Self-driving cars could turn insurance industry on its head


By Kathy Canavan

The auto-insurance industry won’t join slide-rule manufacturers on the endangered industries list,
but local brokers know a big change is coming.

The Vienna Convention on Road Traffic, which requires a human driver to be present in a moving vehicle, is being amended. Cars that drive themselves are already legal in four states. Google’s experimental driverless cars have logged more than 700,000 miles without an accident. Large companies like Enterprise are jumping into the car-sharing business.

“The industry’s flying in the dark right now, trying to figure it out,” said Larry Zutz, managing partner at USI Insurance Services. “There’s a lot of stuff going on that nobody thought would go on in our lifetime, but it is happening.”

There are three disruptors for the auto industry — artificial intelligence being incorporated into new cars, any government regulation that mandates artificial intelligence in new cars and young city dwellers and companies favoring shared-economy services like Uber and eEnterprise Carshare.

Joe Valerio
Joe Valerio, executive vice president at Lyons Companies, said underwriting will change when driverless cars proliferate because underwriting is now based on the driver’s record.

Self-driving cars could be a thing as early as 2017 and almost certainly by the mid-2020s, according to Price Waterhouse Cooper, although it typically takes 15 years between the introduction of a new technology and 95 percent new-vehicle availability and another 15 years before the technology is available in all cars on the road.

Google estimates the driverless cars could reduce traffic accidents by 90 percent. Baby steps toward driverless technology like backup cameras are already reducing collisions.

How will that affect auto insurance premiums?

Risk management always sees a decrease in claims as a result of technological advances, said Joseph M. Valerio, executive vice president at Lyons Companies in Wilmington. He said one example was fire sprinklers on factory floors, which made workplaces safer and reduced premiums.

It’s a two-way street though, because the premium reduction consumers might realize from safety features will be chipped away because they’ll pay more to protect their pricey feature-loaded new cars.

“The decrease in claims will ultimately drive down premiums, but I also think, from a protection perspective, you’re going to see a possible increase in premiums because the cars are going to be more expensive,” Valerio said.

“As a consumer, you want to be in a vehicle that’s going to be on the downslope as it relates to liability as opposed to property, because property is a fixed cost. Liability claims could be in the millions if you strike that proverbial school bus, God forbid.”

It’s a little early to tell what will happen, he said: “There’s just not enough vehicles where people are really using it. I think we’ll have a better feel for it when it’s much, much more pervasive — when the majority of vehicles have that type of technology.”

Valerio said many technology issues will have to be worked through before people even begin to think about premiums: “How do you underwrite it, because, right now, when you’re talking about rating either commercial or personal, you’re looking at people’s driving records. You’re looking at their history. You have something to underwrite. They’re going to have to change the way they do the underwriting — instead of who they’re underwriting it will be what they’re underwriting.”

He said driverlessness is going to add a level of complexity that’s never been seen on the auto side of the insurance business: “There hasn’t been much change to the automobile-insurance world in many, many years,” he said. “Right now, it’s pretty easy to prove when there’s liability. Driver error is pretty easy to prove. But, when you start getting into you’re just kind of sitting behind the wheel, what kind of liability are you going to share if you’re a passive driver? I don’t know if that’s even a term.”

Driverless cars could turn the current system upside down. “Will they sue manufacturers of automobiles?” Valerio said. “My opinion is it’s going to fall back on the manufacturer first and then the driver. Now it’s kind of the reverse. The onus is on the driver to prove the pedal got stuck or whatever.”

Dick Corroon
Dick Corroon, a principal at Weymouth, Swayze & Corroon Insurance, said the number of claims is shrinking, but the severity is not.

Dick Corroon, a principal at Weymouth, Swayze & Corroon Insurance in Wilmington, said the number of claims is already shrinking, but the severity of claims is not, driven by factors such as texting and inattentive driving.

Corroon says he’s seen projections that auto premiums could decrease by 60 percent with self-driving cars, but he doesn’t think it’s an immediate issue for insurance agencies. Right now, he’s more concerned about car-sharing.

“Really, autonomous cars are something that we’re keeping an eye on. It’s not something that really worries us now,” Corroon said. “We don’t think there’s going to be self-driving cars on Kennett Pike in Wilmington any time soon, but Uber is here.”

“There has definitely been a lower frequency of claims, although they haven’t been tied 100 percent to the car safety systems. The severity of claims is up, due to inattentive driving and texting,” Corroon said. “Another reason for the decline in the number of claims is Uber and Lyft and other on-demand car services.”

Uber and Lyft lessen the need for car ownership among millennials who live in cities, and agencies like Corroon’s are noting there’s a significantly lower rate of auto ownership among twenty-somethings. They are increasingly attracting the attention of companies that insure fleets too.

Valero said car-sharing has also created questions from commercial insureds who want to know if it is more cost-effective to pass along liability to a car service.

Frost & Sullivan forecasts car-sharing will become a mainstream mobility solution, with 500,000 car-sharing vehicles and 26 million users globally by 2020.  Giants like Avis and Enterprise have entered the market, and the trend has gone global, Frost and Sullivan said, with higher than anticipated growth in Asia in particular.

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