Driverless cars could hurt insurers’ bottom lines

Thanks to breakthroughs in technology, motorists could see a gradual but substantial drop in the number and seriousness of accidents over the long term, as well as much cheaper car insurance.

“Automated vehicle technology appears to have the potential to significantly reduce the number of automobile crashes,” said Carol Csanda, innovation team director at State Farm, based in Bloomington, Ill.

The technology is being embraced at a rapid pace. In fact, Ford Motor Co. said it expects vehicles to have “fully autonomous navigation and parking” after 2025.

Innovations could lead to decreases in car insurance premiums by more than 60 percent in the 2020s from current levels, said Donald Light, director of Americas Property/Casualty Insurance Practice at financial technology consulting firm Celent. The advances include the increasingly prevalent driver-monitoring devices, collision avoidance systems and automated traffic-law enforcement, such as speed and red-light cameras, as well as robotic cars.

The technologies, Light said, also could result in substantial drops in revenues for car insurers, an industry whose dominant players include State Farm and Northbrook-based Allstate Corp. “If I were running a big auto insurer, this is something I’d spend time thinking about,” Light said.

State Farm said it is embracing the technology. “It has been suggested that insurers might seek to delay or impede progress of this technology in light of how it might impact their current business model,” State Farm said. The company said its view is that technology will make people safer, and it is working with Ford as the carmaker develops futuristic vehicles.

In 2012, Light published “A Scenario: The End of Auto Insurance: What Happens When There Are (Almost) No Accidents?” Light said that if he were to write the report in 2014, it would move beyond the realm of a “provocative but plausible” scenario to the “probable.”

Just last month, Ford — in conjunction with State Farm and the University of Michigan — unveiled an “automated” research vehicle. The goal is to incorporate technology into vehicles to enable them to “communicate with each other and the world around them to make driving safer” and reduce congestion.

The research vehicle has sensors that scan the road up to 200 feet, using light in the same way that a bat or dolphin uses sound waves. State Farm’s research with Ford will also include whether any new risks emerge with automated cars, including their performance in bad weather compared with a human driver’s response.

Some Ford cars already detect when a vehicle has entered a driver’s blind spot. A vibration in the steering wheel alerts a driver that the car might be unintentionally veering out of a lane. Collision avoidance systems are becoming so commonplace that they are featured in TV commercials, including one in which a driver averts backing over a child.

Most major insurers already have telematics programs. The driver-monitoring devices are installed in policyholders’ vehicles to track mileage and driving habits. Users tend to become safer drivers. The payoff for the motorist is a discount. But some insurance industry executives recently have said policyholders aren’t as willing to sign up for the programs as they had hoped.

Some locales have already rolled out automated traffic-law enforcement.

Chicago’s red-light camera program took off in 2007, and motorists who blow through red lights are photographed and ticketed through the mail; the number of tickets has declined in recent years, and Chicago officials have credited the cameras with changing driving habits and reducing the risk of collisions.

Vehicles able to drive themselves will account for about 9 percent of global auto sales in about two decades, according to a forecast published last month by auto industry consultant IHS Automotive.

The study focused on autonomous cars, which can drive with “no attention needed by the driver.” Such cars are not yet available for sale, but IHS predicts that they will be available by about 2025.

IHS expects global sales of self-driving cars in 2025 to be about 230,000 — about two-tenths of 1 percent of the 115 million cars expected to be sold that year.

The property and casualty industry, which Celent said derives nearly 40 percent of its premiums from vehicle insurance, acknowledges that driverless cars in particular could put a major dent in the sale of coverage for personal and commercial vehicles.

“If driverless cars become a reality, and if, as a result, there is a dramatic reduction in the number and severity of vehicle-related accidents, there is no doubt it is going to have a major impact on auto insurance,” said Loretta Worters, vice president for the Insurance Information Institute, an industry-supported research group.

She doesn’t see it as the end of auto insurance, but “certainly companies will have to adapt,” with measures that could include expanding lines of businesses unrelated to autos.

Even if driverless cars became prevalent, drivers still would need comprehensive coverage, Worters said. That would cover damage to a policyholder’s car not involving a collision with another car, such as damage from fire, explosions, earthquakes, fallen trees, riots and theft.

Worters also questions whether consumers are eager to cede control of their cars, though skeptics could change their minds if premiums fall enough.

Chubb Group of Insurance Cos. recently commissioned a survey and found that 18 percent of consumers said they would buy autonomous vehicles.

Insurance agents don’t yet seem concerned by the emerging technologies and the effect that it could have on their business, said Jim Fish, executive director of the National Association of Professional Allstate Agents.

“They understand that self-parking cars and backup cameras are a reality, but most seem to think that driverless cars are a long way off, which, of course they’re not,” Fish said. “Over 10 or 15 years, the economic impact could be fairly significant.”

Fish pointed out, however, that the new technology could drive up the prices of new vehicles, which, in turn, could keep costs of comprehensive insurance coverage rising.

In 2012, auto premiums accounted for 59 percent of all premiums for the 10 biggest writers of auto insurance, said Celent, citing data from SNL Financial.

By the end of 2017, according to Celent, the share of auto premiums for those insurers could decline 24 percent from the 2012 level, and by 2022 it could decline more than 60 percent from 2012.

Celent’s Light agrees with the Insurance Information Institute that car coverage won’t completely disappear; there will be areas where the technologies are unavailable or don’t work well. Drunken drivers might clip cars in parking garages. Mother Nature will continue to damage cars. And although traffic fatality rates have steadily dropped since 1994, according to the National Highway Traffic Safety Administration, about 30,000 people are killed in U.S. traffic accidents each year.

Also, the nation will remain a litigious society, Light said. There will be new entities to sue, such as businesses that make the technologies. Premiums to insure against those losses won’t come from auto insurance premiums but from other types of coverage, Light said.

Ford said that, in the midterm, the ability for vehicles to communicate with one another will begin to enter the mainstream. That will include such autopilot features as “platooning,” in which vehicles traveling in the same direction sync their movements to create denser driving patterns.

Worters, of the Insurance Information Institute, points out that driverless cars would have implications for not just property and casualty companies, but also industries like tow-truck operators and repair shops.

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