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Insurers' profiling will change as autonomous vehicles hit the road, says expert

FOCUS: Insurers will place less reliance on the personal traits and behaviours of drivers and focus instead on the technical features of cars when setting car insurance premiums in the future.28 Jan 2016

The shift from customer to car profiling is one of the likely outcomes of the shift to autonomous driving, a shift which could be just a few years away.

Currently car insurers place a great deal of emphasis on the personal traits and behaviours of customers when setting premiums. They analyse a wide range of data, from basic information like age and where someone lives, to behavioural details like their history of accidents and most recently telematics data which can relay how safely someone drives.

However the continued development and advancement of technology supporting the use of autonomous vehicles on public roads will force the insurance market to evolve. One of the areas in which changes are likely is in how risk is assessed, which will change how premiums are set.

With complex software and systems dictating how cars behave on the road, and people travelling inside serving merely as passengers in these transport pods of the future, technical features of vehicles will become the most important things for insurers to consider when calculating risk and premiums.

This means that the sophistication, reliability and security of driverless car systems will become the most important considerations as autonomous driving takes off.

The potential impact on insurers of the emergence of driverless cars has been assessed in a new report on the subject published by Standard & Poor's.

S&P said: "A decline in both the frequency of claims, as a result of crash avoidance technology, and the severity of notified claims, as a result of crash impact technology improving outcomes, will significantly reduce the cost of claims to the motor insurers, which would likely trigger a fall in premium rates."

"In the longer term, it is possible that many car owners will no longer feel the need to replace a car once driverless cars are available. Instead, they will sign up for an autonomous car sharing service. Widespread use of pooled driverless vehicles would substantially reduce the number of insured personal vehicles on the road, while also complicating the liability picture in the event of an accident affecting a driverless car. As the size of the market shrinks over the next 15-20 years, we expect many insurers to seek further diversification in retail lines or move away from their traditional customer base," it said.

The S&P report paints a gloomy picture. There certainly will be challenges for insurers to address, however the transition towards the age of autonomous vehicles will offer opportunities for insurers too.

A major change to impact insurers will be the anticipated shift away from personal liability to manufacturer liability when it comes to accidents involving driverless cars. Volvo has already confirmed that it will, in certain circumstances, "accept full liability" for collisions involving autonomous vehicles it develops.

On the face of it this approach to addressing liability, particularly if endorsed by other driverless car manufacturers, puts the market for personal car insurance at risk. If car manufacturers accept liability for collisions it diminishes the risk owners of those vehicles face, and the potential demand for insurance coverage.

There remains uncertainty, however, on how liability might be apportioned where there are gaps in the detail of manufacturers' liability commitments.

For example, driverless car manufacturers might insist that vehicle owners use their maintenance services to benefit from their commitment on accepting liability. If owners of driverless cars have repairs and servicing carried out by alternative providers they might find themselves exposed to potential liability. What rules will apply to modifications to both vehicle hardware and software or a failure by the owner to follow a manufacturer's instructions relating to the use of the vehicle?

If owners are left exposed to some element of risk, there would be inherent opportunities for insurers to underwrite it. Whether insurers would be attracted to offer insurance in this side market is another matter, particularly if that market would involve higher risk customers.

In Germany there has been debate among the academic community about whether a new type of liability might be established as a result of increasingly self-learning software for eventually near-autonomous operating robots which could equally be applicable for autonomous vehicles being on the road.

In a futuristic world where artificial intelligence meets autonomous driving, self-operating, self-learning vehicles of the future could, as the discussion goes, be held liable for accidents they are involved in.

If a machine can drive itself and the owner has little or no influence over how it operates, and if no technical fault arises in the event of an accident that can be pinned on the manufacturer, then you can see why there might need to be a paradigm shift in consideration of liability.

To pursue a machine for damages there would need to be an underlying pot of money that those seeking redress could access. It would be likely that funds would be provided for by manufacturers of these new-style intelligent cars, and it is here that insurers might have a new market. Manufacturers would be likely to sell these vehicles to consumers with insurance coverage attached to underwrite the risk of machine liability.

The futuristic concept of machine liability remains a distant prospect, but in many ways you need only look back to history on how the concept of liability has evolved to see the potential for future changes in light of the rise of robots and intelligent machines. Liability was once considered only in the context of actions by individuals. Today, it is common for the failings of corporate entities to raise issues of liability too.

The reality is that the impact on insurers of the move to more autonomous vehicles on our roads will differ depending on at what stage the technology, and underlying legal framework, is at.

In the early stage of adoption we can expect the legal framework governing the use of driverless cars to require users to be able to take control of their vehicles. Driverless cars technology is not currently flawless and is never likely to be either. Recent data released by Google, for example, highlighted the potential for technology failures to occur and the need, at this stage in the development of driverless cars technology, for humans to be ready to take control of 'driverless' vehicles.

With human intervention will come potential liability, risk and demand for insurance coverage, notwithstanding any legal requirement for car owners to be insured when taking to the road.

Even at its most advanced stage it is hard to imagine use of autonomous vehicles being completely risk free. Connectivity can falter; cyber risk is prevalent; system outages do happen.

We might expect the number of accidents to reduce in a world of fully autonomous vehicles, but there will still be a market for insurance, even if it predominantly reflects manufacturer liability.

Where accidents do arise it is reasonable to envisage that the average cost of damages will be higher than those which are associated with the average 'bump' in today's world. That is because of the expensive technology that will be fitted both in the interior and on the outside of driverless and connected cars of the future. For this reason insurance coverage will remain in demand.

Ultimately, if autonomous vehicles provide for a lower risk experience on the roads, and particularly if their use encourages growth in the sharing economy with a knock-on impact on the number of vehicle owners, it will put pressure on insurers' revenues.

In that environment we might expect there to be less insurers active in the car insurance market. It might prompt consolidation as insurers look for economies of scale and for growth opportunities, and as the S&P report points out, there might be a need for insurers to diversify into other areas to account for any reduction in the value of the car insurance market.

Stephan Appt is an expert in the regulation of connected and autonomous vehicles at Pinsent Masons, the law firm behind Out-Law.com