April 18, 2021


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Self Driving Cars Head Toward Collision With Insurance Industry Status Quo

8 min read

Millions of Americans are injured, and tens of thousands killed, in auto accidents each year. Self-driving cars should reduce those numbers as they take to U.S. highways and roads. As a result, “crash economy” industries that provide repair, salvage, medical and financial services may be headed for an overhaul.


The insurance industry is a leading candidate on that list. Research firm IBISWorld pegged insurance as a $311 billion piece of the crash economy. By 2026, insurers will begin to see premiums decrease as a result of autonomous vehicles, according to consultant Accenture. By 2035, annual premium revenues are projected to fall as much as $25 billion, an estimated 12.5% of the total market.

A growing army of automotive disrupters are staking their success at least partly on self-driving technologies. At the upper end of the spectrum, Tesla (TSLA), General Motors (GM) and Daimler (DDAIF) are early leaders. So are Zoox, an Amazon.com (AMZN) subsidiary, and the Waymo unit of Alphabet‘s (GOOGL) Google.

Nvidia (NVDA) and Qualcomm (QCOM) also are leading self-driving technology providers. So is Intel (INTC), through its 2017 acquisition of Israel’s Mobileye. Apple (AAPL) and China’s Baidu (BIDU) are among the companies reportedly preparing to throw their hats in the ring.

With all that firepower, what will autonomous vehicles and potential safety gains mean for the insurance industry, a business grounded in data-driven risk assessment?

“It’s still too early to tell if these technologies will live up to expectations,” said Jessica Cicchino, vice president of research at the Insurance Institute for Highway Safety. “When using self-driving technology, drivers often get overconfident and become distracted,” she said. “Part of the problem is these systems do not adequately monitor the driver.”

Tesla Self-Driving-Car Fatality

That appeared to be the case in the first known fatality of a driver in a semi-autonomous vehicle in 2016. The driver of a Tesla Model S on a Florida highway died after slamming into a tractor trailer. The crash set off a wave of high-level investigations over who or what was responsible.

Ultimately, the NTSB and the NHTSA exonerated Tesla. They concluded the Tesla driver ignored the manufacturer’s warnings to maintain control of the vehicle by keeping his hands on the wheel. But the findings did not leave Tesla and other manufacturers of self-driving cars off the hook. Ensuring drivers use autonomous vehicle technology responsibly requires more work, they said.

One estimate, from the Insurance Institute for Highway Safety, anticipates 3.5 million self-driving vehicles will be on U.S. roads by 2025. The institute projects 4.5 million by 2030, equal to less than 1% of cars on streets today.

Accenture projects as many as 23 million self-driving cars and trucks will travel U.S. roads by 2035. Taxis and trucking fleets are expected to be early adopters. A top selling point for autonomous vehicle technology is the expectation that it will reduce accidents and save lives.

Spotlight On Autonomous Vehicle Safety

In the U.S., driver error accounts for more than 90% of all automobile accidents. Overall, car crashes cause about 4.5 million injuries and 36,500 fatalities per year in the U.S., according to the National Transportation Safety Board.

The assumption is that self-driving cars and trucks will eliminate driver error, preventing millions of injuries each year and thousands of fatalities. But an autonomous vehicle from Uber Technologies (UBER) was found at fault in the 2018 death of a 49-year-old woman in Tempe, Ariz.

The pedestrian reportedly moved suddenly from the sidewalk and onto the road. The vehicle detected the person, but did not compensate quickly enough when she stepped into the street.

The National Transportation Safety Board found that Uber’s autonomous vehicles were not properly programmed to react to pedestrians outside of designated crosswalks. It also said the person in the Uber self-driving car who was monitoring its performance was visually distracted throughout the trip by her cellphone.

Moreover, Uber revealed to the board that its self-driving test vehicles were involved in over three dozen crashes prior to the fatal one in Tempe. Uber ended its effort to develop its own autonomous technology in December, selling the business to Aurora Innovation.

Aurora is reportedly headed by the former head engineer of Google’s self-driving unit. As part of the deal, Uber agreed to invest $400 million in Aurora.

What’s Inside Self-Driving Cars?

Most autonomous vehicles employ a system of cameras, radar, laser sensors and other technologies to assess road conditions and adjust driving behavior.

The Society of Automotive Engineers developed a widely adopted classification system that divides autos into five levels of autonomous technology support. NHTSA uses the system. All the semi-autonomous vehicles available to consumers today are Level 1 or 2.

These vehicles might have adaptive cruise control, traffic lane adjustments and automatic braking, steering and acceleration.

The Tesla Autopilot falls into the Level 2 category alongside the Cadillac Super Cruise, Mercedes-Benz Drive Pilot and Volvo Pilot Assist. Another Level 2 vehicle is Nissan’s ProPilot, found in the Nissan Leaf.

Level 3 is a more substantial upgrade. It allows the driver to relinquish control of safety critical functions, depending on traffic and environmental conditions. The vehicle can make decisions, such as accelerating past a slow-moving vehicle.

Level 3 still requires that the driver remain alert and ready to take control. Honda Motor (HMC) in early March started selling a Level 3 vehicle, but only in Japan.

Level 4 vehicles can operate all aspects of driving. But until legislation and infrastructure evolves, they can only do so within a limited area where top speeds reach an average of 30 mph.

Level 5 is a fully autonomous vehicle, requiring no human attention. Level 5 cars won’t even have steering wheels or acceleration or braking pedals. They will be able to go anywhere and do anything that an experienced human driver can do.

Liability Issue For Insurance Industry

Studies show, however, that most consumers remain uncomfortable with the idea of driverless self-driving cars. A survey by IEEE of more than 200 autonomous vehicle experts found the top three concerns that could hinder mass adoption were legal liability, consumer acceptance and legislation.

For insurers, legal liability — who’s responsible for an accident — is an issue that likely will take years to resolve.

Assessing whom or what to hold responsible in accidents involving driver-assisted technology could turn into an epic battle. Lobbyists and trade groups will look to spread the risk among insurers, manufacturers, technology suppliers, car owners and municipalities.

“Determining who’s at fault is going to take time to adjudicate and litigate and will be messy in the interim,” said Jim Bramblet, leader of Accenture’s insurance industry practice consulting group. “Insurance companies will have to figure out what do.”

Insurance For Self-Driving Cars

Auto insurance premiums will account for about $311 billion in revenue this year, according to IBISWorld. A big chunk of that revenue is liability insurance.

Bramblet and other experts in the field believe liability will likely shift from the driver to the manufacturers of autonomous vehicles. Components suppliers and software developers are also likely to be in the hot seat.

In February, Tesla added a new wrinkle by offering its own insurance for its vehicles. Daimler’s insurances services unit also broadened its insurance stance, launching a 50/50 joint venture with reinsurer Swiss Re in October called Movinx. Reinsurers insure insurance companies or companies that provide self-insurance against large-scale losses.

“Our joint long-term ambition is to unlock an ecosystem interplay where insurance supports the introduction of new technologies such as advanced driving-assistance systems and autonomous cars as well as new business models in the mobility area,” said Pravina Ladva, Swiss Re’s digital transformation officer, in prepared remarks.

In November, General Motors launched an auto insurance program with the help of its OnStar subsidiary. It aims to cash in on the vast amounts of data generated by increasingly automated and connected cars.

Bundling insurance with the price of the self-driving car may be attractive to consumers. The long-term viability of this approach and potential insurance industry impact are far from clear. Even the pricing of premiums for self-driving autos remains uncertain, due to a lack of data for insurers to appropriately determine liability coverage prices.

Lack Of Data Prevents Insurance Premium Cuts

The Insurance Information Institute expects self-driving technologies to greatly reduce the number of auto accidents. However, “the insurance aspects of this gradual transformation are at present unclear,” it said in a research report.

Moreover, even with fewer crashes, cameras and sensors could make the cost of repairing a self-driving car far higher vs. conventional cars. But data on this contention is also lacking.

As crash avoidance technology becomes standard equipment, insurers will get a better handle on accident costs. They will also be able to determine whether the accidents lead to a higher percentage of product liability claims.

“Some aspects of insurance will be impacted as autonomous cars become the norm,” according to the insurance institute report. “There will still be a need for liability coverage, but over time the coverage could change, as manufacturers and suppliers and possibly even municipalities are called upon to take responsibility for what went wrong.”

There will also be arguments over access to data.

Insurance Industry Data Access

“The data is king and will drive decisions for underwriters,” said David Carlson, head of Marsh & McLennan’s Manufacturing & Automotive Industry Practice. “And the underwriters don’t have a lot of data on that.”

Companies like Tesla do have autonomous vehicle data on each car they sell.

Currently, there is no requirement for auto manufacturers to share data with auto insurance providers. But the insurance industry contends that it needs access to the data to pay claims and assess risks.

Carlson says insurance companies have plenty of cards to play to avoid getting run over by the new competition. For starters, they can leverage customer loyalty as they work to innovate to accommodate risk.

“The insurers are concerned, but they’re not putting their head in the sand,” Carlson said. “They could partner with car companies. Or, they have the advantage of bundling policies with various other forms of insurance.”

The Crash Economy And Self-Driving Cars

It’s not just the insurance industry that needs to plan for the changes. Self-driving cars will set off ripples across the crash economy.

With fewer accidents, hospitals and trauma centers likely will see a decline in revenue, according to Carlson’s research. Moreover, as the auto manufacturing industry shifts over time to electric vehicles and self-driving technology, many traditional auto repair and maintenance shops will be replaced by more specialized technology repair shops.

Demand could decline for chiropractors and other medical service providers. Some lawyers might see less activity. Municipalities may lose revenue due to fewer drivers running lights and violating other traffic laws.

Another change to the crash economy: Fewer body organs could be available for transplant, as fewer accident fatalities cut into the major source of organ donations.

“There are a lot of consequences that we don’t even know yet,” said Carlson.

Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.


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