How the Insurance Market Will Expand in an Age of Autonomous Vehicles

Though it’s estimated that by 2025, auto insurance premiums will drop by $25 billion as a result of the adoption of driverless cars, the insurance market is expected to recover through new lines of coverage, according to a report released last year by market analyst Accenture.

In fact, new coverage lines will generate substantially more premium than is lost — to the tune of almost $81 billion.

During the recent annual Professional Liability Underwriting Society (PLUS) conference in San Diego, Jamison Narbaitz, senior counsel with Clyde & Co., discussed three areas of insurance that will grow: cyber security, products liability and infrastructure.

He explained that auto transportation is currently in the lower levels of autonomy now; Tesla is considered a level 2 on the National Highway Traffic Safety Administration’s 1-5 scale, which means a driver should still be fully engaged in the operation of the vehicle. It’s expected that by 2035, 23 million vehicles on the road will be a level 4 vehicle, according to the Stevens Institute of Technology.

With fewer humans driving, and more people sharing rather than owning vehicles, auto insurance premiums will initially spike then plummet, he said.

Auto insurers’ core business models will become obsolete; however, there will be some potential for driver liability to remain.

“These changes have interesting implications for insurance because as there’s fewer human drivers, there will be less of a need for personal auto insurance as we know it,” Narbaitz said.

“As there’s more fleet ownership of vehicles, there will also be less of a need of personal auto, and there will be more of a focus on products liability-type coverages,” he said.

There are three reasons premiums will drop. Cars will be safer, thus accident frequency and severity will drop. There will be a shift from personal auto ownership to fleet ownership, and liability will move from drivers to manufacturers, suppliers, technology firms and fleet owners.

The manufacturer’s liability role will increase substantially. “He said, it said” versus “he said, she said” scenarios will emerge. Some auto manufacturers, like Volvo, have already acknowledged the increased liability exposure.

The good news is the difference in losses will be recovered by new coverage lines, said Narbaitz.

He identified three key areas of insurance that will grow.

One is cyber security — for losses like auto theft by hacking or failure of smart road technology.

The second is products liability coverage for disruptions in communication and internet connections, algorithm defects, lidar/radar failure and camera vision failure.

The third area of insurance growth will come from the infrastructure investments that will be needed for vehicle-to-vehicle and vehicle-to-infrastructure communication failures, cloud issues, satellite issues and/or disruptions.

Narbaitz said there may be standalone personal cyber policies or coverage may be endorsed on an auto policy or a hybrid auto/cyber policy could be created.

In its report, Accenture recommended that the insurance industry develop big data/analytics expertise, create actuarial models and explore the driverless ecosystem.

According to Narbaitz, auto insurance is rapidly changing, but may never become completely obsolete.