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Insuring The Driverless World


Who pays when there's a crash?

As the technology for fully autonomous automobiles moves closer and automakers prepare to bring self-driving cars to dealerships nationwide, auto insurers are bracing for the change — pondering how to adapt to a world where a computer operating system could be liable for an accident rather than a person.

State and federal authorities are working to keep pace with the technological change by proposing guidelines or regulations governing self-driving autos.

Some automakers say they will take full responsibility for their self-driving cars (at least while the vehicles are driving themselves), and all are expected to do so eventually. The result could be product liability-like coverage supplanting personal liability policies, experts say. But the burden of this commitment would be factored into vehicle purchase prices, which will rise to well above today’s mass-market levels.

So, experts also predict self-driving cars will spur changes in vehicle ownership patterns, when fleets of self-driving vehicles belonging to ridesharing companies like Uber and Lyft replace private cars in the decades ahead.

Shifting Mindset, Shifting Blame

Today, most homeowners own multiple cars that they drive themselves. Of the more than three trillion miles traversed by autos each year in the U.S. alone, only about two percent is accrued by taxis or car services, including ridesharing services, says John Matley, principal with Deloitte Consulting’s Future of Mobility Practice. By 2040, the scenario will flip, with self-driving and ridesharing cars becoming the primary means of transportation for people, particularly in urban and suburban areas, Matley says.

“Autonomous cars that are owned by individuals are going to tend to be highly customized, they’re going to be on average more expensive than the average car today,” he says. “Cars are still going to need insurance,” he adds, because of damage from falling trees or vandalism. “But if you’re being driven around, the question is who is responsible for an accident? Our point of view is that insurance will need to evolve and become much more product liability-like for the operating system of these autonomous vehicles.”

Thus, traditional automotive insurers “are going to have to shift their mindset” and change their sales focus from individuals to fleets and product liability, Matley says. It will be a challenge for insurers akin to underwriting cyber threats, which are difficult to rate, he adds.

“Over time, the operating systems, hardware, sensors and LiDAR ultimately will become responsible for incidents where they are at fault and in control of the vehicle.” But until then, the individual driver will continue to get blamed, as he would today even if an advanced driver assistance systems such as adaptive cruise control is in control, Matley contends.

However, “we actually think that claims become easier with self-driving cars,” Matley says, thanks to all the sensors and data they incorporate that can relate what happened when an accident occurred.

Deloitte also is projecting that the frequency of traffic accidents will decrease as fully driverless cars multiply during the next 25 years — from 14 per million miles driven today (by driver-driven vehicles) to four or five per million miles driven by driverless vehicles starting in 2020.

The consulting fi rm also sees the severity of accidents falling as driverless cars owned by ridesharing or car service fl eets begin to predominate. It forecasts those vehicles will be more mundane and less customized — like today’s taxis — and will have sticker prices of only $8,000 to $15,000. (Insurers calculate accident severity in terms of the cost to repair or total a vehicle.)

“Particularly in the short- to mid-term,” when driver-driven, semiautonomous and fully self-driving cars are mixing on the roads, “you’ll get a lot of hybrid approaches” to auto insurance, says Haden Kirkpatrick, head of strategy and innovation at eSurance Insurance Services Inc., a subsidiary of Allstate Insurance Co. based in San Francisco, CA. “And that creates a lot of unique problems for insurers, because the liability ends up being split,” he adds, explaining that such policies would apply an automaker’s coverage when a vehicle is in self-driving mode and the individual owner’s policy when the driver is in control. In such a scenario, he envisions, those individual policies may also be based on a “pay by use, pay by mile or pay by hour” model that taps in to the vehicle’s on-board data stream.

“I think that’s an interesting interim step,” Kirkpatrick says. “Longer-term, actuaries will have to monitor the mix of driverless versus regular cars, and what the risk to the driverless cars are of everybody else on the road. In a world where 65 percent of the cars are driverless, the biggest threat is probably the 35 percent that aren’t.”

But while the changes coming to auto insurance are numerous, insurers are grossly unprepared to deal with them, says Kimberly Harris-Ferrante, vice president and analyst at the insurance industry division of Gartner in Wake Forest, NC.

A survey conducted online by Gartner last summer in conjunction with ACORD — a standards organization serving the global insurance industry — found that only seven percent of P&C (property and casualty) sector respondents believed smart car, smart home and driverless car technology was completely reshaping the way they do business, and an additional 22 percent thought these would have a significant impact. Just six percent reported that they were extremely or very prepared for smart car, smart home and driverless car technology. The remainder admit to being unprepared.

Reality is that fully autonomous cars will vastly reshape the pricing and product structures of both auto insurers and automakers, Harris- Ferrante asserts.

She notes that there’ll be no need for good driver discounts if the vehicle itself is driving, and that removes a tactic some insurers have used to distinguish themselves in a commoditized marketplace. Likewise, automakers taking responsibility for their self-driving cars may want to strengthen ties with insurance companies — white labeling consumer policies under their own brand names, for instance — or even buy insurance companies outright, but the commodity nature of auto insurance makes this an unattractive proposition, she adds.

So, coverage for self-driving cars remains “in the crack between two industries,” Harris-Ferrante says.

Collaboration is Crucial

Volvo has gone the furthest of any car company toward filling that crack, declaring in 2015 that it would take responsibility for liability if one of its fully driverless vehicles had an accident caused by a system failure, notes Roger Lanctot, associate director of the global automotive practice at Strategy Analytics. “The rest of the industry has yet to step up to that line,” he says. “But it’s a hypothetical at this point,” since neither Volvo nor any other automaker has a fully self-driving car for sale today. And despite this, other automakers didn’t welcome Volvo’s assertion, Lanctot says.

“It’s important that everybody is engaging with each other” as self-driving car technology matures, says Brad Stertz, director of government affairs at Audi of America Inc. “It’s at a very fragile stage in a lot of ways,” Stertz says, because there’s no consensus on government regulation of fully autonomous vehicles, which now falls to the individual states in the U.S. And those “are still getting their minds around what all this is going to mean and how it should be handled in the future,” he says.

“The only state that expressly forbids (self-driving cars) right now — and it wasn’t even envisioned when they wrote the law — is New York, which requires one hand on the steering wheel,” he points out. “That law was written in 1971 before computers were even thought of as being available for a car.” But Governor Cuomo’s office is looking at ways to update New York’s law to accommodate driverless cars, Stertz says, adding that California is seen as a role model for the rest of the nation since it just issued proposed regulations covering deployment of driverless cars. The California guidelines were based on guidelines for fully driverless vehicles issued by the U.S. Department of Transportation, National Highway Traffic Safety Administration (NHTSA).

Audi’s next-generation A8 sedan will be the first “Level 3” self-driving car for sale — a car with limited self-driving features — and will debut in the U.S. market in 2018, Stertz says. It will put itself through a 12-step test before determining whether it will allow the driver to cede control, and then will only work at speeds up to 35 miles per hour on limited access highways known to its built-in navigation system, he explains.

For liability reasons, there will also be a “clear handoff ” when the car takes control or gives it back to the driver, and recorded data from the 30 seconds before any crash will assign the fault, Stertz says.

“Car companies are recognizing that they have to take a stronger interest in insurance,” Strategy Analytics’ Lanctot says. “Several already have insurance arms or relationships with insurance companies,” and now some also see an opportunity “to create their own insurance marketplaces, by leveraging crash notification technology in their telematics systems,” Lanctot says.

Nevertheless, coming together will serve both the auto and insurance industries better than going it alone in developing the self-driving car marketplace, stresses eSurance’s Kirkpatrick.

“Collaboration is crucial here,” Kirkpatrick says. “Everybody has data, they know there’s value in it, and they want to keep it to themselves. But ultimately collaboration and working across industries and across providers is the best way to ensure that a customer experience is created that benefits the users.”

Robert E. Calem

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