General Insurance Article - Driverless Cars: How will insurers be affected?

 By Cherry Chan, Partner, Barnett Waddingham

 On 30th July the UK Government announced that driverless cars will be permitted on public roads from the beginning of next year. Following US, Japan and Germany, who have already trialled driverless cars, three UK cities will be chosen to trial the autonomous vehicles for a minimum of 18 months. The technology is ready but what effect will the uptake of these autonomous vehicles have on insurers?

 Reduction of accidents vs increase in claim size
 There are over 1,700 fatalities and 180,000 other injuries resulting from motor accidents in the UK a year and an estimated 90% of these arise from human error1. Driverless cars have the potential to remove the human error element of risk and hence could have a dramatic effect on our road safety. Google’s redesigned Prius has driven more than 700,000 autonomous miles2  without a single accident. This reduction in risk could cause third-party damage insurance to largely disappear and Forbes has estimated that premiums could be reduced by as much as 75% as a result3.

 However, at an estimated whopping price of £170,000 per car4, the cost to replace and repair parts after a crash could be high. In addition, if there was a crash due to the automated systems, extensive software and hardware analysis would be necessary to determine the reasons for the crash. Although the technology should become cheaper with advances in technology, these costs and the expensive equipment and software may inflate premiums, compensating for the reduction of accidents, and increase the demand for comprehensive policies.

 Elimination of fraudulent claims
 The increased quantity and availability of data could be beneficial in accurately assessing the risk of policyholders and reducing fraudulent claims. Nick Beecroft, manager of emerging risks & research at Lloyd’s said “Autonomous vehicles should mean that insurers will be able to get a more comprehensive and detailed picture of risk.”5  Claimants will no longer be able to exaggerate and lie about the cause of an accident, reducing the amount insurers pay out unnecessarily on fraudulent claims and eliminating ‘crash-for-cash’ scams.

 The move away from personal lines motor insurance
 With cars becoming automated, risk may be transferred from the individual driver to the manufacturer, depending on future legislations. Accidents will in future be principally caused by the malfunctioning of systems, forcing manufacturers to insure whole fleets of cars instead of the driver insuring themselves. This shift from personal lines motor insurance to product liability insurance could introduce big aggregation risk caused by a system failure affecting multiple vehicles at once.

 It is also possible that damage and theft risk may become part of household contents policies requiring motor insurance companies to find other revenue streams to widen tight profit margins. However, there could still remain a need for motor insurance companies as human risk may not be eliminated entirely or accidents not caused by the malfunctioning of systems. The car may be able to be manually overridden and if an accident occurred in this case the liability would fall back to the driver.

 Cyber risk and terrorism
 Another potential worry for insurers is cyber risk and hacking of the systems. Driverless cars may rely on internet connectivity, resulting in an inevitable risk of disruption. Nuisance attacks like ‘spam jams’ and hacker created congestion, causing changed destinations or clogged up roads, for example, could be prevalent. Furthermore, autonomous cars would be a perfect target for criminals, likened to leaving your keys in the ignition whilst you pop into a shop. Criminals could drive away with thousands of pounds worth of vehicles. Moreover, the FBI recently pointed out that driverless cars could potentially be a threat as terrorists6  could gain control of vehicles for attacks. Although this may not impact the motor insurance market as the standard policy wordings do not cover illegal use of the vehicle, it remains a potential risk that may have to be insured elsewhere.

 The reality of autonomous vehicles
 Despite all of these predictions, the effects will not come in to place unless driverless cars are taken to with enthusiasm. Unless all cars are driverless, there will still be problems with human error collisions, whether it is between two ‘normal’ cars or one of each. These situations may be very difficult for insurers to deal with and determine who is liable. With new cars making up only 10% of the road traffic, it is estimated to take 20 years to replace all cars on the roads. Moreover, according to a recent survey by AA7, over half of respondents were not confident in the technology and were not keen on giving up driving. Until driverless cars are made compulsory, there will be people who are against change and will want to retain control of their vehicles. These drivers will require third-party insurance to cover their risk and will likely prevent the move away from personal motor insurance.

 What insurers can do to prepare for driverless cars
 So, although the future looks bright for the driverless technology, it may take years to incorporate the driverless cars into our everyday lives and so, it may be a while until we see the main effects on insurers. Andrew Miller, chief technical officer at Thatcham research, asserted that individual drivers insurance will remain “for a long time to come”8. Although we may have raised more questions than answers, as an insurer, it is essential to think about the future impact and effects of the introduction of autonomous vehicles. The insurers who are able to make use of the increasing volumes of data and that build policies to recognise the shifts of risk are likely to rapidly move ahead of their competitors and should find opportunities to make a profit in a very competitive market.

  1 Reported Road Casualties in Great Britain: Main Results 2013

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