How driverless cars will transform auto insurance and shift burden onto AI and software

In the era of autonomous cars, driving will become safer. With a predicted 80% drop in accidents by 2040, there are major implications for the car insurance industry. Here's what you need to know.


With almost every major car company—and even tech companies like Google and Apple—looking to unveil models of self-driving cars in the next few years, considerations for car safety are being radically altered. According to a report from KPMG, there will be an 80% drop in accident frequency by 2040.

So what does this huge drop in accidents mean? According to Jerry Albright at KPMG, "the implications for the insurance sector are going to be profound. They have to completely transform their business model."

How cars are getting safer

Humans are responsible for 90% of the accidents on the road, said Albright. So when cars make more and more decisions, with tools like like lane assist, self parallel parking, traffic jam assistant and more, accidents drop. "When you remove the human element with something that can react quicker, detect with sensors and lenses, perform a full environmental driving scan," said Albright, "the vehicle risk profile is going to change, and it's going to get safer."

SEE: Autonomous driving levels 0 to 5: Understanding the differences

And, as automated vehicle technology moves toward level 5—offering a completely driverless experience—safety increases. The Insurance Institute for Highway Safety's research shows that fully-engaged technology, meaning that you don't turn off any function, translates into a 7% to 15% reduction in property damage claims. Still, "you don't have to wait to be at a level four to realize the safety benefits," said Albright. "Each generation, each capability that advances the autonomous technology—be it lane assist, stop and go traffic—all of those continue to improve the safety profile of the car."

The rise of the "smart" car

Another way that safety is increasing is through car to car communication. Cars "talk" to each other. "We're anticipating a smart environment in which cars will be talking to the stoplights, to the guardrails, actually to the pavement itself as well as to the other vehicles," said Albright. It's like "a spider web of interactive interchange of communication—as it gets denser and denser, the safety factor continues to advance."

In many ways, autonomous cars can become safer by continuing to learn about the driver. "It's going to also learn from the cumulative driving of all the other drivers," said Albright. Vehicle-to-vehicle communication, (V2V), means that cars will start interacting with other cars. And, eventually, they will also "talk" to the infrastructure at some point, or vehicle-to-infrastructure (V2I).

"You're essentially accumulating driving information from all of their vehicles on the road," said Albright. "If you're driving down 290 West in Chicago and see a huge pothole in the left-hand lane and all the cars are swerving around it, your car then tells all your other cars that are going on 290 West to 'watch out.'"

Impact on insurance companies

Insurers have typically considered the past to be an indicator of what's going to happen in the future. But what's happened over the last 100 years is radically different than what the next five to ten years will bring. "You go from human behind the wheel to no human behind the wheel," said Albright "How do you accurately predict what you should be charging people from a premium perspective on their insurance when the world is totally different than it's been for the last century?"

The key, he said, is to be proactive. It's no longer an option to deny that self-driving cars will be a reality. "The thing that's plaguing a lot of insurers," said Albright, "is disbelief that this is ever going to happen, or it's going to happen too far in the future to do anything about it now. They are weighed down by legacy systems and process and all sorts of other things that do not enable them to act nimbly to massive changes in their environment," said Albright.

Now is the time for a "call to action," he said. "They need to completely reevaluate their business strategy."

So it's time for businesses to answer some core questions, said Albright, like how to sell business, who to sell to, how to underwrite risk, and how to manage claims."Every core component of doing insurance right now will change," he said.

SEE: CNET Roadshow showcases the future of cars

With new technology comes new risks

Of course, automated driving does not mean that accidents will be altogether eliminated. There will still be bad weather, animals darting in front of vehicles, and other unforeseen circumstances that will lead to crashes. Also, there are still problems with the technology behind level 3 driving, in which drivers are handed back control from the system.

Gill Pratt, head of the Toyota Research Institute, which is studying AI, said that this hand-off can sometimes be dangerous. "Our view is that in certain circumstances, hand-off can be valuable, but in others, it can't," he said. "The important thing is to make sure that drivers know what to expect and aren't surprised when a car hands off control back to the driver."

But the big change in insurance is likely to come from a shift in focus, going from covering the car itself to the software of the car. "That may well become the majority of the driving exposure and the component of the insurance," said Albright. "That's a different product from the personal auto insurance that you or I would buy for our car."

Thilo Koslowski, Vice President and Distinguished Analyst, Automotive, at Gartner, believes that we will always have a need for insurance. "Technology can fail. But we will move from a driver-centric approach to a product-centric approach. Going forward, manufacturers would insure that the vehicles will function, rather than putting the burden on the driver."

Instead, car insurance companies will need to broaden the scope of what constitutes potential safety threats. Cybersecurity, for example, is one of the biggest areas of concern.

According to Koslowski, "the companies have to master cybersecurity. They have to consider it wholistically—data communication, the cloud, and a cybersecurity approach needs to be on the table."

"I hope the industry is taking it seriously enough," said Koslowski.

The 3 big takeaways for TechRepublic readers

1. The auto insurance industry will change dramatically with autonomous vehicles, and the burden of indemnity could switch from drivers to the software and systems powering the vehicles.

2. The driverless cars of the future will talk to each other (V2V) and the infrastructure around them (V2I) to provide a far safer driving experience than humans currently can.

3. With the rise of autonomous vehicles, there are will be demand for a lot more tech jobs in the auto industry in the years ahead.

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Hope Reese is a Staff Writer for TechRepublic. She covers the intersection of technology and society, examining the people and ideas that transform how we live today.

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