Are we ready for the driverless car?

I grew up watching sci-fi movies, and a constant theme in these movies was the notion of a future with autonomous or self-driving cars.

With several countries around the world allowing testing of autonomous cars, both for private and public transportation, and Google having built a fully functional autonomous car, it is clear that what I once saw as science fiction, is now becoming a reality. This begs the question: are we, as the insurance industry, ready for the driverless car?

Calculation of insurance premiums

If one had to dissect the premium charged on a motor insurance policy, it can be broken down and therefore seen as a risk premium for:

• Own damage where the driver is erroneous or negligent. Insurers try to estimate this risk by basing it on factors such as the age, experience, and claims history of the driver.
• Own damage where other parties are erroneous or negligent.
• Own damage by other causes such as hail events.

Potential impact on insurance

The driverless car introduces an interesting dynamic to the market place. With the driver removed from the equation, the element of driver error or negligence is removed. With driver error driving anywhere between 60% to 90% of the insurance premium, driverless cars will potentially attract significantly lower premiums than conventional cars, provided, of course, that the technology that operates them is reliable and demonstrates a significant reduction in the accidental risk.

Where there is a potential failure in the technology, not due to negligence or operator/driver error, resulting in own damage to the driverless car or third party damage, this would not necessarily be covered by an individual’s motor insurance policy, but rather the manufacturer’s product liability insurance policy.

Defining risk

This brings me to another question: if driverless cars have no manual intervention controls, such as the Google car launched in May 2014, could the potential theft of the car be classified as cyber-risk?

With the exception of a situation where an individual is hijacked, and under eminent danger voluntarily divulges his login and passwords, the only other way to steal the vehicle would be through a cyber-attack. This would potentially be covered under the manufacturer’s product liability or cyber-risk insurance policy.

This essentially leaves the risks associated with other causes of damage, such as minor dings, hail events and potential malicious damage, which accounts for a small portion of the risk premium charged by insurers.

Good news for clients

Currently, motor insurance accounts for approximately 43% of the R96 billion short-term insurance industry in South Africa. With potentially 90% or more of the risk eliminated by the introduction of, and total adoption of, driverless cars, in current market values, one could infer a R37 billion or 39% reduction in premium income to insurers. Whilst there may be increases in premiums collected on the liability risks due to product defect or cyber-risk, these gains would be marginal.

Preparing for D-day

Fortunately, driverless cars are not quite yet a reality as there are a multitude of obstacles that need to be addressed before these type of vehicles can become real.

These obstacles are, amongst others:

• the delivery of a reliable and affordable driverless car;
• the implementation of legal frameworks that regulate driverless cars;
• software and product reliability;
• economic employment issues, such as loss of driver related jobs, anddriverless cars relying on road signs and markings.

It gives the industry time to prepare for the introduction of driverless cars into a market which still has to jump the hurdle of having more uninsured than insured cars on the roads. We will need to proactively engage with government and regulators, vehicle manufacturers and the legal community on this potentially life-changing and life-saving technology.