What Autonomous Cars Mean For Insurance Companies

Robert Cordray

Silicon Valley thrives on being disruptive. So far, these startups have taken down the music industry, the movie rental business, and the print news industry. Now, they are in the process of speeding carchanging countless other bastions that were once considered traditional workplaces.

So what’s next? One of the big ideas being explored – and taken more seriously – is the concept of the driverless or autonomous vehicle. The implications for this technology are staggering, possibly even more so than the other revolutionary changes we’ve seen in tech over the past 10 to 20 years.

Now more than ever, executives in the insurance industry are the ones who need to be cautiously looking over their shoulders. When the technology completely matures for an autonomous vehicle that allows you take a nap on the way to work every day, insurance companies better have a new business model in place if they want to stay alive.

How the advent of the autonomous car will impact insurers

There will always be a need for insurance, no matter how advanced technology becomes. The possibility of an act of nature occurring and damaging property will always be present. But, these kinds of accidents are usually outliers when it comes to the insurance business for automobiles. The problem of human error on the roads is what inspired the concept of an autonomous car from the start, but this is also the very same thing insurance companies rely on to stay profitable.

Insurance premiums are charged based on the individual, their propensity for safe driving along with their driving history, and the vehicle they wish to insure. A car insurance comparison will show that these premiums differ slightly, but each of these premiums will incorporate this human element as a big factor for the final cost. So what happens when that element ceases to be present? This is a point of contention now among car manufacturers, regulators, and, especially, insurance companies. And opinions largely differ across these groups.

Why insurers should care now

Some insurance executives aren’t worried about this rise in automated driving, asserting that this change isn’t going to happen for years or possibly even decades. And they do have a point.

Driverless technologies are still only in their infancy, and it can be presumed that we’ll see iterations of them introduced in a piecemeal fashion. For example, in the past five years, some cars have introduced features like automated parallel parking and assisted cruise control options. So how long is it before the full package arrives? It could be years until something like Google’s driverless car is on sale at your local dealership. And even then there would be a huge amount of red tape, bureaucracy, and safety testing that would need to be done to help ensure these vehicles are actually safe for consumers.

Then, on top of everything already mentioned, the technology must be accepted by the public. It could reasonably take at least a decade for driverless cars to constitute a majority of cars on the road from the time they’re introduced in the marketplace. The adoption cycle for new technologies represents a bell curve, with only a few early adopters at first who are then followed by a constantly rising number of people until a majority is reached. Know any adults who don’t own a cell phone? These are the late adopters, and they’ll be the same people are the last to phase out their non-autonomous vehicles.

However, it would be a mistake for these same executives to dismiss this innovation so quickly, especially with the radical changes that technology has introduced to topple previously successful businesses virtually overnight. While this could take multiple decades, it’s still something that must be considered now so insurance companies can minimize future risk to profits, especially if it ends up happening sooner rather than later. Some thoughts on where profit could be made up include insuring the new components on these cars. Driverless cars will have a host of new sensors, cameras, and software to give them these new capabilities. A more expensive vehicle with more specialized parts inherently means a greater premium cost.

But, does this make up for the cost of losing out on the mistakes of human drivers? Probably not. Driverless cars mean fewer accidents by orders of magnitude less than the current statistics on automobile accidents. Undoubtedly, there will be bugs in the software and hardware with some of the first iterations of these vehicles, and there might even be the occasional bug even after driverless cars have been around for years. While this could mean big trouble and liability for automakers, filling the insurance gap by selling to automakers in place of consumers is still likely to yield less of an overall profit. For this dilemma, these companies are going to have to get a little more creative with the products and services they offer people.

Finally, it should be noted that driverless cars raise new issues that we likely haven’t even contemplated yet. There will be unforeseen circumstances that begin to appear as implementation begins. These are the areas insurance companies will likely be forced to focus on in order to maintain their current sizes. Otherwise, they’ll risk drawdowns that will most likely end up happening.