Automated vehicles have been a hot topic of conversation in the news and at industry conferences recently.
Manufacturers have indicated their interest in being actively involved in the development and production of driverless cars.
Technology companies have been rapidly improving and advancing the equipment that will allow driverless vehicles to become a reality. And instances of both successes and failures of these cars on real roads have been widely reported.
In the midst of this activity, and with the hope of bringing about rapid — but safe — deployment of driverless technology, policymakers in the U.S. Congress and in many state legislatures have taken steps to address testing and deployment of automated vehicles.
Ultimately, legislators and the judicial branch will play a key role in establishing the framework that will govern the use of these vehicles, as well as the determination of fiduciary responsibility in the event of mishaps. It will be critical that insurers, actuaries, and claims handlers understand those liability rules.
But, more than that, insurance companies should be proactive and involved in the foundational discussions that will help create the optimal climate — legal, actuarial and legislative — for automated vehicles.
An interior view of the Tesla Model S. (Photo: P. Harman/propertycasualty360.com)
Creating a climate for change
One of the first steps toward creating such a climate for this new era is to design an efficient and effective liability system. Insurers and actuaries are in a position to help achieve this within the following guidelines:
Align accountability and responsibility.
Compensate claimants fairly and efficiently.
Encourage product development and safety.
Efficiently perform these tasks at the lowest possible cost.
In general, we anticipate that automated vehicle technology will cause claims to ultimately come down. Frequency should decrease, as vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) technologies improve and ease the transition from human-driven cars to fleets of automated vehicles.
Severity may also ultimately decrease, although initially it could be higher due to the increased cost of technology (e.g., radar technology, high resolution cameras, gyroscopes and internal computers to process it all). As the technology becomes more mainstream, it will likely come down in cost. These views are widely supported in the industry through such studies conducted by the Insurance Institute for Highway Safety as well as KPMG.
Significant challenges still exist, however. For example, we know that human drivers will still need insurance protection even after more vehicles become automated. There are several ways this can be done, but one example would involve telematics and usage-based insurance.
When the driver shifts the car away from an automated mode, this pay-as you go insurance is automatically triggered. The car will communicate to the insurance carrier of choice to start charging usage-based insurance utilizing information like mileage, speed, time, location and driving style (such as application of brakes and lane departures). Other data needs could include vehicles’ safety conditions and the other vehicle's proximity when the accident occurs.
Matching price with risk
As properly matching price with risk is something insurers will be grappling with, they will need the utmost freedom in rating, underwriting and insuring this technological advancement. Fair pricing, though challenging, is necessary both to properly determine the cost of risk and to help efficiently and effectively bring automated vehicles to market.
If automated vehicles and their insurance coverage are overpriced, a potentially life-saving technology could become unaffordable or delayed in being brought to market. On the other hand, if automated vehicles and their risks are underpriced, less-safe vehicles may be introduced too quickly. Incorrect pricing of risks can also lead to unfortunate cross-subsidies between vehicles and customers.
Cyber attacks will also need to be considered, as telematics and dedicated short-range communications can make automated vehicles an easy target for vehicular attacks. Finally, insurers need to consider that consumer appetites may change over time.
In the present market, for example, the design and overall “look” of a car remain important factors to many buyers who own their cars. However, if a ‘Lyft’-type of automated car service becomes popular, consumers may not be concerned by the idea of potentially visible technology, since they won't actually own the vehicle.
Comprehensive & effective data collection & analysis
These are just some of the necessary considerations as the automated vehicle market moves forward. As technology continues to improve, automated vehicles will create new opportunities, and the insurance industry and its experts have much to contribute. To the extent that this revolution may result in a world with fewer vehicle accidents and lower claims payments, this can only be reliably determined with a comprehensive and effective plan for data collection and analysis.
A cooperative effort among actuaries, insurers, risk managers, manufacturers, technologists and policymakers is essential to bringing this technology safely to market. Such an effort will allow all parties to participate in organizing and collecting data, sharing analytical insights, and making policy recommendations. Although there is much to be learned, automated vehicles are getting the green light, and we need to be prepared.
Jonathan Charak, FCAS, MAAA, (firstname.lastname@example.org) is an assistant vice president and actuary at Zurich. His role includes driving efficiency and execution across multiple initiatives, creating and communicating financial plans, and improving business reviews. He volunteers with the Casualty Actuarial Society as the vice-chair of the Automated Vehicle Task Force and on additional committees.