Self-driving cars eliminate the human element on the road — as well as 90% of the risk. What are insurers going to do?
“They quoted me $10,000 a year,” shared Dan Peate. He’s an entrepreneur and venture capitalist in Southern California. He thought of buying a Tesla Model X in the past until he was made aware of how much his premiums were going to be.
What’s the problem?
There still is a lot of concern revolving the idea of driverless cars. Tesla does have some trouble with its Autopilot (self-driving) mode, which is still limited.
Still, we can’t argue over the fact that these cars can make our roads safer. Thanks to radar, lidar, and cameras working together, these cars can detect trouble better than human sight and hearing.
They don’t get drunk, use their phones, or sleep on the wheel, either.
Dan Peate started Hixme, a company of group health insurance. He hoped to launch a company specifically providing coverage for automated-driving modes and fully autonomous cars.
The enormous quote he got from his old, non-driverless insurer confirmed the need for this new type of insurance.
Not enough evidence
According to him, when actuaries or underwriters calculate premium on a new kind of risk, they overcharge because they don’t have enough data to understand it.
So few Model X’s are actually on the road, so the insurers can’t analyze its safety record. He said, “We can get large amounts of data across entire fleets and be able to underwrite without having to wait for years of data,” – from previous accidents after they take place.
This also allows insurers to slash premiums for motorists if they use autonomous driving more.
The start of Avinew
Peate launched Avinew on January 30, with a seed funding of $5 million, led by Crosscut Ventures from Los Angeles.
Its coverage will carefully watch motorists’ usage of the cars’ autonomous features, from vehicles coming from Tesla, Ford, Nissan, and Cadillac.
Discounts will be decided based on how the feature is used. Avinew partnered with many manufacturers and is aiming to catch up with the rest so that it can have more accurate data – should the customers permit him.
In a 2019 insurance outlook report from Deloitte, they said, “The rise of connectivity … has generated a massive amount of real-time data and turned the insurer’s relationship with policyholders from static and transactional to dynamic and interactive.” Avinew anticipates writing policies in select states later this year.
This shift shows us a bigger existential crisis for the car insurance industry, which spans a multibillion-dollar franchise.
With no one driving, is insurance still necessary? Insurers’ revenue – and their premiums – all base of the person’s risk of falling into an accident, together with actual crash data.
With over 90% of accidents caused by human error, removing the human from the calculation may mean a whole different ball game for insurance companies.
Michelle Krause, Accenture’s insurance client service group’s senior managing director, said, “This comes up in every strategic conversation. Insurers are very focused on understanding the technology behind [automation] and what opportunities are available for them.”
Research has shown
Her group includes researchers from the Stevens Institute of Technology in New Jersey. They launched a report back in 2017, expecting trouble for insurance firms as this automated technology spreads more widely.
Rates can drop by 12.5% of the entire market by 2035. While more novel insurance products focusing on autonomous cars may offset these losses, the falling revenue from the premiums can gradually outdo their profits.
The research group says that by 2035, there will be 23 million automated cars on US roads. That’s 10% less than today’s numbers. The industry still has time.
Right now, the tech required for all these automated features is pricey to create and repair, which means premiums will still rise as more vehicles carry the said features.
David Ross Keith is an assistant professor at the Massachusetts Institute of Technology. He teaches system dynamics.
He said, “When you think of all these sensors and calibration, a little fender bender could be a much more costly proposition. It’s foreseeable that insurance is a much less consumer-facing industry in the future.”
Technology keeps moving forward
As technology approaches levels 4 and 5 – which refers to the complete autonomous capability, with an option for a person to take over; and fully autonomous with absolutely no human involvement, respectively – premiums are dramatically going to change.
This is because humans aren’t the risk anymore. An associate professor of operations management at Indiana University, Rodney Parker, said, “Liability is likely to migrate from the individual to the manufacturer and the licensers of the software that drives the AV.”
The report from Accenture supports this statement. This means that insurance firms will need to sell more policies to companies, and less to motorists. Car manufacturers and software, sensors and communications systems suppliers will all be on liability if their products fail. Drivers won’t be blamed for not checking blind spots anymore.
In a broader sense, the risk of nature is going to change, too. Northwestern University professor Hyejin Youn said that with people driving, “uncertainty is randomness, and random chances follow a normal distribution.”
But if the fault is in the sensors or software, then it is “more systematic.”
Nationwide weighs in
One of the biggest companies thinking of this problem is Nationwide. Motorists today are graded based on different factors, like age, sex, and driving records.
Nationwide’s associate vice president for product development, Teresa Scharn, said, “If we’re getting data from the vehicle, that rating changes dramatically and gets very complex.”
Insurance firms already are in the business of data management, but, according to Scharn, “it’s getting to be an even bigger muscle that we have to flex.” And just like Nationwide, Allstate is also hiring experts aggressively, getting more expertise in big data and analytics, as revealed by Don Civgin, its president of service businesses.
I am finding out who is at fault when an accident can be tricky in this new world.
For instance: if the lidar errs, whose fault is it? The car manufacturer? Or the lidar supplier? What if the driver didn’t update to the latest firmware? Is it the driver’s fault then?
If a Cadillac with Super Cruise gets disconnected from the Internet, is it Verizon’s, or General Motors’ fault? If a car is hacked and rerouted to a thief’s house, what happens? What if the local infrastructure which manages traffic loses data?
Keith said, “As a society, we’ll have to figure out who’s liable for these different things, and that will determine who’s required to ensure against what risks.” Meanwhile, Professor Youn views it as a problem in public policy, which should be addressed by the government.
Opportunity for new insurers
So many opportunities are coming in for legacy insurers who are first to adapt, even for startup companies like Avinew.
Insurance policies which protect products will be more popular, offering mobility as a service. Keith said that they would want to “ensure our safety as a passenger” too. No driver means no driver to insure.
Nationwide believes that the best path to take is one where insurance companies and car makers both have hands on the wheel. Scharn said, “We’re working to build deeper relationships with car manufacturers.”
Maybe this will lead to mergers in the future, between insurers and car makers. After all, Krause said that these conversations are already taking place at this moment.
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