Driverless cars are preparing for launch in Milton Keynes, Partha Panda takes a look at how the new innovation will change the motor insurance market globally
Driverless cars are no longer being talked about as a future technology - they are on the roads. From the time of announcements of launches by different institutions and organisations (Celtic-Plus Wisafecar, Vislab, Google), things have moved fast towards operational, on-road driverless cars. In 2013, Volvo announced the world's first large-scale test of driverless cars, involving 100 cars on the streets of Gothenburg in Sweden by 2017 and possibly earlier, while Milton Keynes in the UK predicted operational cars by 2015. Lawmakers have not been far behind - as of 2013, three states in the USA, California, Florida and Nevada, have passed laws permitting autonomous cars.
Driverless or autonomous cars have built-in technology to sense surroundings and make driving decisions. The sensing data collected is transmitted to separate infrastructure, and processed. This includes road features, signs and traffic lights, spotting pedestrians, lane markings, guard rails, overpasses, speed limits, accident prone areas, map information and vehicle-to-vehicle information.
Information is collected through a multitude of instruments - cameras, radar, ultrasonic detectors, lidar (light detection and ranging), gyroscopes, accelerometers and altimeters. These provide data to answer the questions of what is happening around the car, where it is and where it should go.
Road traffic crashes are the ninth leading cause of death and account for 2.2% (1.3 million) of all deaths globally. An additional 20-50 million people are injured or disabled. This costs US$518 billion globally, costing individual countries 1-2% of their annual GDP. Both the human and monetary costs of road accidents provide a mind-numbing reminder of the everyday dangers on roads.
The benefits
For non-life insurance companies, motor insurance accounts for a significant part of their insurance portfolio - sometimes more than 50%. Motor insurance accounts for a large proportion of the claims due to liability claims arising from injury to people.
Driverless cars are likely to bring down the accident rates drastically - to as much as 1% according to some estimates. Reduction of accident rates will bring down the cost in terms of human lives as well as in monetary terms. For the insurance industry, it will mean a huge reduction on the claims reported and paid for under motor insurance.
The insurance industry is still trying to understand the transformation impact that driverless cars will have on the business. The possible benefit of reduced claims cost is there, but there are associated positives and negatives to this which insurers will have to focus on to make the changes to their business models. Considering the reality of having driverless cars on the roads within the next 3-5 years, insurers will have to move quickly in the following key areas:
a) Rate making for motor insurance: There will be a complete change in the way rating and underwriting is done. Rate making for motor insurance typically focuses on key parameters (with variations by insurer and geography). Table 1 (right) lists the rating parameters impact from driverless cars.
Driver rating will be of less importance, since the vehicle itself will combine the driver capabilities. The vehicle rating will have to include more factors for rating of the equipment to drive the 'driverless' capabilities, for example the radar, cameras, software for the programming and record of accidents for the equipment manufacturer. The location rating takes on prominence due to the place of storage of the vehicle and its equipment. The security of the vehicle with its software and hardware is important since the whole premise of safe functioning of the vehicle depends on this equipment, the tampering of which can result in malfunctioning.
Insurers will have to evaluate premiums in line with the lower accident rates due to lower loss ratios for the line of business. The rate-making will have to keep in mind that though the frequency of accidents is expected to go down, the severity of the same can be high due to the high cost of equipment involved in the accidents.
b) New product types: The conventional motor insurance product coverage focus will no longer be completely applicable, since the risk focus for the product will change. Present motor insurance products are around the coverage of liability (to others) and/or physical damage (to own vehicle and accessories). The third party liability for both vehicle damage and bodily injury will assume higher proportions of importance with specific products focusing on them due to the high value of the equipment and higher possible severity in accidents. In some regions, comprehensive cover is provided without collision cover. This will change since collision cover will be a key focus too.
c) Claims: Who is responsible for the claim? This question of to whom to assign liability in accidents will be a challenge. Will it be the owner/driver of the car or its manufacturer or the equipment or software manufacturer? Insurers will have to work with regulators to decide liability for claims while formulating the laws and rating for driverless cars. Insurers will also have to contend with a higher amount of loss per claim due to damage of expensive equipment, though the frequency is expected to come down.
d) Data usage and analytics: All decisions with regard to rating, products and claims will have to depend on the large amount of data analysis generated from the vehicle and its 'sensing'. This data will cover manual interventions, road conditions, traffic and other vehicle movements, accidents and vehicle diagnostics and will have to be analysed and sent back to the vehicle without lag to enable the vehicle to function 'driverless'. Insurers will need to use this data for risk rating, loss development, vehicle categorisation, location analysis and accident analysis, among others. The challenge for insurers is to be able to take in the large quantum of data coming their way. This includes having the physical IT infrastructure, data management capability and analytics to manage the data and churn out the required analysis. Considering the level of maturity of many insurers in data management and infrastructure, this is the first step that needs to be taken for readiness for driverless cars on roads.
Back to the future
Driverless vehicles will change the face of transportation with significant impact on insurers. It is imperative that the insurance industry is able to harness this change - be ready for managing the data, prepare for new products and rating and create a new claims management eco system. The connected car, which has been talked about only theoretically, has now become a reality - bringing with it a completely new way of working for the insurance industry.
