By Andrew Blancher, Director, Commercial Auto Product Development
One question that’s often posed to us at ISO is how fully autonomous vehicles may affect our coverage products. In the context of insurance contracts, it’s first helpful to reflect on how those coverage forms were developed and then advanced to their current state before considering this and other related questions.
Auto insurance, like many other property/casualty lines of business, is highly regulated by state law. Since the law is dynamic, the target keeps moving, and insurance forms are typically either created or incrementally updated to remain in harmony. But which portions of the law, if any, dictate insurance requirements for a fully autonomous vehicle?
Consider the following questions:
- Who’s liable? Man or machine?
In the absence of a driver or even a steering wheel, as currently contemplated for many fully autonomous vehicles, when all vehicle occupants are merely passengers, are current automobile liability insurance requirements still practicable? There is an ongoing debate as who may be held liable in the event of an accident. Is it the vehicle manufacturer, the subcontractor that developed the crash avoidance algorithm or supplied the sensor, the person who selected the route, or someone else?
- Who owns the vehicle? An individual or group?
In a world of fully autonomous vehicles, might the concept of personal vehicle ownership dissolve? One study reports that the typical privately owned vehicle is generally parked 95 percent of the time1. Autonomous vehicles will also likely be very expensive (at least at their onset). Could autonomous vehicles be the perfect candidates for a shared ownership model where one pays for transportation on a subscription or usage basis? Shared ownership would reduce or even eliminate the need to purchase an expensive, quickly depreciating asset that’s generally used only a small portion of the day. Unlike today’s shared-ownership vehicles, a fully autonomous vehicle could be summoned as needed and not need be parked most of the day, adjacent to potential users.
- How could autonomous cars affect accidents?
The potential shift from individual ownership to a smaller, highly utilized fleet of shared or commercially owned autonomous vehicles could cause a major disruption in the auto insurance industry. Some speculate that there will be a decrease in the issuance auto insurance policies which then might be at least somewhat offset by an increase in the need for product liability insurance, subject to potential claims relating to manufacturing defects in the self-driving systems. However, given the estimate that about 95 percent of all auto accidents are the result of driver error2, bodily injury and property damage losses and related insurance premiums could potentially decrease profoundly. The “Oracle of Omaha” apparently agrees. In fact, during a May 2, 2016, interview3, Warren Buffet observed that “anything that makes cars safer is very pro-social, and it’s bad for the auto insurance industry.” In other words, the promise of autonomous vehicles—aside from less traffic, pollution, and time spent behind the wheel—is conceivably far fewer and less severe automobile accidents. As overall auto exposure plunges with the widespread use of fully autonomous cars, the need for auto liability coverage may be greatly impacted.
- How would claims be resolved?
The need for auto insurance coverage would hinge on a variety of factors, including if there were a significant overhaul of state insurance laws, and related financial responsibility requirements. State financial responsibility and compulsory insurance laws typically require the owner of a car to provide liability insurance as well as other coverages including uninsured motorists insurance, depending on the applicable jurisdiction. Absent changes to those laws, there’s the potential for liability coverage to remain the first line of coverage pursued by an injured party. If autonomous cars become more prevalent, will the owner’s policy still provide the coverage to resolve claims, and in a timely manner? Will liability insurers more often pursue subrogation rights against the auto manufacturer or other liable party, leading to more legal costs? While greater product liability exposure may be on the horizon, a sizable mix of autonomous and non-autonomous vehicles sharing the same roads is likely to temper any quick shift to product liability.
One alternative approach to this mix of owner’s insurance versus product liability insurance would be to move to a no-fault type insurance environment. If “true” first party no-fault principles were implemented, including meaningful limitations on the injured party’s right to sue the auto manufacturers, this could reduce the need to assign the liability to the driver and/or the car manufacturer (or subcontractor) while mitigating potentially costly litigation and/or lengthy claims investigation.
While we’ve focused on liability exposures, we certainly can’t overlook physical damage coverage and more specifically, the peril of theft, particularly when faced with more cyber threats and technological ways to steal or vandalize a vehicle. Even if the law doesn’t lead us down the path of no-fault insurance, or shifts requirements to maintain liability coverage from the vehicle owner or operator to a manufacturer or other such party, the need for physical damage coverages is still relevant. Many of these coverage questions, though, remain in the hands of the lawmakers as well as the progression of autonomous vehicle technology.
In the next article in our series, we’ll explore some potential challenges in rating autonomous vehicles and the ways contemporary rating plans may retain value in an autonomous world.
2 http://www.its.dot.gov/pilots/pdf/ITSA2016_v2vNRPM_Anderson.pdf (4th page)