Driverless Cars: Crash of the motor insurance industry?

Robot car by Oxford University

by Cherry Chan, partner at Barnett Waddingham

Driverless cars are no longer merely associated with science fiction. Autonomous vehicles that can not only drive to a destination but also avoid collisions and traffic are predicted to appear on our roads as soon as 2025. Japan is already starting to see the effects, with Nissan's driverless car being made street legal in 2013, and legislation permitting the use of autonomous cars has also been passed in four US states. In the UK, driverless pods are in the experimental stage, with fully autonomous vehicles expected to be on Milton Keynes's pathways by 2017.
Considering that over 90% of current car accidents are attributable to human error, it is no wonder that driverless vehicles are considered far safer. Autonomous cars cannot get distracted, become drowsy or drive whilst intoxicated. Google's autonomous cars have already completed over 500 000 miles of road tests, and it is only a matter of time before we start to see these vehicles alongside traditional cars on our roads.
Thanks to these developments, the motor insurance industry as we know it may fail to exist in 25 years' time. Of the 26.4 million households in the UK, 19.6 million have a motor insurance policy; and the UK motor insurance market makes up 34% of the UK insurance industry, with total premiums of £13.8 billion in 2012.
This sector is driven by claims. Anti-collision technology will, by definition, reduce the number and severity of claims, which will naturally cause the motor insurance industry to shrink as the exposure to pay-outs reduces. Car insurance is predicted to evolve into a similar set-up as home insurance - a much lower rate of claims but a much higher cost per incident. This will be particularly true if current predictions about the initial cost of a commercial driverless car are correct - a staggering £170,000.
But new opportunities will also develop. The mass of data that will be generated by autonomous vehicles can pave new business pathways for insurers. Profit prospects will exist for those who are able to utilise the plethora of data that is recorded from the vehicle systems. For an industry which has failed to make an underwriting profit since 1994, this could be good news. On the other hand, the market for cyber insurance may see an increase in demand as a direct result of the higher volumes of data that will be generated.
The insurance industry is not the only sector that may encounter drastic changes as a result of driverless technology. Vehicle repair shops will lose business due to the reduction in collisions, and hospitals may see a fall in the number of accident and emergency events. The government could lose revenue from fines incurred through driving penalties, and long haul lorry drivers may become obsolete.
We may also see an evolvement in the patterns of fraud. A huge volume of data will be generated by the autonomous vehicle, and while this is likely to eradicate fraudulent claims, we may see a rise in hacking or manipulation of the computer systems. Cyber criminals who are able to breach the vehicle's control systems may be able to influence the sensor results to display ideal driving qualities, such as no speeding over the legal limit.
Despite the fact that technology is advancing at an astounding rate, further research is still needed before driverless cars become the norm on our roads. Legislation and regulation will have to be written and enforced, to ensure all safety angles are covered. There is no doubt, however, that driverless cars and driverless infrastructure will become conventional in the not too distant future.

Cherry Chan is a partner at Barnett Waddingham

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