We are beginning to enter the twilight of the driving era as we know it and in a few decades, it will be rare for humans to be in control of a tonne of metal travelling in excess of 100km per hour. For those of us with young children, the likelihood is that they will never drive a car.
In many respects this has to a good thing, with global road deaths running at more than 1 million people per year and tens of millions injured each year, the quantum of pain caused by road transport is unimaginable. This era of road transport has, with some justification, been labelled autogeddon.
The commensurate economic costs associated with road traffic accidents are similarly impressive with each fatal accident costing more than €2 million in a developed country. In the US alone the annual cost of road accidents runs into hundreds of billions of dollars. Presently, much of these economic costs are borne by the insurance industry. In Europe, the value of the motor insurance business exceeds €130 billion per annum and the sector employs thousands of workers. The consensus is that the world of motor insurance is about to witness some profound changes.
Automated driving technology has the potential to seriously disrupt a number of sectors including the haulage business and taxi companies. What has received less attention is the impact of this disruptive technology on the insurance sector. There are two major threats to the current status quo, firstly, the predicted fall in motor insurance premiums. As assisted driving technologies improve and more longterm, fully-automated driving systems emerge, there is likely to be a steep fall in accidents rates. Given that human factors are responsible for the vast majority of accidents, as technology replaces the driver, claims are going to fall over time.
The estimates vary, but claim costs in the motor sector are expected to fall by between 60 per cent and 80 per cent in the next 20 or so years. Clearly, as claims fall so will premium income. Secondly, another threat to the motor insurance sector as currently constituted resides with the changing nature of the risk and the manner in which that risk is calculated.
At the moment the responsibility/liability is with the driver and the metrics from which driver premium rates are derived are based on historical claims. As the control function shifts towards the car, insurers will need to understand the relationship between the various features of assisted/automated driving in order to accurately price the risk.
Legal debate
In the phase of assisted driving where control of the vehicle is shared, this is going to be a difficult task. For example, it may be the case that driver error activates an element of the assisted driving technology but if an accident still occurs does the responsibility reside wholly with the driver? The issue of responsibility is likely to be a vexed legal debate between various stakeholders.
At an event in Brussels last week on assisted driving, a major point of discussion centred on the ability of the driver to ignore or turn off assisted driving features and how insurers would respond if they did. For instance, "the car" might suggest to the driver to pull over due to a technical problem, if the driver continues and an adverse event occurs then questions arise as to whether or not insurance cover is still valid.
Many vehicles now come equipped with black-box technology – or telematics – which allows for the tracking of driver behaviour. Access to this data will allow insurance companies to individualise insurance policies and reward better behaviour by the car/driver combination. There are some profound consequences to the introduction of this type of technology.
For some time, insurers have used fairly rudimentary data from black boxes to price insurance cover. However, one of the tasks of the EU-funded VIDAS project (which started this week) is to measure driver performance with “in cab” instrumentation and this has the potential to impact on liability regimes. And, as more cars carry sensors and cameras feeding into black boxes, establishing causation for an accident will become more straightforward. In the future, law enforcement will routinely download black-box data in the event of road traffic accident.
Real-time data
Ptolemus, a specialist consultancy, estimates that by 2030, half the world’s vehicles will be insured with telematics policies, generating €250 billion of premiums for the industry. Theoretically, it will be possible to access real-time data as to the behaviour of the driver and for those entities able to process such data efficiently there is a competitive advantage to be gained. The availability of such data represents a challenge to motor insurers as they may find themselves outflanked by those companies better able to manage real-time big data to identify low-risk individuals. There is also the question as to how well positioned insurers are, in a data rich environment, to competitively price risk. Even before fully automated vehicles hit the market, cars will generate a huge amount of data on the nature of driving habits.
Longer term, a number of profound changes in the nature of road transport will also impact on motor insurers. One of these changes is already underway, that is a shift away from car ownership towards car sharing services. Motor manufacturers are already planning for this aspect of the sharing economy. The shift towards automation is likely to further dilute the attachment consumers have to cars. If you are not actually driving the car, the willingness to express identity through such a purchase will diminish.
Here again, there may be a shift in how motor insurance is sold; it may well be the vehicle providers that purchase insurance. This might be a ride-share company, a fleet company or it may even be the manufacturers. We can also anticipate new entrants such as social media giants or mobile phone manufacturers. Car insurance will become more of a business-to-business arrangement and this will open up possibilities for other types of risk transfer solutions to become available. Conversely, as the overall motor insurance industry declines, vehicle recall insurance is likely to increase. The number and cost of vehicle recalls is already increasing because more sensors and software in cars increase complexity and the likelihood those elements will fail.
Motor insurers will be caught in a pincer movement of falling premiums and an ever shrinking cohort of insured drivers. These phenomena will have impacts beyond the motor insurance business as insurers’ ability to form a relationship with consumers in order to sell others insurance products will also be compromised.
Dr Martin Mullins and Dr Finbarr Murphy of the University of Limerick are principle investigators on EU-funded projects VIDAS and CLOUD LSVA which focus on technical and risk transfer issues pertaining to assisted and automated driving systems.
