Visions of robotic self-driving cars may appear like something from a George Lucas film but in June 2011, this vision took a giant leap toward becoming reality when Nevada became the first state to enact legislation that allows driverless cars. This move allowed Google to begin testing its experimental driverless technology. The prospect of highways full of self-driving cars is now a few decades away and will undoubtedly change our social lives in many ways. The impact of this new technology on the $200 billion automobile insurance industry will be equally profound.
Led by the Google engineer who co-invented Google Street View and whose team won an award for the development of a robotic vehicle in 2005, the driverless car system combines Google’s advanced mapping technology with inputs from in-car video cameras and various sensors and lasers outside. Advanced software then computes these inputs to control every aspect of the car, from steering and navigation through to accelerating and braking. Although a human driver must still be present, with the ability to enable a manual override, the role will be mostly redundant.
If the statistics are to be believed, we will be far safer as a result.
With more than 90 percent of current car accidents attributable to human error, it is unsurprising that Google’s co-founder Sergey Brin recently stated that “self-driving cars will be far safer than human-driven cars.” To prove it, the development team has completed more than 300,000 driverless miles accident-free with cars tested on winding and traffic-filled roads like San Francisco’s Lombard Street and the Golden Gate Bridge. Many expect the first commercial driverless car to arrive on our roads before this decade is out, and to become mainstream within 20 years.
Three U.S. states — California, Florida and Nevada — already have passed laws permitting driverless cars and the test fleet includes major brands like Toyota Prius, Audi TT and Lexus RX450h. In addition, Nevada’s state legislature has passed a bill to provide an exemption from the ban on distracted driving, allowing those sitting in the driver’s seat of an automated vehicle to send a text message. The law is now fighting to keep pace with the technology.
Effect on Insurance
Driverless cars will have a profound effect upon our lives; it is a truly disruptive technology that will transform the world we live in. But what will be the effect on the insurance industry?
Auto insurance represents the largest class of non-life insurance, with net premiums of almost $200 billion and more than 250,000 employees working in the sector in the United States alone. This is an industry fueled by claims. With a motor vehicle accident occurring on U.S. roads every 14 seconds and a fatal crash every 16 minutes, it is clear why this has become such a big insurance market.
In the past 10 years, however, there have been significant advances in road safety. The effect of this can be seen in premium numbers. Improved braking systems, advanced impact protection mechanisms and on-board computers have collectively meant that the frequency of claims has fallen by almost 20 percent. In the same period, total auto insurance net premiums also have fallen almost 7 percent in real terms.
In an almost perfect insurance market, where claims values exactly mirror premium movements, it is clear that the impact of Sergey Brin’s driverless utopia will be huge.
Not only is claims frequency expected to tumble — by as much as 90 percent according to some estimates — it is also expected that claims fraud will almost be eliminated by the presence of vast amounts of data relating to every single motion of the cars involved.
Claims inflation is also likely to stagnate, as near perfect information about every incident will ensure disputes are settled long before they reach the courts.
What Does All This Mean?
If in 20 years we are living in a world where driverless cars are mainstream and total automobile insurance claims contract by almost 90 percent, we will be looking at an industry that is worth closer to $20 billion than its present state of $200 billion. The role of claims handlers and loss adjusters will change dramatically, and instead become the domain of data analysts. Insurance will be priced and sold by computers, as the industry benefits from near-perfect information. It will be the cars that are insured, not the drivers.
These changes, however, will always be a process of evolution rather than revolution. The smartest insurers and brokers will be the ones that react to this changing landscape the quickest. Those that harness and make use of the increasing volumes of data being generated by our computer-powered cars will still find opportunities to make profit in a contracting market. Those that build policies that recognize it is the car that is the risk and not the driver will rapidly move ahead of their competitors.
Where will the new insurance opportunities arise? Probably in the long-term care business, if the safety statistics are to be believed.