes paramount importance.
As an example, it is not difficult to imagine that there will be the potential for low frequency but
high impact incidents if cars travelling at high speed (say on the German Autobahn) suddenly
suffer from a software malfunction and innocent lives are lost. Where would fault be
attributed in this situation – the car, or the software, or both (i.e. the failure to seamlessly
integrate between physical automobile function and software)? The fallout from such an event
for the car maker could be immense, especially if entire model lines have to be recalled and
decommissioned, or risk further class actions taken by other parties that would escalate
business interruption costs very quickly. If fault was determined to lie with the software
producer, a similar set of problems to the car maker could unfold, and worse – as the barriers
to entry in software manufacturing are substantially lower than the production of vehicles, if
consumers lose trust in the software, other competitors may emerge to permanently gain a
12
Adams G., The Future of Motor Insurance, March 2014, Finity Consulting
market lead. Given the gravity of the consequences in the unlikely event of a software glitch,
the premiums of any insurance product to safeguard against these events will be high, thus
making the arena of product liability a potentially lucrative field – one that may even eclipse
traditional motor premiums due to lower overheads such as low distribution costs and small
but specialized claims handlers. Another potential issue involves the deliberate decision of
the driverless car to swerve into the path of a large oncoming truck to avoid an errant
pedestrian as it was programmed to make the decision that reduces harm to human life as a
priority13
. Where would liability lie in this instance, and how can auto insurers step in to
provide financial relief in the event that ‘grey’ decisions are made by computers?
Aside from product liability to auto and software makers, other avenues may become
available to insurers. As mentioned earlier, if the norms of car ownership change in a
driverless future, and consumers turn to cars as a purely commuter service, fleets of taxis and
freight vehicles will be established and there will in turn be insurance opportunities within this
space. Alternatively, since cars will be entirely automated and presumably controlled via an
online source, it will not farfetched to see a need to insure against crimes of hacking and
cyber security breaches.
From just a few hypothetical examples stipulated above, it is clear that insurers will need to
be nimble and flexible to explore these alternatives. In the advent of improving technology
and increasing complexity in both software and hardware of the driverless car, insurers
should consider shifting from their current broad scale auto insurance model to focus on
specialty lines with a team of legal and technology underwriting experts to pricing one major
line (say product liability) and pricing it well. In addition, insurers could also forge stronger
ties and business relationships with the likes of the main auto makers or Google as they may
find it more practical and economical to offer insurance up-front upon the purchase of a
driverless vehicle. The risk of not doing so may be that the creators of these products emerge
as competitors themselves should they see greater benefit in offering insurance internally
instead of transferring risk to the insurers.
Conclusion
Each new technological milestone achieved by Google edges the auto-insurance industry
precariously closer to a head on collision with the driverless car –a collision that will provide
openings for new players and upset established order. With inevitable shifts in profit pools
between companies and industries, the severity of this collision will depend on a number of
mitigating factors, many of which are within the control of insurers. The fear that the traditional
motor insurance market may shrink permanently remains a real one, although there is
considerable optimism that premiums in new liability driven sectors (in addition to other lines
such as natural perils that are still required) may emerge as a viable offset. As such, the first
mover’s advantage will be crucial in devising new lines of business with the right underwriting
13
Light D., Is Tort Law a Roadblock for Driverless Cars, Insurance Experts Forum, Dec 2013. (http://www.insurancenetworking.com/blogs/insurance-tort-law-driverless-cars-33576-1.html)
human capital as well as new ways to conduct business by forging powerful partnerships with
software and auto makers, and quickly establishing reputation in the new markets of product
liability insurance. In short, regardless of how profitable auto-insurance is at the moment in its
current form, firms should adopt a longer-term view instead of focusing solely on immediate
financial incentives. Those that are receptive to the advent of the autonomous vehicle and
plan ahead should be able to successfully navigate the teething issues when disruptive
change arrives.
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