Part 2 of a two-part series.
As discussed in Part 1, driverless cars will dramatically impact automobile costs, safety, behavior, regulation and lifetime value. During their three-phased rollout (defined in Part 1), autonomous vehicles will also radically affect who’s liable in the event of loss or damage.
As a result, auto insurers must reconsider how they price, underwrite and manage claims. Pricing has historically been based on insured details, vehicle details, vehicle usage and loss history. In the impending autonomous car era, most of these factors will still impact vehicle premiums, but to a different degree.
Impact on Pricing and Underwriting
With the promise of automated safety devices, Phase I (driver-controlled with partial automation) will usher in dramatic reductions in property damage and bodily injury rates, which could result in reduced auto insurance premiums. While higher sticker prices of individual vehicles will increase premium costs, we predict the reductions will far outweigh the premium increases.
In phase 2 (semi-autonomous driving), we anticipate that loss history will have less impact on premium pricing in the first few years. Once sufficient data is captured, loss history will become a bigger parameter, and the judgment factor in pricing will be accordingly reduced.
The default network in use will also impact premium pricing because a vehicle may sometimes switch networks to ensure seamless connectivity. Every switch in the controlling network could diminish the car’s reliability and boost premiums for the vehicles using it.
In this phase, telematics would be used to calculate the actual amount of time a vehicle was driven manually or automatically. Based on that calculation, premiums would be adjusted during the policy period in a periodic mode.
In phase 3 (full autonomous driving except direction input and start-stop), premium prices will be influenced by the loss history of the vehicle, in combination with the default network provider and the vehicle operating system. Driver-specific factors such as age, gender, driving history and driving tickets will no longer have any bearing on auto insurance premiums. Telematics will be a thing of past and will have no influence on pricing, although such devices still may be used to monitor the behavior of different operating systems, for instance.
With increased regulator and customer confidence in the safety of autonomous vehicles, and the rapid growth of this new technology, the cost of such vehicles is expected to decrease from previous phases. Thus, with better safety, fewer accidents, proper infrastructure and inexpensive devices, overall pricing is likely to fall for driverless cars in the long run.
Impact on Claims Management
Driverless cars will require a complete overhaul to claims management. Numerous steps will be eliminated with the help of self-diagnostics devices present in the car that enable first notification of loss (FNOL), claims survey, claims estimations (partially) and litigation.
High repair costs for replacing cutting-edge technological devices in the car, along with the high salvage value of a car (reusable electronic and mechanical components), are likely to increase salvage and reduce repairs. These trends will make it easier to classify a vehicle as “totaled” in the event of serious damage.
During phase 2, we expect claims management to change for two reasons:
- It will become important to identify whether the vehicle was running in auto or manual mode. If autonomous, it will be important to determine whether the cause of the accident was due to a vehicle malfunction or network issue.
- Technology advancement will require various devices, such as on-board cameras and “black boxes,” to provide accurate accident information.
In phase 3, the loss event is expected to follow the same sequence as phase 2, except that the vehicle will always be auto-driven. In the case of a loss event, it will still be important to track if there was a breach of warranty that led to the loss.
With reduced claims frequency and severity, we believe claims management will undergo a great degree of disruption. Regulatory guidance will go a long way toward determining the ultimate impact.
The Way Forward
Make no mistake: driverless cars are coming and will forever disrupt key aspects of the insurance industry. As a result, carriers must prepare for significant changes to remain relevant over the near and long term.
In our view, insurers can prepare for this technology by:
Analyzing their existing books of business.
Developing a scenario-based action plan for each of the three adoption phases.
Understanding the increasing amount of driverless data being captured.
Forming a partner ecosystem to ensure success.
Developing and testing products in early adopting driverless states such as Nevada, Florida, California and Michigan.
With so many moving parts, a mindset shift is ultimately required for driverless insurance to break with convention and become a highly sought after product of the future.
To learn more, please read Driverless Cars: Time for Insurers to Shift Gears or visit the Insurance section of our website.