A fast-moving trend to autonomous driving challenges the insurance sector

The problem presented by automated driving to the insurance industry became evident through an accident in May in the US when a Tesla car crashed in northern Florida into a truck that was turning left in front of it, killing Joshua Brown from Ohio. This was, according to a statement on the carmaker’s website, the first known fatality when Tesla’s Autopilot system was activated in just over 200 million kilometers.

“Neither Autopilot nor the driver noticed the white side of the tractor trailer against a brightly lit sky, so the brake was not applied,” according to the article.

Tesla will need to take action to make sure such a tragic accident won’t occur again. Insurers also have a lesson to learn from it as it raises the question of liability for the claims. If the accident had been caused by human fault, it would be a case for the motor insurer to pay for the damage. If it was, however, the fault of the autopilot, it could potentially trigger the product liability insurance.

In the Tesla case, the question has yet to be answered. The company stresses that it disables Autopilot by default and requires explicit acknowledgement that the system is new technology and still in a public beta phase before it can be enabled. An acknowledgment box explains that Autopilot “is an assist feature that requires you to keep your hands on the steering wheel at all times”, and that “you need to maintain control and responsibility for your vehicle” while using it, the company argues, suggesting that the accident was caused by human fault.

The US National Highway Traffic Safety Administration is investigating the case. In a letter to Tesla, Jeffrey L. Quandt, chief of the vehicle control division at the office of defects investigation, says that the crash that killed Brown and two non-fatal accidents were “all crashes alleged to have occurred because Forward Collision Warning (FCW) or Automatic Emergency Braking (AEB) did not occur when expected,” suggesting that the Autopilot technology failed.

Such unclear legal situations are likely increasingly to occupy the insurance industry as driver aids such as lane assist, active cruise control or assisted parking become standard in the car industry, which is also working on the development of fully autonomous vehicles.

A NEW KIND OF MOTOR COVER

“As these driver assistance systems gradually bring about more autonomous driving, many consider a shift away from traditional auto insurance to be inevitable,” says Hazel Yang Lee, lead, personal auto product development at ISO Solutions, a Verisk Analytics business.

“This shift is expected to reflect a transition from private vehicle ownership to shared fleets of commercially or publicly owned vehicles,” Yang Lee adds.

The involvement of driver assistance systems is likely to change the claims process in case of an accident. As a general rule, in the event of third party damage arising as a result of errors in the assistance system, the injured party is in a position to choose whether to assert the claim against the vehicle holder responsible or against the manufacturer, Carsten Krieglstein, head of liability, Central & Eastern Europe, for Allianz, explains in a June 2016 article titled Autonomy on four wheels.

Within this framework, the internal settlement is the responsibility of the auto insurer, Krieglstein continues. In the event of damage to one’s own vehicle as a result of system errors, the auto hull insurer is equally liable, even if the damage can be attributed to an error in the assistance system, he notes. The insurer is subrogated to all claims asserted by the policyholder against the assistance system manufacturer.

Subsequently, greater emphasis will be placed on auto insurers resorting to assistance system manufacturers for compensation, which will have a bearing on product liability insurance. This means we have to develop a course of action to facilitate such processes under product liability insurance, he notes.

For claims handling, insurers will increasingly need to tackle differences between traditional versus automated vehicles such as determining if collision avoidance systems were fully activated and, potentially, face an increase in subrogation by auto insurers against manufacturers, Yang Lee explains. At the same time, rating criteria linked to a driver’s age, gender, marital status, and driving record is likely to become less predictive. Instead, telematics data, or vehicle characteristics such as the version of the crash avoidance software on the vehicle, could become more relevant.

“With autonomous driving, the risk for the insurer won’t disappear completely, instead shifting from the ‘human error’ to the ‘product error’ category,” Krieglstein adds.

The increasing application of driver assistance technology is likely to affect underwriting practices, says Yang Lee. “Insurers may need to determine which cars have what technology, what equipment maintenance may be required, possibly using telematics data to understand driving behaviour,” she says.

“Before full autonomy is achieved, insurers may face additional complexities in claims handling while determining whether the accident was the result of software failure or due to negligence by the human operator of the semi-autonomous vehicle.”

There will be a significant period of time during which there will be ‘mixed’ traffic, since it may be assumed there will be a mix of newer and older vehicle models on the road. “In fact, this may even be the case for good,” Krieglstein notes.

At the moment, a sharp distinction is drawn between insurance concepts for the driver and the automotive manufacturer or supplier, Krieglstein says. However, according to a study carried out by management consultancy firm McKinsey, major changes are just around the corner for the auto insurance business model.

Until now, the spotlight has been on individual insurance solutions offering cover to protect all traffic participants against human errors. In the future, however, it will shift to insuring the few car manufacturers, manufacturers of assistance systems and fleet organisations in the event of technical failure in the vehicles.

“Until current financial responsibility and compulsory insurance laws and regulations that require liability insurance are changed to address such fully autonomous vehicles, operators/owners will still need coverage to meet minimum driving requirements depending on the laws of a particular jurisdiction,” Yang Lee explains.

“Some have suggested that a no-fault type auto insurance system be given greater consideration to address driverless cars, because product liability lawsuits can further increase expenses and be more time-consuming,” she adds.

“Drivers may still need certain first-party coverages for perils such as theft, weather-related damage, and other non-collision-related losses. Further, some drivers may still want to protect their financial interests by purchasing liability coverage as a first line of defence,” Yang Lee notes.

It is, however, essential that the relevant legal framework be revised in order to create the necessary legal certainty, Krieglstein says. Regulators will need to pave the way for highly and fully automated driving as technological progress within the automotive industry has the potential to cause disruption within the insurance sector.