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Driverless cars. An insurance regulator’s view

Even though driverless cars are yet to become a commercial reality, automakers and insurers have begun internal discussions over the implications of these highly intelligent machines making decisions at the wheel.

We spoke to Raymond Farmer – director for the South Carolina Department of Insurance and secretary-treasurer of the National Association of Insurance Commissioners (NAIC) – to get an insurance regulator’s perspective on the new innovation and the potential transformation expected in the auto-insurance industry. Here are excerpts from the interview, edited for length.

U.S. regulators and driverless car insurance

Q: What kind of disruption will the auto-insurance industry face as fully autonomous vehicles or driverless cars become a reality?

Raymond Farmer: Insurance is about transferring risk, and as risk transforms, so does insurance. I’m not sure yet if “disruption” is the right word, but there will be changes coming as autonomous vehicles arrive. We’re moving towards gradual evolution towards autonomy rather than rapid change. This will take its time in evolving but that time is coming.

I don’t think our legal system, as it stands today, is ready for self-driving cars because damages are still assessed based on the level of fault of the driver. If that paradigm does shift, insurance companies will be equipped to address that shift as well as they have adapted in the past. This is a new challenge but the industry will be up to the challenge as will state regulators.

Personal auto insurance vs products liability insurance

Over time, with more driving done by technology rather than humans, a shift to products liability insurance is anticipated.

Data chart shows driverless car insurance will shift the market from personal auto insurance at 89 percent to 22 percent in favor of products liability at 57 percent in 2050
Source: KPMG “The chaotic middle: the autonomous vehicle and disruption in automobile insurance,” June 2017

Q: The NAIC, the standard-setting body for the U.S. insurance industry, is trying to be supportive of innovation and new technology in the insurance market. Will regulators take steps to prepare a regulatory standard for driverless car insurance prior to their launch?

Farmer: We are continuing to monitor the situation closely. It is a subject of vital importance to the NAIC, each state regulator and our consumers. We will be an active participant as this industry evolves.

As the legal system changes, the insurance industry will adapt with the change. I’m not sure it is a chicken or the egg illustration, but I think they will both change together and legislators and regulators will be part of that change as well. I’m not sure if anyone has a crystal ball to look into the future to ensure when the change is likely to occur or when autonomous vehicles will be on the road in a meaningful fashion, but insurance companies are getting prepared, the auto industry is getting prepared and so are the regulators.

Level 4 autonomous driving technology timeline

Driverless cars timeline shows autonomous car technology includes the Volvo Drive-Me program, Tesla models, Delphi and Mobileye CSLP system, Nissan ProPILOT 3.0, BMW iNext model, and Ford driverless ridesharing program
Note: Level 4 autonomous technology as defined by the Society of Automotive Engineers (SAE): “High Automation” in which the automated system performs all aspects of the driving task, in pre-mapped and programmed areas, even if the human driver does not respond to a request to intervene. CSLP is Central Sensing Localization and Planning.

Source: KPMG “The chaotic middle: the autonomous vehicle and disruption in automobile insurance,” June 2017

Cybersecurity as a real threat for driverless cars

Q: As a state regulator what is your take on fully-autonomous vehicles going mainstream, even as there are unpredictable and unavoidable risks involved – like risk from pedestrians on the road, animals, or even human error from other cars in the early adoption phase?

Farmer: The NAIC is actively engaged in discussion on all aspects of the automobile liability system or the automobile insurance system. This is no different. This is a new phase, a new wrinkle but certainly something the regulators continue to be involved in. The NAIC has addressed issues in the auto industry for as long as there’s been insurance. At this point, I do not have a take on where the liability should fall. This could be an evolving issue and evolving industry. Smart insurance companies and smart auto manufacturers and regulators will be able to keep pace and benefit the consumers.

Q: While the push towards autonomous vehicles has been largely based on safety claims, how are regulators viewing the new element of cyber risk that could be a cause of auto damage claims?

Farmer: In 2015 over 35,000 people lost their lives on U.S. roads. So I’m looking forward to autonomous vehicles as a big safety feature that could save several thousands of lives per year. I’m excited about autonomous vehicles and have ridden in one in a test area. They’re not quite ready but in my opinion they’re close.

KPMG estimated an approximate 90 percent reduction in accident frequency per vehicle by 2050 with the widespread adoption of autonomous vehicles.

Cyber risk continues to be a concern of insurance regulators. The NAIC has had a cybersecurity working group since 2014 and we’ve addressed a number of cyber-related issues and will be able to continue do so. But it will be up to the auto manufacturer, and software developer and everyone involved to make sure that when an individual is in the autonomous vehicle, or purchases an autonomous vehicle, they have the confidence that that vehicle will be secure in all aspects and cybersecurity will be chief among those concerns.

New insurance costs for automotive technologies

Q: Are we seeing any early effects on the insurance industry in the drive toward autonomous vehicles?

Farmer: It’s a little bit early to see any impact yet. We have seen some costs rise from increased cost from some of the new technology in vehicles. For instance, when you damage your car bumper; instead of putting in an old rechromed bumper, you realize you now have all kinds of sensors, cameras and gadgets in the part you damaged. So technology will continue to increase the cost of automobiles and the items that insurance pays for. I think we will continue to see the use of more technology increase costs in repairs.

State regulators will retain responsibilities

Q: Could the U.S. auto insurance marketplace change in a few years from now, if automakers develop or move toward a self-insurance model?

Farmer: The only change could be the new players entering the insurance space because of the autonomous vehicles. Traditional companies may still be in the marketplace and there may be a way for them to coexist. As insurance regulators, we are charged with enforcement of insurance laws established by state legislatures and our goal is to encourage the development of a competitive insurance marketplace where consumers are offered as many choices as possible among insurers and products at competitive prices. This paradigm will be shifting, and it’s a good time to be a part of the regulation of the insurance industry. New players may come in, but they will still be regulated at the state level and regulators will continue to use their power to ensure the new players are solvent, to pay claims.


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