Fewer accidents translate into lower insurance rates, and driverless car technologies could lower rates by as much as $475 per year, according to industry experts.
Driverless cars are on the streets in California, Nevada, Michigan and elsewhere, and while they are proving to cause fewer accidents than human drivers, there will continue to be accidents and someone will be liable for them. However, who will be responsible, and who will need insurance, is not yet clear.
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At the Casualty Actuarial Society’s Ratemaking and Product Management seminar last month, industry experts discussed the implications of driverless cars and insurance telematics in the presentation “Autonomous Vehicles and the Impact on the Insurance Industry.” Presenters included Robert Peterson, a professor of law at Santa Clara University, Frank Douma, research fellow from the University of Minnesota, and Michael Stienstra, FCAS, AVP at QBE North America.
Human error contributes to more than 90 percent of all auto accidents, but even as accidents decline with consumer acceptance of the technology, there will continue to be a need to insurance the cars, their owners and manufacturers, the experts said.
Fewer accidents likely will means cheaper auto insurance, Peterson said, adding that rates could decline as much as $475 per year for operators of self-driving cars cheaper every year, according to a study by Alain L. Kornhauser, professor of operations research and financial engineering director, Transportation Program at Princeton University.
Many automakers say they will market driverless cars by 2020, and Google says it will have a fully automated car by 2017. Further, the costs may be lower than consumers may have imagined. According to Raj Rajkumar, director of the Carnegie Mellon-GM Autonomous Driving Collaborative Research Lab, quoted in the discussion, an autonomous technology package could add $5,000 to $7,000 to the sticker price.
For actuaries, the flood of data coming from driverless cars could be problematic. Stienstra said driverless cars likely will transmit as much as 750 megabytes of data per minute, and actuaries will have to cull the data before collecting it, and then find the variables that predict accidents.
Regulators also could create hurdles, Peterson said, adding that California has mandatory rating factors, including driving record and number of years as a driver; and that safer drivers receive discounts. With an automated vehicle, Peterson said those factors may prove irrelevant, and that state insurance laws will likely need to be altered to accommodate driverless cars.
Driverless cars may be safer than traditional cars, but flawed hardware or software could cause accidents, and liability could then fall on manufacturers or installers, in which case, the insurance pricing would fall to product liability actuaries for coverage.
For a considerable time, there will be a mixture of three types of cars, self-driving cars; partially automated cars, where the owner does some or almost all the driving, and human driven cars, Douma said. He described the five levels of vehicle automation, ranging from no automation, level 0, to fully self-driving, level 4. Currently, development efforts are aimed at level 3, where cars perform all safety-critical functions under certain conditions. Drivers will be alternating with computers for some time, Douma explains, as drivers could back out of the garage and onto the street before handing control to the computer, which could hand control back to the driver as they approach their destination.
Regulators, automakers and the public will expect safer cars to translate into lower insurance premiums, Stienstra said, and actuaries will need to be proactive on this issue, noting that the Casualty Actuarial Society has an Automated Vehicles Task Force to make sure casualty actuaries have the ability to partner with engineers and researchers to properly understand and insure the risks.
The increasing availability and consumer acceptance of insurance telematics, also called usage-based insurance also has implications for insurers and actuaries.
In separate discussions, Jim Weiss, FCAS for ISO, Jerel Cestkowski of American Family Insurance and Allen Greenberg, a senior policy analyst at the U.S. Department of Transportation, addressed telematics technology and implications for insurers and consumers.
When drivers are aware that their behavior is being monitored, they may drive more safely, Weiss said, adding that studies have found crash rates fell between 20 and 30 percent in cars monitored by telematics devices. Monitoring is not cheap, though. Weiss said telematics devices currently cost about $100, last three years, and wireless communications for each device costs about $5 a month.
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Considering those costs, the breakeven point for insurers would require loss ratios to drop 22 percent to justify the cost of a permanently installed device. A shorter monitoring period and the ability to reuse the devices drives down the costs, though loss ratios would need to fall 13 percent to break even, Weiss said, which improves the economic justifications.
Weiss also said actuaries have developed a powerful set of rating factors and more recently have used predictive analytics to further refine their craft. Now, Weiss said, they are as good as early generations of telematics, and have confirmed rating factors, such as age. At ISO, he found that the added precision telematics offer has created significant lift to ISO’s rating plan; according to vehicles’ telematics scores, the expected claim costs of the riskiest 20 percent of operators were 10 times higher than those of the least risky 20 percent, even after the effects of a traditional rating plan were considered.
Training and hiring support staff for telematics is proving to be a challenge, Cestowski said. “You’re going to have to invest in education and resources to handle this in your support areas,” and agents will need training, too.
Greenberg said despite the logistical challenges, telematics remains an insurance concept favored by the federal government.
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