The launch of self-driving cars, or fully autonomous vehicles, may herald the biggest transformation to the auto insurance industry since the first policy was written for a gasoline-powered vehicle in 1897.
With automakers and technology majors teaming up in the race to put the first fully-automated car up for sale, insurers and insurance regulators have an aggressive deadline to meet.
Equipped with high-powered cameras, sensors and highly advanced software to react to surroundings quickly, autonomous vehicles potentially can eliminate human error as a significant driving risk. Vehicles with semi-autonomous components such as automatic braking technology have already proven to be safer on the streets, reducing front-to-rear crashes by at least 50 percent, data from the Insurance Institute for Highway Safety shows.
Estimates for when the first fully self-driving car will be publicly available range from as early as 2018 to 2024, and on-road testing has already begun in various countries across the globe. A number of crucial milestones in testing by companies such as Ford, BMW and Tesla are expected in 2017, and the interval between the final stage of a successful test and the commercial launch of the vehicle may not be long. Google, which has been testing its autonomous vehicle technology for about 10 years, has said it is “close” to taking the technology to people.
The touted safety advantages in self-driving vehicles have spurred many U.S. states to introduce or pass legislation related to their development, testing and use. Thirteen U.S. states and the District of Columbia have already enacted legislation related to autonomous vehicle, and for this year, 33 more states introduced legislation related to autonomous vehicles, according to the National Conference of State Legislatures.
Many questions remain for the insurance industry
While innovators driving the development of autonomous cars are still involved in meticulous testing and perfection of the software to control these self-driving vehicles, insurers are scrambling to adapt and facing actuarial and pricing challenges. Although the state legislative efforts govern developmental issues such as vehicle testing, neither insurers nor insurance regulators have made public a solution for the new era of self-driving cars.
The cars present the possibility of fewer claims and lower insurance costs to the consumer, since driver error causes about 90 percent of the road accidents in a year in the United States.
Accident frequency per vehicle by year through 2040 (Baseline scenario)
However, actuaries working to price policies will also be faced with estimating product liability for situations they have not dealt with before.
Problems with advanced software mechanisms may require more high-cost technical expertise to fix.
Furthermore, the novelty of the technology is also bound to create confusion, such as when an accident is caused by a human command overriding the software, or, especially during the early adoption phase, when autonomous cars will be on the road alongside human-driven cars.
With road traffic accidents being the leading cause of death for the populations aged 15 to 34 in the United States, mortality tables for life insurance will also have to be potentially altered, experts say.
Still, one of the biggest unanswered questions around autonomous vehicles is a fundamental one pertaining to its ownership — it is not clear if these vehicles will be sold in the traditional way or owned by their manufacturers and only leased to individuals. As a result, it is uncertain whether the carmaker would assume liability for any incident involving the vehicle, if human error does not have any role in it.
The commercial launch of these vehicles may be eventually delayed due to extensive, and highly-regulated, testing involved, but such delays may be relatively minor given the number of players and amount of money involved. For the insurance industry, the rush is on.
Survey results: The impact of driverless vehicles on the insurance industry
In the race to put self-driving vehicles on the street by 2021, major automakers and suppliers are partnering with, investing in and acquiring smaller component makers and technology start-ups so that they can expand their capability, pool expertise, share the workload, cut cost and get the cars to market sooner. View the special Reuters Graphics interactive report on the innovation boom in the automotive industry.
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