First published in Asia Insurance Review

The past 12 months have seen an increased focus on the move to fully automated vehicles. In what is a clear response by the auto industry to the increased demand for connectivity and “on demand” services, we hear promises of increased efficiencies, lower emissions, reduced accident rates and better driver experience. With the adoption of fully automated vehicles appearing to be inevitable, the landscape for insurers operating in this space will be a challenging and rewarding one.

Current landscape

The auto industry has never feared technology. Semi-automated vehicles using driver-assist technology are now commonplace. Vehicle manufacturers produce vehicles with advanced mobile technology components, with many on-the-road vehicles having wireless technology or the ability to connect to a personal or public network.

Businesses are already using connected cars to offer consumer and business services and to manage fleets and logistics. And telematics are commonly used by insurers and other industries to monitor, manage and assist drivers. So it is no surprise that the industry is looking at the next big step.

Google started its self-driving car project in 2009 in the United States and major manufacturers such as Tesla, Mercedes, Audi, BMW, Volvo and General Motors are developing vehicles featuring varying degrees of automation.

Australia at the forefront

Experts predict that the driverless car industry will be worth USD 90 billion in 15 years and Australia is already placing itself at the forefront of this change.

South Australia is leading the way with the introduction of the Motor Vehicles (Trials of Automotive Technologies) Amendment Bill 2015 in September 2015. This provides exemptions from existing laws to accommodate automated vehicle testing on public roads.

Media reports tell us Telstra, Volvo and Bosch have already conducted the first trials of driverless cars in South Australia. Australian company Cohda Wireless was instrumental in this testing and has been at the forefront of development of vehicle to vehicle (V2V) and vehicle to infrastructure (V2I) technology, which lies at the heart of driverless car systems.

With the introduction of more advanced technology, insurers operating in the Australian market are faced with a number of opportunities and challenges, both in terms of development of new products and in the ways in which their business manages the risks relating to such change.

Opportunities

Perhaps the most significant opportunity will be the potential to revolutionise vehicle safety.

Regulators are optimistic that driverless technology, especially V2V and V2I systems, will dramatically reduce road death tolls and improve traffic congestion and driver experience through the use, collection and interpretation of data to enable sophisticated traffic control and incident management systems. At the same time, it is anticipated that increased efficiencies will flow into businesses that rely on vehicle use, for example freight, delivery and logistics.

Australian mining company Rio Tinto has implemented driverless vehicles on mine sites in Australia and claims this has resulted in improved productivity, increased safety and capital savings. Even the daily commute will be taken out of the hands of the driver, freeing up this time for other tasks and resulting in a windfall of productivity.

In Western Australia, later in 2016, the Royal Automobile Club (RAC) will trial a driverless electric shuttle bus for up to 15 people, complementing existing transport infrastructure and servicing shorter distances. It is hoped the trial will identify some of the issues facing driverless vehicles in the transition onto public roads.

Challenges

But like any revolution, there are risks that need to be considered by insurers including the changes to liability law, development of more advanced insurance, management of data, and operational risks associated with such advanced technology.

Cyber risk sits at the top of this list. Driverless cars will collect large amounts of data about the user, including details of acceleration, braking, speed, direction of travel and other key metrics.

This data will give insurers the ability to use this information to monitor drivers’ use of the vehicle, conditions at the time of an accident and other data that will, when collated and analysed, provide an accurate statistical baseline for insurers to work from when designing and pricing new products. Using this data to develop accurate risk models will have clear flow on benefits to consumers, with tailored products, reduced premiums for better drivers and a more competitive market for products.

Privacy and security concerns

Yet the collection of this data brings with it inherent privacy and security concerns. Insurers accessing and using this data will need to adhere to local and international privacy frameworks to ensure the data is managed appropriately and to ensure compliance with relevant mandatory breach reporting schemes.

Data will have to be securely stored and transmitted. Many questions will have to be answered including who will own the data? How will an insurer make a request for data following an incident? Would the data be standardised between manufacturers? How, if at all will the data be de-identified?

GPS-based fleet management and logistics applications are already being used to improve productivity, routing and dispatching, and fuel management.

Hacking risk

As fully connected mobile devices, driverless cars will also face the increased risk of the device being a target of interference or hacking.

In an age where keyless entry can be "skimmed", where the vehicle will be connected to a live network (personal or public), a vehicle’s on-board systems are vulnerable end points that need to be secured, leaving manufacturers with the challenge of securing these systems from breach.

As hackers’ techniques evolve alongside technological developments, there is a heightened risk of vulnerability and the potential for mass disruption is a very live issue.

Cyber terrorists could not only disable vehicles, they could also hack the system to hijack individual vehicles or engineer chaotic or catastrophic outcomes. Large private transport networks, cities or even states could be disabled by cyber breaches.

While security standards and best practices will inevitably emerge for the auto industry, they will take years to mature and find their way into vehicles. Insurers offering cyber coverage are already aware of and grappling with these risks, however as we move to a world of connected vehicles, this risk becomes increasingly relevant and significant for the insurance industry.

Reduction in premium

From a motor insurance perspective, it is apparent that driverless technology will inevitably transform the market. In the US, insurers collected USD 195 billion in 2014 for auto insurance premiums.

By 2030, it is expected that these premiums could be reduced by up to 60%. So mono-line motor insurers face a complete overhaul of their products and will need to evolve and adapt to the changing technology.

The liability question

There is also the tricky question as to liability in the event of an accident - which will almost certainly be shifted away from the driver and onto the product. The question as to liability has already been considered for semi-automated vehicles - but not yet for fully-automated vehicles.

Tackling the liability question head on, Volvo has announced that it will accept full liability when their vehicle is in autonomous mode unless the customer uses the technology in an inappropriate way or the crash is caused by a third party. Google has also made a similar statement.

Such bold moves have the potential to not only ease the public into adopting driverless technology, but also to cement brand awareness and loyalty amongst drivers from an early stage.

How product liability coverage may need to change as a consequence is an interesting question, given that manufacturers will likely bear the brunt of a driverless car claim. Will the value of such connected vehicles rise steeply with the introduction of this new technology, causing upkeep costs to soar and in turn drive up the cost of claims? Time will tell.

Are we ready?

Is the insurance industry ready for such change? There is certainly some way to go to be ready, and there is no doubt that the move to driverless technology will be a challenge for the insurance industry. But this changing market landscape presents real opportunities for insurers to embrace the change and to adapt their products to meet the needs of changing technology.

As Inga Beale, the CEO of Lloyd’s, said of technological change recently, the time has come for the financial services market to "Engage, Embrace, Evolve."

Those not embracing technology and evolving to adapt their products to the sea of change may be left behind.