What the Arrival of AI Vehicles Means to the Insurance Industry
When the very first Ford Model T automobile left the factory in Detroit, MA, on September 27, 1908, a car was hardly a revolutionary innovation anymore. In fact, before the Model T, “horseless carriages”, as automobiles were sometimes called at the time, had been around for decades. Automotive industry could already boast some technologically sophisticated and aesthetically pleasing machines, for example, the luxury Rolls-Royce Silver Ghost model, whose production began two years earlier. However, it was the Model T that became a true game-changer for the industry, a breakthrough that opened the world of cars to the masses and “put the world on wheels”, as it were. In little under 20 years, the Ford Motor Company sold 15 million Model T cars; as of 2012, it still was one of the 10 best-selling cars in the history of the automotive industry.
While it is true that the Model T became the first affordable automobile and as such created a whole new market for relatively easy to obtain cars, its impact on the society as a whole was even more far-reaching. For example, more people having cars meant that government earned more from taxes on gasoline – and that money was in turn invested into infrastructure. Moreover, more cars on the roads inevitably translated into more collisions. Although the first car insurance policies were being sold already by the end of the 19th century, they were neither obligatory nor widely bought. Thus, even if the at-fault party could be determined in the case of a car crash, many drivers were not able to cover the liabilities. To tackle that situation, many states started adopting legislation that evolved into compulsory insurance laws and gave rise to the US personal automobile insurance market. This market now generates more than $220 billion in annual revenue, accounts for more than 277,000 jobs, and is responsible for almost 40% of the financial sector’s GDP.
The car insurance business was brought about by what some scholars call a disruptive innovation. In broad terms, this can signify an invention “whose application significantly affects the way a market functions”. As outlined above, this is precisely what the Model T did to the auto market. Ironically, it is likely that in the years to come the very same industry that gave rise to car insurance companies may, in effect, become their undoing. All of that thanks to another disruptive innovation within the automotive market that in recent years has been steadily gaining momentum. In one of our recent posts, we hinted at some of the revolutionary changes that the advance of autonomous cars is predicted to cause not only to the automotive industry but also to other parts of the economy. This and the following post in this series will analyze in more detail how driverless cars may change insurance industry and personal injury paradigms.
Headed for extinction?
If anyone should have an opinion about how autonomous vehicles will change the insurance industry, it is likely to be Warren Buffet. The American business magnate and investor leads Berkshire Hathaway – a conglomerate holding company which owns GEICO, the second largest auto insurer in the US. Indeed, in February, CNBC interviewed Buffet on the subject of what changes self-driving cars are likely to bring about once the technology truly hits the market. The opinion the magnate gave was anything but optimistic for insurance companies. Buffet said that the advance of autonomous vehicles will “hurt GEICO’s business very significantly”. He also added that if driverless cars are safer, it will cut the insurance costs and “that brings down premium buy significantly”. How exactly could this scenario play out?
Today, insurance companies make the majority of their profit on premiums. How high the premium depends on many factors, but generally speaking, it is related to the likelihood of a damage claim being made, in other words, how likely it is that a driver will have an accident in which they may be found to be the at-fault party. Thus, insurance rates are calculated based on previous claims history, driving records, and other details related to the driver. Now, autonomous vehicles can change that in a two-fold way. First, as Warren Buffet noted, self-driving cars are predicted to be much safer. Vehicles already equipped with some level of autonomy seem to confirm that prediction. For example, since Tesla Autopilot mode was first installed in 2015, crash rates for Tesla cars dropped by 40%. The Autopilot is considered to display the so-called “Level 2” in the 5-level scale of driving autonomy. Level 2 signifies partial automation that still requires a human driver to be paying constant attention to the road. Level 5, once it is reached, will mean that a car’s automated system is capable of fully controlling the vehicle on all roads and in all conditions. Currently, two companies – Google and Ford – are trying to develop Level 5, fully self-driving cars. Ford has already announced plans to introduce a whole fleet of cars without steering wheels or gas and brake pedals by 2021. Considering that today human error is estimated to be the cause of at least 90% accidents, this will likely mean a huge improvement in traffic safety. According to many, safer cars should entail lower insurance premiums and this translates into lower revenues for the insurance companies. Because of this one change alone, the personal auto insurance industry is predicted to decrease by 40% in the next 25 years, or even by 60% according to some estimates.
Where will the liability lie?
The second way driverless cars are predicted to change the insurance industry has to do with liability and personal injury claims. Although autonomous vehicles will almost certainly be safer, this does not mean that accidents will not happen; it only means that whatever incidents will occur, a human driver will no longer be at fault. The question, then, is: who would be found liable in the event of a self-driving car accident? There is more than one answer to this question. One potential solution to this issue can be found in what is called a strict liability regime. According to one definition, strict liability “imposes legal responsibility for damages or injuries even if the person who was found strictly liable did not act with fault or negligence”. Today, strict liability is applied, for example, to injuries caused or related to a product’s manufacturing defects. In the case of autonomous vehicles, however, strict liability would mean that the responsibility for the crash would be automatically placed on the owner of the vehicle. This scenario, though, assumes that the proliferation of self-driving technologies will not affect private car ownership. It is not unlikely, however, that autonomous vehicles will be owned and operated in fleets by manufacturers themselves or by third-party companies. Could corporations like Google or Ford automatically assume responsibility for crashes where their vehicles will be involved?
The answer, simply speaking, is yes. In fact, Google, Volvo, and Mercedes have already issued statements to the effect that they will self-insure their cars and accept full liability in the case of accidents in which their car was driving in autonomous mode. Tesla seem to be heading in a similar direction, judging by their plan to include the cost of insurance in the final price of the car, a model that the company has been experimenting with in Asia.
Does all of this mean that car insurance companies are headed for extinction? Not necessarily. Self-insurance models that Google, Volvo, and Mercedes are vowing to adopt may encounter some opposition both from within the AI vehicles industry and from the general public. Why? First, self-insurance may be costly. Smaller companies, especially innovative start-ups, will most likely be unable to afford to self-insure their products and thus may still want to turn to insurance companies. Second, as one Forbes’ article points out, manufacturers that will self-insure may “censor” some of the routes, that is to say, prevent that their vehicles from entering certain areas based on perceived risk of an accident. This idea may not sit well with the general public, so, independent insurance companies may still have a vital role to fulfill in a world in which autonomous vehicles take over.
As mentioned earlier, another area on which self-driving vehicles are likely to have considerable impact is personal injury paradigms and laws. Our next blog post will analyze how autonomous vehicles may affect personal injury cases and potential legislation in that regard.