July 26th, 2016 10:41 am
Via WSJ:
By LESLIE SCISM
July 26, 2016 10:22 a.m. ET
0 COMMENTS
The insurance industry has a $160 billion blind spot: the driverless car.
Car insurers last year hauled in $200 billion of premiums, about a third of all premiums collected by the property-casualty industry. But as much as 80% of the intake could evaporate in coming decades, say some consultants, assuming crucial breakthroughs in driverless technology make driving safer and propel big changes in car ownership.
As the threat approaches, U.S. insurance executives are spending millions and embedding with car companies, testing the technology themselves, and wrestling with whether to lower prices as parts of the autonomous future hit America’s roads.
For the actuaries who set insurance rates, it is a puzzle like no other: How do they prepare for a world of so many fewer auto accidents? In the future, will underwriters be insuring drivers or computer code?
“Change is coming and we need to get ahead of it,” said Allstate Corp. Chief Executive Tom Wilson in an interview. The suburban Chicago insurer is spending millions on research for new products and services that involves more than 200 data scientists and tech experts at a company it founded called Arity.
“It isn’t going to happen tomorrow but it is going to happen soon,” he said.
So far, however, the industry hasn’t made dramatic changes to the way it prices car insurance. Truly autonomous cars are years away from dealer showrooms, and many insurers say there isn’t enough data to determine how much safer even some of the newest “semi-autonomous” gear makes America’s roads.
Highlighting the technological challenges still ahead for driverless-car makers, federal authorities in late June disclosed a probe into the May death of a 40-year-old who was killed while operating a Tesla Motors sedan on “Autopilot.”
For insurers, the key to determining how much to charge remains predicting the likelihood that accidents will happen and how much they will cost in repairs and medical care for the injured.
To get that figure, actuaries know how many billions of miles cars typically are driven and how that translates into accidents—currently estimated at one fatality for about every 90 million miles driven in America. They know that male and female drivers have different crash rates, and age matters. And they know that people who have caused wrecks or have certain traffic violations are riskier to insure.
The rates charged by car insurers are subject to approval by state regulators, who seek to ensure that most of each premium dollar goes to claims and claims-handling costs, not to excessive overhead or profits.
But in a future of autonomous cars, actuaries may have to replace calculations about individuals with issues such as: how often cars are hacked and which parts of the country have better satellite imagery. They’ll also have to identify the safety differences across driverless cars, from Google to Tesla, just as they now know that today’s auto makers have safety features of varying quality.
So far, Google’s self-driving cars have racked up more than 1.5 million miles of testing, while Tesla says Autopilot has topped 130 million miles.
In a report last year, KPMG actuaries estimated an 80% drop in the U.S. accident-frequency rate by 2040. Among its assumptions: By 2020, some fully autonomous cars will be available and authorities will be experimenting with upgrades to road infrastructure to help driverless cars navigate.
Data on semi-autonomous gear remains limited to a small subset of vehicles. One of the few insurers adjusting prices already is Liberty Mutual. The insurer gives discounts for some gear including automatic emergency braking, which halts a car to avert a front-to-rear crash. Liberty Mutual is conducting research on the features with the Massachusetts Institute of Technology, and said discounts vary by feature, state regulation and other factors.
Autonomous vehicles “will certainly drive down the cost of insurance as we think of it today, but…there will be other liabilities associated with intelligent cars that will need to be insured,” Liberty Mutual Chief Executive David Long said in an interview.
Consultants say car insurers such as Liberty Mutual that also sell property and liability policies for business customers may be best positioned. That is because many experts see responsibility for car crashes shifting to auto makers and suppliers if caused by equipment malfunction or hacked software.
As insurers debate the impact of a driverless future, timing remains one of the biggest questions.
KPMG forecasts fully autonomous vehicles to be widely available by 2025, while Deloitte Consulting expects proliferation in the late 2020s.
Deloitte forecasts approximately $200 billion in personal-car-insurance premiums to hold steady for seven or eight years, then slide to about $40 billion by 2040. It projects about $100 billion of this $200 billion could migrate to product-liability insurance and coverage bought by ride-sharing businesses.
Deloitte and KPMG stood by their research when reached after news of the Tesla fatality.
State Farm Mutual Automobile Insurance Co. has positioned itself to get an inside look at the technology as it is being developed. The country’s largest auto insurer is a founding partner at the University of Michigan’s Mobility Transformation Center, whose Mcity lab is a leading test site for driverless gear.
Just as air bags and seat belts did in generations past, increasingly common semi-autonomous equipment is expected to offer significant improvements in safety. Among the most effective is automatic braking, which is in fewer than 10% of cars now but will be standard on new cars by 2022, according to the insurance-industry funded Insurance Institute for Highway Safety.
The Highway Loss Data Institute, a sister organization to IIHS, last year found that 11 front-crash-prevention systems from six manufacturers showed 10% to 15% lower rates of claims for damaging other vehicles, compared with models without the gear.
Surprisingly, the institute found no consistent reduction in claim rates from “lane-departure warning” systems. Researchers had a hunch many drivers found the beeping annoying and were turning off the feature. So they visited Honda dealerships in Germantown, Md., and Alexandria, Va., to take a look at cars as they arrived for servicing.
Of 184 cars, only a third had the feature turned on.
While many in the insurance industry expect the new technologies to improve and proliferate, “we are still operating in an era when car makers are recalling millions of vehicles for the simplest of technology failures: ignition switches, floor mats and air bags,” said Robert Hartwig, president of trade group Insurance Information Institute.
He said many prognosticators with speedy timetables for driverless-car adoption “have drunk too much of the Silicon Valley Kool-Aid.”
Write to Leslie Scism at [email protected]
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