Will Automated Cars Make Auto Insurance Obsolete?

Given the recent advances in auto technology, it’s hard to imagine that we are far from full vehicle automation. Advanced technologies have the potential to continue the downward trends in accident, injury, and fatality rates. In the past decade, improved safety features, such as advanced braking systems and impact protection, have decreased auto insurance claim frequency by about 20%, causing a 7% fall in total insurance net premiums.

Today’s upcoming technology includes intelligent driver-assist functions such as smart cruise control, accident avoidance, and crash monitoring and reporting.Volvo says it will eliminate all accidents by 2020 with a number of technologies, ranging from its City Safety low-speed collision avoidance system to its high-speed road train system that allows cars to navigate road congestion.

Auto advancements taking human error out of the equation have the potential to change how insurers price risk. Some experts, like Fred Cripe of PWC, think automation technology will make auto insurance obsolete altogether. However, most people in the insurance industry say that the industry’s competition will just be forced to shift to other aspects of the business. The insurance industry’s current pricing formula based heavily on underwriting (driver risk and exposures) is predicted to shift to new risks associated with driverless vehicles, like vehicle type, usage, and the physical characteristics of the driver’s most common routes. Also, liability may change if software defects, not human error, become the cause of accidents. If that is the case, insurance companies may develop a product to protect automakers from the onslaught of lawsuits.

Insurers who have not changed their policies to profit from the new auto landscape may be tempted to set high prices or to simply refuse to cover driverless technology. While slow to adapt, these insurance companies will not be doomed as soon as driverless cars hit the roads. Though automatic cars may incur fewer accidents, the costs to repair all the high tech features like cameras and sensors will be much higher. Additionally, fewer accidents mean fewer claims, and therefore greater profits for the insurance companies. In fact, insurance companies will probably benefit from the technology – that is, until there is enough evidence to prove driverless cars increase safety. Then, premiums would have to go down.

From technology to licensing to consumer confidence, it will be at least a decade before automated cars have a large presence on the roads. Even when they do appear, human drivers requiring traditional insurance will be commonplace. Still, it is smart for insurance companies to consider how they will be active in the future insurance market. Insurance companies will need to control their losses by finding a new niche, like bundle insurance and car-sharing businesses.