Who Would Insure a Driverless Car?

Google Executive Chairman Eric Schmidt, right, shakes hands with Brazil President Dilma Rousseff before taking a ride in a self-driving car at Google Headquarters in Mountain View, California, July 1, 2015. Beck Diefenbach/Reuters

In 2020 Google plans to launch a self-driving car which has already driven nearly 1 million miles without causing an accident; it doesn't get tired and irritable, swerve into lamp posts or require a driving test. The in-built chauffeur comes in the form of a rotating LIDAR laser taking 1.3 million recordings per second, and it's a better driver than you.

By eliminating the element of human blunders, driverless cars are forecast to reduce motor accidents by up to 90 percent in the U.S. according to McKinsey. That might imply a substantial impact on the insurance industry, with liability potentially shifting to car manufacturers. Such developments would pose challenging questions for the Prudential Regulation Authority in regulating U.K. insurance firms.

In the U.K., 23 percent of all car insurance claims result from parking incidents of which 71 percent occur during reversing. A switch to driverless cars could largely eliminate these costs.

This is a double-edged sword for U.K. insurers who underwrote around £8 billion in private motor insurance premiums last year. What they could save in falling claims costs and frequency, they stand to lose in shrinking premiums—one estimate being as much as 50 percent by 2025 and 80 percent by 2040 according to Thatcham Research.

The entire basis of motor insurance, which mainly exists because people crash, could also be upended. Harvesting data on individual drivers is key for insurers to predict the riskiness of people—more information means smarter pricing. But self-driving cars take the driver out of the equation—a 17-year-old male and 35-year-old female could now receive the same car insurance quote—with the vehicle as the key determinant of risk.

So how might motor insurers adapt in a driverless world?

There's a lesson to learn from Kodak's battles in the stock market and plunge into bankruptcy after failing to embrace digitalized photography. Forward-looking investors in the largest publicly traded U.K. insurers—many of whom write motor insurance as their primary line of business—might not wait till driverless cars are on the road before worrying about this development.

This doesn't have to be the case. Insurers have an existing customer base, brand value and insurance expertise. They have increasingly sophisticated fraud departments, a gold mine of data and, despite hosting some of TV's most annoying adverts, insurers have profited from the booming popularity of price comparison websites. These resources could be gainfully employed elsewhere.

Naturally, there may be increased focus on expanding into other lines of business, such as household and commercial insurance.

But traveling in a driverless car will also free up a lot of time for passengers. That's time that could be spent on iPads, TVs, music systems and computers—all candidates for automobile contents insurance.

Alarmingly, there are also concerns over cyber-attacks against cars' smart technology wreaking havoc on roads en masse. Here, the provision of cyber insurance could be both necessary and lucrative.

Yet an even more pressing question for insurers might be the direction that vehicle legislation on liability takes, as the bulk of profitability may be realized from tie-ups with manufacturers.

There are naysayers who claim to enjoy the gratification of driving too much to give it up. Some will even sympathize with Chrysler's TV adverts branding their Dodge Car the "leader of the human resistance": "An unmanned car driven by a search engine company? We've seen that movie and it ends with robots harvesting our bodies for energy."

But the reality is that vehicle technology is already assisting human judgement; parking sensors, automatic braking and cruise control make it 25 to 45 percent less likely that an accident will occur, granting drivers up to a 20 percent reduction in car insurance. As human drivers become replaced by lasers and sensors, the placement of liability may start to shift towards manufacturers.

A case in point: Volvo has aspirationally declared that by 2020 no one will die in one of its cars—a claim which will hinge on the robustness of Volvo's technology. This could make them liable in the event of a car collision caused by faulty sensors if Volvo guarantees to cover the costs of accidents to lure customers. Volvo could become the de facto insurer of its own product.

It's still a legal gray area however, particularly for partially autonomous cars. Floridian law exempts manufacturers from liability for cars retrofitted with automating technology, whilst German lawyers argue that the legality of autonomous vehicles on German roads is contingent upon the presence of a fully liable driver operating them.

Bridging the legislative gap between cars which allow for manual override and those in which a driver is unnecessary is still an area under consideration by the U.K.'s Department for Transport.

Will this wipe out traditional motor insurance?

Maybe not. It's feasible that some motor incidents may still require traditional insurance, even if driving habits change significantly. Damage and injuries caused by trees falling onto driverless cars could be subsumed under health insurance or shift to household contents insurance, according to a study by RAND.

Second, manufacturers may want to partner with insurance companies. After all, insurers will have the existing organizational structures, customer links and expertise to provide insurance. The success of U.K. insurers in securing such business from manufacturers would likely depend on their ability to price competitively, although core supporting services are likely to remain operational in the U.K.

If a Japanese car crashes on U.K. soil, then contesting the claim remains in the jurisdiction of U.K. courts and not Japan. International car manufacturers may therefore want to keep ties with localized claims divisions.

Retail motor insurance—currently based on the relationship between a driver and their insurance company—might increasingly mold into commercial, inter-company insurance contracts. Regulators will have to be mindful of such potential reconfigurations in the insurance industry, especially in the light of three U.S. insurers recognizing driverless cars as a risk factor in their SEC filings, and would expect to discuss these and other strategic challenges with firms as part of their on-going supervision.

Driverless cities?

Communal ownership of autonomous cars and designated "driverless zones" in major cities could evolve. M-City is one such area; 32 acres on the University of Michigan devoted to testing driverless cars in a simulated urban environment.

Ultimately, car ownership is expensive and inefficient. Road tax, maintenance, depreciation, parking hassle and insurance all cost on average £3,000 to £7,000 ($5,000 to $11,000) a year, but cars are only in use for 5 percent of the time. As the appetite for car ownership has slowed, schemes such as Zipcar and Uber have soared in popularity.

In such a city, vehicles could be communally insured via pay as you go—hail the car and pay with your contactless card, arrive at your destination and the car will valet park itself. In such a world, insurers could participate in a pooled scheme of insurance. Split the premiums received from the pay as you go scheme, and each pay a levy towards any accidents that occur.

Is it time we took our hands off the wheel?

The Google Chauffeur for some will still be confined to the realm of science fiction. But at one point so were cars. As Henry Ford is attributed as saying: "If I asked my customers what they wanted, they would have said faster horses."

The number of fatalities on U.K. roads does call for a solution which autonomous cars may address. However, public reception of driverless vehicles will be critical to their evolution, and subsequently, the scale of impact to insurers.

Neha Jain, James O'Reilly and Nicholas Silk work in the Bank of England's General Insurance Supervision Division. This article first appeared on Bank Underground, a blog for Bank of England staff to share views that challenge—or support—prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.