By Sailesh Kandimalla, Visista Insurance Brokers 23 July 2021
Autonomous vehicles offer the promise that 20 years from now we will live in a world where cars take themselves to the fill-up fuel or charge up for the next morning drive, where we can enjoy texting without getting totaled and getting a learner’s permit will no longer be a teenage rite of passage. The day of autonomous vehicles is approaching, while not every vehicle on the road will be without a driver, it’s expected that by around 2035 up to one-third are likely not to have one. Widespread adoption of autonomous vehicles may seem to insurers like something that takes place in the far distant future, but autonomous vehicles are making inroads and quickly.
The shift to autonomous vehicles will cause dramatic changes in how insurance premiums are generated. With most autonomous vehicles likely to be owned by original equipment manufacturers (OEMs), over-the-top (OTT) players, and other service providers such as ride-sharing companies, the number of individual policies will decline, along with the revenues from premiums generated by these policies. And, since autonomous vehicles are considered safer than vehicles driven by humans, there will be fewer road accidents, leading to reduced pricing for insurance policies. Estimates are that claim frequency could drop significantly, when compared to vehicles driven by humans. While insurers for autonomous vehicles will make fewer pay-outs for the claim, this will not compensate them for lost policy revenues.
WHAT IS AN AUTONOMOUS VEHICLE AND ITS ROLLING POINT?
An autonomous vehicle (sometimes called an autonomous car, a self-driving car, or a driverless car) is a robot that is designed to move between several places without any human operator. Autonomous vehicles are evolving rapidly and are currently between Level 0-2.
Level 0- In which the human driver controls everything, including steering, brakes, power, and throttle.
Level 1– in which most functions are still controlled by the driver, but some functions like parallel parking and braking can be done automatically by the car.
Level 2 or Modern plus – at least two vehicle functions such as cruise control and lane-centering are automated but the driver must be ready to take control.
Level 3 (Partial Autonomy)– drivers are still necessary but are not required to continuously monitor the vehicles as in previous levels.
Level 4 (Full Autonomy + Human)– the vehicle performs all the safety-critical driving functions and monitors roadway conditions for an entire trip, with the option of humans to take over driving at any time.
Level 5 (Full Autonomy No Human)- there is no option for human driving (that is there is no steering wheel or other controls).
ACCELERATION OF THE PACE OF CHANGE:
Over the past years, advances within and across few elements have accelerated industry change, creating the potential for market conversion sooner than anticipated. Below are few elements that have shifted the driverless landscape and accelerated industry change.
- The integrity of technology: cars are getting safer and smarter. Continued innovation in autonomous technology has provided more driver substitution. Investments by OEMs and high-tech companies, coupled with a significant flow of smart money are delivering a broader, deeper set of capabilities.
- Capability accessibility: companies are delivering pipelines of autonomous capabilities faster than originally announced. Growing competition has ushered in a race to the road, with several manufacturers committed to delivering highly automated vehicles. Sophisticated autonomous technology has become more accessible with each consecutive release of new vehicles from traditional manufacturers.
- Infrastructure availability: with initial technology embedded into vehicles themselves, industry players have developed vehicles that can perform on existing roads (no upfront investment on infrastructure is needed to get started). Standardization of supporting infrastructure, roads, and an improvement in support technology such as mapping and GPS will have to be fast-tracked. Low tech cars, lack of adequate infrastructure for the handicapped, poor road discipline, lack of strict regulations, poor enforcement of traffic rules, inexperienced and first-time drivers are some of the immediate issues that come into mind. These issues are not restricted to India.
- Legal responsibility: As driving decisions and the underlying risk shift from the driver to the vehicle itself, the legal liability also will evolve. Legal positions and case precedent have yet to be tested, but discussions and analyses are being advanced in task forces at manufacturers, insurance companies, and law firms/schools.
- Regulatory permission: As innovation often develops in an unfettered zone, it is key that legislators resort to the regulation only where absolutely needed. Given the general parliamentary impasse prevalent in our nation, one hopes that adequate legislation will keep pace with global driverless resolution, as India looks to become a dominant and influential world economy in 21st century.
- Consumer adoption: There has been a significant increase in press and visibility around autonomous vehicles. Consumer awareness continues to climb as innovators capture headlines with bold predictions on the future of driverless technology.
- Mobility services: It is very possible that the majority of personal travel will be on-demand rather than via a personal vehicle. Mobility platforms allow consumers to buy the trip, not the car, delivering convenience and cost advantages directly to the user.
- Data management: Consumer advocates, technology companies, insurance carriers, and car manufacturers have begun to take a position on who control and have access to the driving data. With “black box” information potentially capturing more driving information than ever before, access to this trove of information is critical. Disaggregation from information is a distinct risk for companies such as insurers and could severely hamper their ability to participate in the future market.
CHAOS CREATES OPPORTUNITY:
Revolution in autonomous vehicles presents opportunities for insurers in three areas cybersecurity, product liability insurance for sensors and/or algorithms, and insuring against infrastructure problems.
- Cybersecurity: The opportunities here include protecting against vehicle theft, unauthorized vehicle entry, and the use of “ransomware” to hold vehicles hostage until payments are made to unlock software controls. Insurers will also be writing policies to protect against criminal or terrorist hijacking of vehicle controls through hacking. And with many cars serving as connected devices, insurers will offer protection against identity theft, privacy invasion, and the theft or misuse of personal information.
- Product liability: Insurers will write policies to cover manufacturers liability for communication or internet connection failure as well as for the potential failure of software – including the software bugs, memory overflow, and algorithm defects – and hardware failures such as sensory circuit failure, camera vision loss, radar, and LIDAR (light detection and ranging) failures.
- Infrastructure: Autonomous vehicle manufacturers and/or service providers will need to shoulder responsibility for the infrastructure put in place to control vehicle movements and traffic flow. This will include cloud server systems (which can malfunction, become overloaded or suffer interruptions from outside factors); failure of external sensors and signals; and communication problems originating at the system level.
The adoption of autonomous technology will have profound implications on how insurance companies perform core operations. Several revolutionary factors will need to be considered and integrated, with important changes resulting in processes, underlying technologies, and employee skills. The following section highlights several key considerations that insurance companies will need to address:
- As cars become increasingly safer due to autonomous technology, what will be the core exposures? Will there be new risks – like cyber, sensor failure, or driver override of decisions? Will bodily injury and comprehensive components become more prevalent? What exactly is being insured and what is not?
- What happens to standard and high-risk auto insurance programs?
- How will personal auto insurance coverage evolve? With decisions being made both by the car algorithm and individual driver, what does the product actually cover? What is the delineation of responsibilities?
- How will consumer expectations change?
- What are the new business models – usage-based, on-demand coverage, integration of coverage into car price?
- What are the other products and services to complement the auto insurance line of business?
- What market plays will be there in product liability? How to diversify?
Underwriting and rating:
- What are the appropriate risk factors if driving becomes a car-made decision?
- Driving data will become deeper and broader with a “black box “capturing all driving decisions and environmental factors. How will this information be used? What does underwriting look like if near-real-time information is available? What technologies will be necessary to absorb, process, and analyze this wave of information?
- Who controls the data? What information will feed underwriting if auto manufacturers and high-tech companies disintermediate the carrier from the information?
- How will the loss frequency and severity change? When? How fast?
- How is the predictive analysis done for new emerging automated technology capabilities?
- When will customers begin to demand discounts given a reduced risk profile? How much is appropriate? What level of information is necessary to quantify with confidence?
- How will variations in the performance of the different algorithmic brains–driving platforms across the manufacturers be measured?
- With driving decisions being made both by the driver and the car, who owns the liability in an accident? Is it the driver, manufacturer, supplier, or a combination? How will liability be assigned – on what criteria?
- How will information flow from the initial accident to settlement? Who has data rights?
- How will discovery and investigation take place when full driving data is available?
- What should be the insurance industry’s perspective on liability?
- How can carriers realize a closed loop between claims, underwriting, and product development?
- How will damaged sensors be repaired and tested? Who will guarantee the now–repaired sensors are again fit for purpose? Who certifies this? How much will this cost?
- How will the customer claims experience need to evolve? What is the customer’s perspective when the car makes a mistake?
- How will subrogation- particularly with OEMs need to evolve?
- Will distribution need to reflect new or evolving products?
- Will OEMs imbed coverage into the purchase price of the car? How do traditional insurance carriers remain relevant to the transaction?
- What is the role of the agent in selling auto insurance if the exposures covered are greatly diminished or if the insurance product is included in the purchase price?
- How do channels need to be educated?
- What happens to the agent and broker compensation? How will lost commissions be offset?
CHANGES THAT COULD HAPPEN:
Technology, competition, and new mobility have the potential to drive a transformation of the entire automotive ecosystem. Almost every aspect of the insurance marketplace will be put in flux. Just consider the implications of potential changes ahead:
- Technologies will make cars safer, resulting in radically fewer accidents and lower severity of costs.
- Urban consumers will use on-demand and car-sharing platforms to meet the majority of mobility needs.
- Car stock will shift from self-owned vehicles towards mobility fleets.
- Data that will emanate for the vehicle – will be broader, deeper, and potentially real-time, which will force changes in core operations around underwriting, product development, and claims.
- Risks will shift from a human driver to the manufacturer/ suppliers.
- New competitors led by OEMs and other high-tech entrants could disintermediate insurers from both customers and data.
- Some carriers severely challenged by a declining overall automobile premium volume could resort to irrational pricing to capture cash flow.
- Regulations and mandates could alter the legal and competitive landscapes.
INITIATIVES TO CONSIDER:
- Although there will be a struggle for control of data generated by the autonomous vehicles and the software systems that control them, market participants with the ability to collect, organize and analyze this data will have inherent advantages over those with less developed capabilities.
- The introduction of partially autonomous safety features has already changed the safety profile of newer vehicles. Insurers should adapt current actuarial and modeling techniques to be ready as vehicles add more and more autonomous features, including the “tipping point” at level 3 when human drivers become largely optional.
- To participate effectively in the autonomous vehicle environment, insurers will need to collaborate with OEMs, providers of communication and software systems, governments at multiple levels, and many other entities. Insurers not doing so should be actively identifying and mapping out potential ecosystem partners.
- Depending upon the opportunities pursued, insurers whose revenues derive primarily from personal automobile policies may have to transfer themselves into large commercial insurers on a small number of very large risks.
INSURANCE PRODUCTS FOR AUTONOMOUS VEHICLES:
Currently, no major insurance companies have a specific offer for autonomous cars. Avinew’s insurance is a new company in LA, the USA using data to redesign auto insurance in the context of semi-autonomous and autonomous vehicles. Avinew will be using driving data, artificial intelligence, and machine learning to measure and detect when drivers switch on/off the semi-autonomous or autonomous mode; this will determine the premium discount the driver is eligible for. Recently Avinew acquired BETTERDRIVE which can predict in near real-time the probability of accidents based on the traffic, weather conditions, time of the day, and route. This will make drivers understand with “risk of the route” and “risk model” and how much they pay based on the distance, weather, and route selected.
Tesla is in a process of taking the cost of insurance into account when pricing their cars. In other words, auto manufacturers will bear a growing part of the driving risk and accountability.
Autonomous vehicles will have a significant impact on the insurance industry and other businesses in the future. This new way of moving will be safer and will significantly reduce the number of accidents over time. As mobility undergoes a worldwide transformation, fuelled by new technologies, insurance companies need to review their traditional business model and adapt it to be more innovative, competitive, and offer customizable solutions.
Automakers like Tesla, which sell their own insurance products pose a threat to traditional insurers. Insurance underwriting and assessing the risks need to be done in real-time using algorithms (like Avinew and BETTERDRIVE). The responsibility will be one of the main points of discussion in case of car accidents with autonomous vehicles. Insurance companies will have to quickly find a solution to define the responsibilities in case of a disaster. New challenges and threads to be considered, like hacking and cybersecurity linked to the onboard technology.
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