Self-driving cars expected to shake up insurance industry

Breana Noble
The Detroit News

Ann Arbor — Insurers are bracing for change as they plan for a future with self-driving cars.

In a future of autonomous vehicles, the industry expects ride-hailing services could eliminate the need for many to carry insurance at all.

Although the hope is that autonomous vehicles will decrease traffic incidents and improve road safety, it could take years before the benefits of expensive-to-repair, technology-packed vehicles reduce insurance premiums.

Meanwhile, autonomous vehicles promise to shift liability for accidents from drivers to the car itself, threatening insurers' traditional business model.

"There's angst, anxiety, worry (because) ... we're heavily in the auto business," Neil Alldredge, senior vice president of corporate affairs for the National Association of Mutual Insurance Companies, told auto insurers earlier this month at an Ann Arbor conference on the topic. "We should do everything we can to understand the technology around autonomous vehicles, but don't panic. There's some time here to work some of the things out."

Insurance industry experts agree that initially, autonomous vehicles will increase insurance rates. Accenture plc, a global management consulting and professional services firm, reported last year that over the next eight to 10 years, new technology in vehicles will increase premiums required by insurance companies to cover associated losses by $81 billion.

"In the short run, rates will increase," said Michelle Krause, senior managing director of Accenture's insurance client service group. "Cars are becoming more complex and more expensive to fix."

At this point, it’s unclear by how much that eventually could increase costs for car owners, but already many are seeing the effects of this technology.

For vehicles with features such as emergency brake-assist and parking guidance systems, insurance rates have increased around 10 percent, as minor fender benders turn into repair jobs that cost thousands of dollars, said Richard Wallace, vice president for transportation systems analysis at Ann Arbor's Center for Automotive Research.

The goal of these “level one” automated features is to increase safety. So far, though, they lack substantial evidence of reduced accidents and insurance claims.

“Insurance prices would go down, if the frequency of claims go down,” said Tom Karol, general counsel for the National Association of Mutual Insurance Companies. “The development is happening now, so it is hard to get any historical data. If today’s technology is gone tomorrow, how do you determine which one is safe?”

As a result, he expects premiums to increase for self-driving vehicles as they increase in autonomy to “level five,” in which the rider has no way of taking over the car.

Krause said she would expect rates to go down only when a substantial percentage of vehicles on the road are autonomous. According to the Insurance Institute for Highway Safety, mass-market adoption of vehicle safety features takes about 30 years.

"When a good percentage of vehicles are autonomous," Krause said, "the insurance premiums will begin to fall and probably at a rapid rate."

Despite the uncertainty, one thing is for sure: Although autonomous vehicle riders would have no ability to alter their car's movements, car owners still would need some insurance.

“It’s a car you own, operate, choose when to put in service, though you might not be driving it,” Wallace said. “Those behavioral characteristics are consumer-driven. You have to have some insurance. It’s comprehensive insurance, that’s for things like tree limbs falling on your car, act-of-God stuff. That will continue forever.”

In a future of autonomous vehicles when the cost to make a car is more expensive, however, the industry expects subscription and ride-hailing services to become the main means of transportation for more people. Companies would own vehicles that customers could call on-demand, which could eliminate the need for many more people to carry insurance at all.

As a result, experts predict the commercial automobile insurance business will increase substantially, as operators of these services as well as automakers and the manufacturers of hardware and software take on greater liability.

That is not to say consumers won't pay for it. Karol said he expects the insurance costs to be rolled into the price of services.

The shift in liability, however, could threaten the automotive insurance business, which represents roughly $230 billion in premiums each year in the United States. Krause said besides potentially losing individual plans, car insurers are concerned that the automotive industry will decide to insure vehicles itself. Since the manufacturers would own the software that collects data on cars' behaviors, they could be in a better position to process claims.

As a result, auto insurers are exploring other things to insure. Krause said she expects cybersecurity insurance to grow in importance to protect vehicle owners and manufacturers in instances of hacking and ransomware attacks.

Additionally, opportunities to insure new infrastructure such as cloud-server systems, external sensors and signals, and internal communication systems may arise. Future innovations could provide new revenue streams, as well.

“All the insurance carriers are trying to be as proactive as possible," Krause said. "There are a lot of unknowns. They know they must focus on it; it’s not an if, it’s a when. They are trying to do their best to anticipate and react and provide their customers with the best coverage possible for the future.”