Driverless Cars Could Drive Car Insurance Companies Out Of Business

When autonomous vehicles rule the roads, they will eliminate the estimated 90 percent of traffic accidents caused by human error, which could save 30,000 lives per year and, according to an advisor to car insurance companies, wipe out car insurance companies.
"Cars are not going to crash nearly as frequently, and they’re not going to crash as severely as we’ve seen in the past, so you could say it could be the demise of the car insurance industry," said Lawrence Burns, a retired GM executive and professor who advises corporations, including Allstate and Google, on mobility issues.
A study last year found driverless cars are more likely than human-operated vehicles to be in accidents, but the accidents documented in the study were all the fault of the human drivers of other cars. None of the driverless cars caused an accident. Often, the driverless cars were struck because they were adhering to traffic laws, Burns said, like making sure an intersection is clear before proceeding when a light turns green, only to get rear-ended.
Those human-error accidents should also disappear as the system goes driverless.
"There will be liability," Burns said Wednesday at the University of Chicago Booth School of Business, "but most traffic safety issues will be resolved when we eliminate 90 percent of the crashes."
Burns wouldn't reveal Allstate's plans to survive this transformation—"I do advise Allstate. I can’t talk specifically about what they’re doing. But because I’ve studied the insurance industry more broadly I can tell you the opportunities and the risks that they see."
Among the opportunities—connectivity allows insurance companies to gather specific data about individual drivers, freeing them from basing rates and coverage on categories and averages.
"A connected vehicle allows an insurance company to really look at you individually in terms of your actual driving and your real risk and real time situational awareness, so they can innovate a lot of products and a lot of pricing strategies aimed at trying to keep you out of harm's way, and almost pivot from selling insurance to selling assurance.
"So the goal isn’t to financially reward you when you get injured in a car crash. The goal is to not have you get in a car crash."
But if a driverless transportation system is fully realized, individual auto insurance itself makes little sense. To survive in that new world, car insurance companies would have to reinvent themselves.
Last summer, a McKinsey & Company report suggested how they might do so:
Car insurers have always provided consumer coverage in the event of accidents caused by human error. With driverless vehicles, auto insurers might shift the core of their business model, focusing mainly on insuring car manufacturers from liabilities from technical failure of their AVs, as opposed to protecting private customers from risks associated with human error in accidents. This change could transform the insurance industry from its current focus on millions of private consumers to one that involves a few OEMs [original equipment manufacturers] and infrastructure operators, similar to insurance for cruise lines and shipping companies.
Any liability in a driverless system is likely to trace back to the manufacturer, leading some analysts to worry that a shift of liability to manufacturers could discourage manufacturing.
Liability law itself might have to evolve "so that lawsuit concerns do not drive manufacturers and their suppliers out of business," according to the Insurance Information Institute.
"RAND has suggested some kind of no-fault auto insurance system. Others foresee something akin to the National Childhood Vaccine Injury Act, a no-fault compensation program for vaccine recipients who suffer a serious adverse reaction when vaccinated. The legislation was passed in 1986 in response to the threat that life-saving vaccines might become scarce or even unavailable if manufacturers, overwhelmed by claims of injury, scaled back or terminated production."
On the whole, liability coverage should cost less—perhaps 10 percent what it does now, according to Jonathan Walker of the Rocky Mountain Institute. That means less cash flow for car insurance overall, and likely casualties among its providers.
Before economists, scientists and policy experts convened by the Energy Policy Institute of Chicago, Burns suggested which would survive:
"I think the companies with really strong brand positioning, if they get out in front of this and use the big data and analytics and real time situational awareness, they’ll do just fine to create new value," he said, "but those who get behind could be in trouble."
Burns cautioned that autonomous vehicles aren't perfect—accidents will happen:
"There will be crashes. There will be people injured and killed in these vehicles," he said. "We're going to have to hang in there and be ready for these kinds of things."
But few would quibble with a 90 percent reduction in accidents. For every American killed in an accident, another eight are hospitalized, accordion to the McKinsey report, and another 100 are treated and released from emergency rooms:
"The overall annual cost of roadway crashes to the US economy was $212 billion in 2012. Taking that year as an example, advanced ADAS [advanced driver assistance systems] and AVs reducing accidents by up to 90 percent would have potentially saved about $190 billion."
They can also retire Mothers Against Drunk Driving , because as the Rocky Mountain Institute has pointed out, robots don't drink and drive.