Driverless cars, once confined to the realms of science fiction, is an idea that came a step closer to being reality in the UK when on 30 July 2014 the government announced that they will be allowed to be tested on public roads from January of next year.

Independent research such as that done by the Eno Centre for Transportation in the US suggests that driverless cars would decrease vehicle-related injuries by 90% each year. Google claims that almost all motor accidents are caused by human error and that as such driverless cars would decrease motor accidents by 90%, as described by Sebastian Thrun who is Google's lead developer. To put this into context in the UK, according to the Department for Transport's 'Reported Road Casualties in Great Britain: Main Results 2013' summary 1,713 people were killed in accidents on Great Britain's roads in 2013 and a further 182,000 were injured, 12% of these seriously. According to the ABIs 'UK Insurance Key Facts 2013' document in 2012, there were 2.9 million claims notified for private cars for which insurers paid out an average of £19.1 million in claims every day. A 90% reduction in accidents and injuries would of course alter these figures hugely. Google calculate this percentage figure presumably on the basis that their cars and ones like them will cut out human error and carelessness. After all, computers don’t daydream and don’t get tired, text or play with the CD player when driving.

So it is clear to see why insurers are paying careful attention to this emerging technology – there is a swell of opinion that the advent of driverless technology will have a significantly adverse effect on the motor insurance industry as a result of the expected improvement in road safety. Claims should reduce, but that comes at a price to the industry because in the long run motor premiums would also reduce.

Motor Insurance

According to the ABIs 'Annual General Insurance Overview Statistics', in 2012, around £12 billion in personal and commercial motor insurance premiums were written in the UK, accounting for about a third of the total general insurance industry's net premium income and providing insurance cover for about 28 million vehicles. These insurance premiums are a direct result of the frequency and severity of accidents. In the world of the driverless car, where most risks that insurers protect against will disappear there will be implications for the business models of motor insurers. Lancashire's chief risk officer, Charles Mathias, said in an address to the Lloyd's Old Library in an Institute of London lunchtime lecture that driverless cars have the potential to revolutionise the motor insurance market. He quoted a US government-run study that suggests motor insurance premiums would be cut by half by 2022 on the basis of a predicted 81% reduction in motor accidents with the application of driverless technology. ANV founder and chief executive Matthew Fairfield has told Insurance Day that he would expect more than $100 billion of revenue to be drawn away from the motor insurance market in the next few years, with some even predicting that by 2030 the motor insurance market will be history. It is clear therefore that insurers must begin preparing themselves for the inevitable disruption that this technology will bring.

Questions of legislation and regulation need to be answered but this will take time. For instance, the government will need to consider who should be liable in the event of an accident not caused by human error but by the car itself. Also, as drivers adapt to the role of something like a system manager, licensing procedures and requirements will need to change. There will be other incidental legal changes to follow – possibly such as the placement of 'black boxes' in the cars as in aircraft in the event of a collision. What is certain is that experts within the motor insurance industry should now be working with government to address issues of regulatory complexities, licensing and liability.

Key question

Perhaps the key question for insurers is just what will happen in the event of an accident. Will responsibility remain with the driver as it is now or will this shift to the vehicle manufacturer or software provider? The current position is that certain vehicles on the road have high levels of technology already such as hazard avoidance software, cruise control and self-parking capabilities. However, most accidents will still be as a result of driver error as the driver is still in overall control of the vehicle as they are able to intervene at will and override the existing technology – and so drivers still require personal insurance and will do until cars become truly autonomous. It is safe to assume that driving will become increasingly automated in the next 10 years but will cars get to the point where they do not require a driver at all? The key change in the industry and the answer to the question of what will happen from an insurance position when accidents occur will come when cars not only become fully self-driving but when a human driver is no longer expected to oversee or monitor the vehicle, relying instead upon the car to make its 'own' decisions. It is conceivable that in this scenario vehicle owners will no longer need to buy personal motor insurance – in cars where autonomy is fully developed and the law is changed such that they no longer require any supervision, then liability assignment to manufacturers and / or software developers would likely follow.

In the event of the above scenario then some personal motor insurance will still be required for theft and vandalism but this will be negligible compared to the current demands for motor insurance. It is therefore foreseeable that the primary revenue stream for motor insurers could shift to commercial businesses as the industry redirects its attention towards product liability coverage on a huge scale.

With an increasing reliance on digitised and networked motoring technology as the march towards driverless cars gathers pace, so the threat of cyber risk will increase. Insurers will find much more scope for writing cyber insurance in view of risks such as software bugs, cyber terrorism, computer malfunction and hacker attacks. The consequences of, say, a hacker attack disrupting braking capabilities of a certain make of car on the road could be catastrophic. Indeed, the FBI recently warned that driverless cars could be potentially used as lethal weapons, predicting that vehicles "will have a high impact on transforming what both law enforcement and its adversaries can operationally do with a car". With regard to current technology, insurers should be aware of the potentially limited lifespan of telematics when analysing the potential long-term benefits of investing in this technology – driver monitoring will become redundant if the driving becomes fully automated.

Long term changes

The predicted transition over time to driverless cars will gradually change the risks associated with driving, the frequency and severity of accidents, and consequently the demand for insurance and the nature of claims. It is highly unlikely that there will be a defining 'switchover' moment as small steps continue to be made towards fully autonomous cars being on the roads. From an insurance perspective, as vehicles with varying degrees of autonomy share the same roads going forward - this may result in an increase in insurance requirements. An excess of expensive technological equipment will be added by car manufacturers which will lead to more costly cars and increased premiums. Insurers will face strategic choices around pricing before they see a drop in claims spend, in view of the fact that some safety features such as autonomous emergency braking currently attract premium discounts.

It might be that motor insurers are cut out altogether as manufacturers, say, self-insure the risks associated with their new technology. However if the traditional motor insurance market continues to be used then attention will focus on these manufacturers rather than the human driver. Lower overall claims as a result of the introduction of the technology would be expected to eventually result in lower premiums and therefore tighter profit margins for insurers. It is fair to say that there is some concern in the motor insurance industry. Some insiders have argued that the new technology poses an existential threat to traditional car insurers because of expected improvements in road safety. Andy Haynes of Insurethebox said that "driverless cars will ultimately mean the elimination of conventional motor insurance". David Powell of Lloyd's Market Association said, on the basis that driverless cars are to become the norm, that "the majority of premiums today go towards covering third-party damage. In the long term that’s largely going to disappear".

No guarantee

Of course there is no guarantee that driverless cars will catch on, as their success will depend upon certain factors such as the continued success of testing, reliability on the road and overall safety. The public will also need to buy in to the idea which may take some time as this will require something of a 'leap of faith' to effectively delegate control to a machine. It will also be interesting to see how successful the interaction between driverless cars and 'normal' cars is as they begin to co-exist.

In any event, the success of motor insurers going forward will depend upon their ability to manage and embrace the transition to a potentially driverless landscape. Innovation in relation to products will be key alongside close interaction with manufacturers and software developers, and also with regulators and legislators. On a final note, it is yet to be seen whether or not the comments recently made by notable thinkers such as one of the world's pre-eminent scientists Professor Stephen Hawking about the threat to the existence of the human race from the continuing development of Artificial Intelligence will have any bearing upon the future for driverless technology…