How Will Driverless Cars Impact Auto Insurance?

3 scenarios for how driverless vehicle technology could transform the industry

aerial view of an intersection where driverless cars may drive without insurance

One of the biggest appeals of driverless vehicles is the promise of increased safety and greatly reduced traffic-related deaths and crashes. Driver error accounts for 94 percent of crashes on the road, so it follows that eliminating the actual driver and handing over the wheel to highly capable technology will reduce crashes (and deaths and injuries). If crashes become a thing of the past, the big question, then, is what kind of auto insurance (if any) drivers of the future will need. Would we still need liability insurance if there isn’t ever an actual person at fault because no one is actually driving (and presumably there aren’t any crashes) anyway? How will insurance for driverless cars work?

Here at Quoted, we — like so many folks — have a keen interest regarding the development of driverless vehicles. We obviously also follow the auto insurance industry very closely. (In fact, it’s what do at The Zebra.) So, as the former will almost certainly affect the former, our interest is piqued and our wheels are turning.

What's the use of car insurance if driverless cars eliminate crashes?

Driverless cars will have a huge impact on the auto insurance industry, that much is expected, but exactly how—and when—is still unknown. Driverless vehicles are neither technologically nor logistically ready for mainstream use, but since they will almost certainly affect the auto insurance industry, insiders are speculating and making their preferences known, and some overarching themes have emerged.

Here, we’ve considered and laid out the most likely scenarios for what might happen with the auto insurance industry when driverless vehicles hit the mainstream.

self-driving car
Google Driverless Car

Scenario 1: The auto insurance industry will adapt and remain relevant.

Auto insurance is one of those sleepy, easy-to-ignore industries, but it’s a significant part of the U.S. economy. Even if you aren’t financially invested in its success, the $220 billion auto insurance industry supports 277,000 jobs.

With all that at stake, the auto insurance industry isn’t waiting until driverless vehicles become mainstream to figure out how to stay relevant.

“Insurance companies are already exploring the best ways to price new risks, create new products, and underwrite entire new markets that are being born from cutting-edge technologies,” said Adam Lyons, CEO at The Zebra, the nation’s largest car insurance comparison marketplace. “However, state insurance departments ultimately have control over how insurance companies can act with the data at their fingertips, so it’s unclear how regulators will respond to this quickly evolving landscape.”

Insurance is often a last line of defense with new technologies and potentially risky developments. While technology companies and auto manufacturers can hype the safety of driverless vehicles all they like, if the numbers don’t add up for new technologies, insurers won’t risk their bottom lines. As massive insurance market (and the first company to offer auto coverage), Lloyd’s of London notes, “Insurers will have a significant role in assisting the development of sound risk management practices for autonomous and unmanned vehicles.”

How Could Existing Companies Provide Insurance for Driverless Cars?

Driverless vehicles offer improved safety in theory—but that theory still must be tested. Several experts (like researchers at RAND) argue that there hasn’t yet been anywhere near enough real-world observation of what driverless vehicles can really do. Therefore the auto insurance industry will play a crucial role in keeping autonomous vehicle developers grounded. Furthermore, even if liability insurance becomes a thing of the past, drivers would still need insurance for theft, vandalism, and weather-related events, keeping the insurance industry afloat.

Forbes offers another potentially frightening reason why auto insurance will still be important with driverless vehicles: “flash crashes.” Think of how buggy laptops and apps can be. Now imagine the software in a driverless vehicle crashing (or needing a reboot) at 60 miles an hour. “If autonomous cars are also connected—say, with vehicle-to-vehicle or vehicle-to-infrastructure communications—then a systemic problem could bring down a whole network of cars in a flash.”

Automakers are weighing in, too. “Volvo’s take on the matter,” writes Yahoo, “is that insurance companies will be forced to completely restructure their enterprises or lose gobs of business to new, more nimble enterprises.”

Evidence in favor of this scenario: Earlier this month, insurance company Adrian Flux in the U.K. announced the availability of what they claim is the first auto insurance policy for driverless vehicles. The policy covers autonomous features, which many vehicles already offer (like self-parking and automatic braking). The policies will cover situations unique to vehicles with autonomous technology: “failure to install vehicle software updates and security patches, subject to an increased policy excess; satellite failure or outages affecting navigation systems, or failure of the manufacturer’s vehicle operating system or other authorised software; loss or damage caused by a failure to manually override the system to prevent an accident should the system fail; and loss or damage if the car gets hacked.”

Current insurance coverage of these features and situations points to the auto insurance industry’s willingness and ability to adapt. As for whether it’ll catch on, we’ll have to see.

man on driverless car windshield

Scenario 2: Car manufacturers will insure the vehicles themselves, making a separate auto insurance industry irrelevant.

There’s a good amount of evidence for this scenario. For one, it’s already happening with Google, Volvo, and Mercedes.

Self-insurance could potentially serve the same gate-keeping function as described in Scenario A: Say, for example, Volvo is on the hook for any damage one of its self-driving cars causes, they might be extra motivated to cross all those T’s and dot all those I’s before letting consumers buy their vehicles.

In fact, recent debacles with Tesla vehicles demonstrates the viability of this scenario. Recently, several Tesla owners have claimed their autopilot features failed, causing wrecks. In response, Tesla has gone to the mat both investigating and proving the crashes were due to driver error, not system failure. It seems that in all cases, drivers overestimated the abilities of Tesla’s autopilot feature, which Tesla has been quite careful to make clear. Tesla explained to Fortune that their autopilot feature doesn’t allow drivers to “abdicate responsibility,” and that every driver must remain actively engaged.

During Tesla’s investigations into the above incidents, they explained that all vehicles have a “black box” on board, which can retroactively map out the details of each crash or traffic incident, making outside investigations unnecessary. If Tesla is intrinsically motivated to ensure their vehicles and autonomous features are as safe as possible, they’re also motivated to investigate all crashes involving their vehicles. In that case, it stands to reason that vehicle manufacturers in general could take over auto insurance, providing coverage for their customers themselves because they would know all the details of each incident and be able to offer fair compensation to all parties. 

Does driverless technology mean 'drivers' abdicate all responsibility in a car?

Scenario 3: The auto insurance industry will become obsolete.

Many details remain up in the air when it comes to autonomous vehicles, and while their actual impact on road safety remains to be seen, there is good evidence already that we will see sharp decreases in traffic crashes. “Data from the Institute for Highway Safety (IIHS) and Highway Loss Data Institute (HLDI) already show a reduction in property damage liability and collision claims for cars equipped with forward-collision warning systems, especially those with automatic braking,” reports Insurance Information Institute (III).

In May, both Warren Buffett and Bill Gates stated that they believe driverless vehicles will undoubtedly disrupt—and perhaps even make irrelevant—the auto industry, writes Auto Blog. “Anything that makes cars safer is very pro-social, and it’s bad for the auto insurance industry. Nevertheless, the auto industry has always worked on making cars safer. They’ve led the way on seatbelts and all that. But if there are no accidents, there’s no need for insurance,” said Buffett.

Of course, driverless vehicles won’t become mainstream overnight. There will be a period of time in which they’ll coexist on the roads with human-driven vehicles, which will likely keep the auto insurance industry in the game, so to speak.

However, evidence suggests that if driverless vehicles live up to their hype, government regulators will have a strong incentive to make them compulsory. Imagine the lives saved by eliminating 94 percent of traffic crashes. According to Yahoo News, the quantity of car crashes is expected to drop by 80 percent by 2035, and insurance premiums will purportedly drop with them.

rusty old obsolete car

More evidence of a declining auto insurance industry:

  • Investors and other financial heavy weights are prepping for the fallout: “Consultancy KPMG predicts that the market will shrink 60% by the year 2040,” writes Forbes.
  • Swiss Re and Higher Education Research Experiences (HERE) released a report this month that projects autonomous driving technology could pull $20 billion from insurance premiums by 2020, a figure which could continue to increase in the following years.
  • Standard & Poor’s, a U.S. financial services company, released five reports in May analyzing the effect self-driving cars will have on the auto industry, reports Investor’s Business Daily: “The advent of a totally driverless car threatens the core auto insurance liability business model. A shift to driverless cars would theoretically shift the legal liability away from the driver, since the incidence of crashes would likely be reduced, and the liability in a crash would shift from human error to product liability, potentially reducing or removing the need for auto liability insurance.”
The pace of driverless car innovation makes the future of the auto insurance industry unknown.

How Soon Could These Scenarios Play Out?

Since driverless cars are such a thrilling concept and hot media topic, the technology itself appears to be progressing quickly. Tesla already has some autonomous functionality in its vehicles, Nissan expects to deliver a fully self-driving vehicle by 2020, and plenty of other big names in the auto and tech (Google, Apple, etc.) industries claim to have big stuff on the not-too-distant horizon as well.

Driverless vehicles could turn the century-old auto insurance industry completely on its head. As state regulations catch up with technology (and technology continues to advance), we’ll likely get a clearer picture of how the auto insurance industry will (or won’t) fit in.