Back in 2008, Volvo’s lead safety expert, Anders Eugensson made this statement;
“By 2020, nobody shall be seriously injured or killed in a new Volvo”.
Earlier this year, the car manufacturer that invented the three point seat belt and made safety its core brand value, restated its commitment to the vision. “We’re trending towards zero (deaths)” and “Our vision is to make it next to near impossible (to die in a new Volvo)”.
I remember thinking “Wow” the first time I heard the Volvo 2020 mission statement. It was bold, clear and powerful. All the best corporate mission statements are just that. Customers are in no doubt what is most important to Volvo. Nor are the 110,000 employees who work for them. Nor are the shareholders of this $21bn corporation.
Then I saw this and thought triple “Wow”…
“Volvo will accept full liability whenever one its cars are in autonomous mode”.
Both Mercedes and Google have made similar statements, although, IMHO, they are not as clear and unequivocal as Volvo.
Now, it’s worth making sure that we’re clear about terminology here. Volvo are talking about autonomous cars, not driverless cars. There is a fundamental difference between the two.
Autonomous cars look like every day cars. They have a steering wheel, pedals and a rear view mirror to hang your furry dice from. Autonomous cars use technology to take over from the driver in certain circumstances. Autonomous technology is already employed today with self-parking, lane assistance, automatic breaking, collision avoidance, and adaptive cruise control.
Driverless or self-driving or robot (take your pick) cars are very different. They don’t look like conventional cars and have no steering wheel, pedals or rear view mirror to hang furry dice from. The front seats can face backwards towards the back seats facing forwards.
Here, the “car” does all the driving from A to B, albeit using the same technology as the autonomous car.
In the autonomous car, the driver has an autopilot to share the driving. In the driverless car everyone is a passenger.
What does this all mean for insurance?
In this recent article on cbsnews.com for the 60 Minutes show (where the reporter is taken for a drive in an autonomous Mercedes S500), the piece opens with;
“Car accidents cost us much more than time and money. They also take a staggering number of lives. Every year on American roads, nearly 33,000 people die, almost all because of driver error. That’s the equivalent of a 747 full of passengers crashing once a week for a year. Self-driving cars could save more than two-thirds of those lives. That’s what the nation’s top auto regulator told us.”
Pause for a second.
The number of driver error related deaths on American roads is equivalent to a full 747 crashing every week of the year!
In Europe, whilst there has been a steady decline in the number of fatalities caused by road traffic accidents (and by as much as 50% since 2001 in a few countries), it is still a very sad fact that traffic fatalities still constitute the most common cause of death amongst youth and young adults (source: GenRe).
1) Lower claims and lower premiums
With cost of claims accounting for around 70% of premiums, it is easy to see how any measure that radically reduces motor accidents with have a major impact on combined ratios.
In the US, motor accounts for around $175bn of the P&C market where the frequency of both Liability and Physical Damage claims resulting from motor accidents have broadly stayed that same for the 10 year to 2014. Although bodily injury average cost per claim has risen by around 30% over that time (see detailed breakdown for US market here).
In the UK market, the combined ratios for both private and commercial motor insurance have been in the doldrums for two decades.
Deloitte reported back in May that gross written premiums were down at £13bn but combined ratios had improved to 101% (this means that the industry spent £101 for every £100 is received in premium, i.e. a loss). For an alternative view and detailed breakdown, go here to request an excellent review of the UK motor industry from Towers Watson.
Of course, the flip side of lower cost of claims is that premiums will also decline as the same rate. What this means for combined ratios in the future, no one really knows. When researching this subject, I see speculation and attention seeking headlines, often on the doom and gloom side, but I’m not convinced this is a bad thing.
It will mean a smaller motor class of insurance for sure, but it might also give the carriers the opportunity to correct the out of kilter market dynamics and return to profitability. That’s a good thing in my book!
2) Shift of liability from drivers to manufacturers
Coming back to Volvo (and the other manufacturers who will follow suit), insurance protection for the motor industry will see a big shift from individual liability to corporate.
For autonomous cars, individual drivers will still require insurance protection for when they are in control. But the policy construct will change to shift liability to the car manufacturer when it is switched into autopilot mode.
Now, how that is defined, tracked, reported and unequivocally proven in a court of law has yet to be made clear by Volvo and Mercedes.
And the legislators have a lot of work to do to figure out how to prepare for this new world. They are not prepared for the changes to the insurance industry that are being driven by the motor industry. Which is why I believe we are some way off from this new world and more than the 5 years until we hit Volvo’s 2020 timeline.
But the principle will be that when you are driving, you are liable and when the car takes control, the car manufacturer is liable (subject to the car being properly maintained, updated and so on).
In this model, we have to assume that Volvo will have software in the car that will “know” if a car has been maintained regularly and if the software controlling the car is current and up to date.
Which begs yet another question; what would Volvo do if the owner doesn’t take the car for its service at the regular intervals? Would they cancel the policy? Would they disable the car? Would they insist on a punitive additional charge for non-compliance?
And then, what if there is an accident. You can just imagine the headlines when the manufacturer refuses a claim because the driver is just over the service interval at time of accident, but over it nonetheless.
The beginning of the end?
I’ve seen a few reports calling this the beginning of the end for motor insurance. I don’t see it that way. To me, I see a substitution of cover from one form to another. There will still be motor insurance; it will just be in a very different form.
And it makes sense too. Insurance is about risk. And risk is best placed with those who can exert the most control over managing that risk. And right now, the biggest risk on the road is us, the drivers, not the cars themselves.
By shifting liability from the driver to the manufacturer, the risk of a driver causing an accident is replaced by consistently reliable and dependable technology.
What I do see though, is that the volume of carriers and intermediaries providing motor cover will reduce in numbers. The size of the motor insurance class will reduce significantly as risk is taken out of the getting from A to B. And the roads will continue to get safer to travel on!
Daily Fintech Advisers provide strategic consulting to organisations with business and investment interests in Fintech.