How Should Insurers Adapt To The Introduction Of Autonomous Cars?

Autonomous vehicles have been around in their simplest forms since the early 2000’s — for example, Toyota Prius introduced automatic parking back in 2003. Since then, the technology has come a long way, and manufacturers such as Ford, Volvo and Tesla are now all pushing to have fully autonomous vehicles on the road by as early as 2022. These market trends are showing us that we’re heading rapidly towards the inflexion point of consumer acceptance, demand, and affordability of autonomous tech, but one thing isn’t keeping up; insurance. What needs to be done for traditional motor insurers to stay relevant in the new age of ‘driverless’ driving?

It’s worth defining the spectrum of autonomous capabilities, since they have different demands on a motor insurer:

  • Level 0 : Human driver controls everything
  • Level 1 : Braking or parallel parking, can be done autonomously
  • Level 2: Cruise control or lane centring are autonomous (but monitored by driver)
  • Level 3: Partial Autonomy — driver first but can opt in to autonomous modes
  • Level 4: Full Autonomy — Autonomous first but driver can override
  • Level 5: Full Autonomy — Autonomous first but and driver can not override (i.e. no steering wheel)

Most new cars sold in the past five years are at Level 1 or Level 2, which means that soon the majority of vehicles on the roads will have some form of autonomy. Motor insurance has managed to incorporate the reduced risk attributed to these driving activities into their existing pricing models already. Motorway driving has always been the least risky insurable journeys and a tricky parallel park, at worst, will result in a minor fender bender if all goes wrong. Insurance models don’t (perceivably) discount for using these lower level autonomous modes.

However, cars at Level 3 will soon become commonplace, and insurers are starting to get concerned. We now have vehicles with the capability to make decisions in almost every driving activity, based on a combination of algorithms and driver choices. Arguably, it is the grey area, of being able to switch between the two, that makes Level 3 the most difficult level for an insurer to predict and price risk for — a mix of the nascent technology and the tentative driver.

It is this problem that insurers must overcome in order to keep up with the future of driving. They need to take a more flexible approach to risk and democratise pricing of this risk to support the innovation happening in the automotive space. If they don’t, as a mandatory legal requirement for driving a vehicle on the road, the insurance industry could walk itself into a most invidious position — an inhibitor of progress.

There are, however, solutions to cross this chasm for insurers:

Data, Data, Data

Vehicles are now sharing data like never before, with the connectivity of cars being a standard on most new vehicles. Data is being streamed in real-time and is accessible either directly from the vehicle manufacturers or service abstractions on top of these companies.This data is already being used to improve driver experience (mobile apps which promote engagement), automatically call emergency services (automated FNOL) and for usage-based insurance products (for example, pay-by-mile).

Insurers need to be utilising this data. There is opportunity for building talented and experienced teams of data scientists that can deliver models (machine-learning or broader AI) and meaning. In doing so, modular and consumable data sets, can be created that can be used by actuaries to create better pricing models and more customer-centric insurance products.

Actuarial advancements

Automated braking and parking systems already contribute to a reduction in incidents and the severity of these incidents. Investing in data will allow new factors for modelling risk. These could be as simple as ‘is a safety feature turned on?’ or ‘are the seatbelts plugged in?’, all the way through to the percentage of time autonomous driving mode is being used.

Understanding when an autonomous mode is activated is the first major step in understanding the risk reduction associated with it. Actuaries can model and pivot against this as long as they have the data.

Working together

Vehicle manufacturers want affordable insurance. In a world of vehicle electrification, insurance becomes the second most expensive part of car ownership (after purchase cost of the vehicle). Insurers should be doing more to work with vehicle manufacturers to consume the data that is available to them. They should be proactive in understanding technological advancements and the timeline for these coming to market.

Furthermore, Governments around the world are investing in mobility and legislating for it, with autonomous driving technology playing a big part. The insurance industry should be lobbying for, not against, evolving mobility technologies and insurers should be involved in the conversations and thought leaders in those conversations.

To aid with this, technology partners (or hires from both inside and outside of the insurance space) can bring a wealth of experience, utilising such techniques as machine learning and AI modelling, data lakes, and rapid development iterations — all modern development paradigms. The insurance industry falls remarkably short of other financial service industries, such as banking, when it comes to investment in technology. Partnerships should be forged early to both maximise the time invested but also to tap into a pool of talent before it dries.

Create new product lines now

Insurers should be creating product lines that encourage consumers to share data and so that they can engage with that data. They should see, with an understanding that the risk and market are still relatively small, that now is a chance to learn. Now is when mistakes can be made, and seeds of knowledge found and be planted for the future.

Usage based insurance products have twin benefits; firstly for the consumer (price savings and transparency) and secondly for the insurer (a clearer, more flexible understanding of risk). These types of products are going to become an essential part of a modern insurers portfolio.

In conclusion

Insurers are not looking to the future and they should be! The industry is still spending too much time and resource on modelling and pricing for ‘the now’, and not ‘the tomorrow’. There are huge near term advantages to the insurers who embrace the changing vehicle technologies. Take a look at our article Using Intelligent Automation To Change The Insurance Industry for more insight.

The ability to engage now, make a quick decision and learn outweighs the risk associated with the unknown. Procrastination and worse, wilful ignorance, will cause insurers to fail. The future is in the data.

For more on why the motor insurance industry needs to change, take a look at our recent research paper UBI Industry Report 2021.

By Bits offers insurers a future proofed usage-based platform that enables the creation of innovative “Pay-per-mile” insurance products, no matter what the state of their existing tech stack. If you’d like to see how By Bits could help your organisation, get in touch for a chat and to arrange a demo